This paper shows that stiff environmental requirements, high tariffs and tariff escalation in importing countries create market access problems for developing countries whose comparative advantage lies in exports of resource-intensive and labour-intensive products. But structural reforms, technological upgradation and proactive responses by industry and government can provide an enabling environment to meet the challenges of trade liberalisation and environmental protection. The paper compares and contrasts the responses of the leather industry to these challenges, by stage or production, in Brazil, China and India.

U SANKAR

T

The 1992 Rio declaration of UNCED recognises the sovereign right of states to exploit their own resources without causing damage to the environment beyond the limits of national jurisdiction. Principle 11 states that environmental standards, management objectives and priorities should reflect environmental and developmental context to which they apply. Standards applied by some countries may be inappropriate and of unwarranted economic and social cost to other countries, in particular developing countries. Principle 12 states that trade policy measures for environmental requirements should not constitute a means of arbitrary or unjustifiable discrimination or a disguised protection on international trade.

The Technical Barriers to Trade (TBT) agreement of the WTO governs the preparation, adoption and application of product technical requirements, and of procedures used for the assessment of compliance with them. It encourages countries to use international standards except when inappropriate because of climate or geographical factors or fundamental technological problems. Article 12 states that all members shall take into account the special needs of developing countries and avoid creating unnecessary obstacles to exports of special interest to developing countries. It also permits developing countries to use international norms appropriate to their needs and grants specified time-limited exceptions from obligations of the TBT. The aim of sanitary and phyto-sanitary (SPS) measures of the WTO is to protect human or animal or plant life. Governments are encouraged to harmonise their SPS requirements, but they are entitled to set more stringent national standards in case the relevant international norms do not suit their needs. However, the measures must be based on scientific justification. Both the agreements recognise the principles of non-discrimination, avoidance of unnecessary obstacles to trade, harmonisation, equivalence, mutual recognition and transparency.

We use the Marshallian partial equilibrium framework and the consumers’ surplus and producers’ surplus criterion to analyse the effect of trade liberalisation on social welfare, with and without environmental policy. This approach follows the Pigouvian tradition.1

In Figure 1, D denotes the domestic demand curve for a good which is an exportable. MCp denotes the marginal private cost curve. MC denotes the marginal social cost curve. The marginal

ssocial cost is the sum of marginal private cost and marginal compliance cost of domestic environmental regulations. Under autarchy, the equilibrium output and prices are q3 and p1 without an environmental policy, and q2 and p2 with an environmental policy. A tax per unit of output equal to dk is necessary to produce optimal output. The welfare loss with an environmental policy is lower by area of the triangle dce. If the world price is p, there is an export opportunity. The

wexporting country is assumed to be small in the sense that its volume of export does not affect the world price. In the absence of domestic environmental policy, the equilibrium output is given by q5. With a domestic environmental policy, that is, a tax per unit of output equal to gl, the output will be lower, at q4, but the social welfare loss will be lower by area of the triangle gfh. Thus, trade liberalisation with a sound environmental policy enhances the social welfare. If the country is required to meet an environmental standard higher than the one appropriate for the country, then the social

cost of complying with the standard will be higher. MCH denotes the marginal social cost curve corresponding to the high standard. The equilibrium output q1 is smaller than q4 and there is a decrease in the social welfare. In fact this situation is worse than the situation under autarchy with a domestic environmental policy regime.

The results corresponding to the different policy regimes are summarised in Table 1.

Trade liberalisation and environmental compliance requirements also provide an opportunity for developing countries to undertake structural reforms, technological upgradation and joint ventures, and creation of a policy environment to lower marginal social costs (rightward shifts of the MCS and MCH curves) and thereby increase production and exports without an increase in pollution. Porter and van der Linde (1995) argue that competitive advantage rests on “the capacity for innovation and improvement that shift the constraint” (p 98).

IIIIIIIIII

Tariff and Non-Tariff BarriersTariff and Non-Tariff BarriersTariff and Non-Tariff BarriersTariff and Non-Tariff BarriersTariff and Non-Tariff Barriers

and Environmental Costs for Export of Leatherand Environmental Costs for Export of Leatherand Environmental Costs for Export of Leatherand Environmental Costs for Export of Leatherand Environmental Costs for Export of Leather

and Leather Productsand Leather Productsand Leather Productsand Leather Productsand Leather Products

Tariffs

In most industrialised countries, the average bound rates for the leather, rubber, footwear and travel goods group is higher than the average bound tariff for all commodities. For example, in the USA the overall bound tariff is 3.9 per cent but the average bound tariff for the leather group is 8.4 per cent; in the EU the corresponding percentages are 4.1 and 4.8.

Tariff escalation is common in the leather group. Table 2 gives the average bound tariffs by stage of processing.

A higher tariff for finished product than for raw material implies that the effective rate of protection for the finished product is higher than the nominal rate of protection. Such a tariff policy limits access to leather products of developed countries by developing countries. The regional trade agreements and free trade agreements in major importing country groups create unfavourable terms of trade for the exports of developing

Table 1: Trade Liberalisation and Environmental Policy:Table 1: Trade Liberalisation and Environmental Policy:Table 1: Trade Liberalisation and Environmental Policy:Table 1: Trade Liberalisation and Environmental Policy:Table 1: Trade Liberalisation and Environmental Policy:

Equilibrium Output, Price and Social WelfareEquilibrium Output, Price and Social WelfareEquilibrium Output, Price and Social WelfareEquilibrium Output, Price and Social WelfareEquilibrium Output, Price and Social Welfare

Autarchy Trade Liberalisation

No With No Domestic Higher

Environ-Environ-Environ-Environ-Standards

mental mental mental mental from

Policy Policy Policy Policy Importers

Equilibrium c d f g i Output q3 q2 q5 q4 q1 Price ppp

p1p2 www Social welfare abd-dce abd abgj-gfh abgj abij

Table 2: Tariff Escalation in Leather and Leather Products, 2003Table 2: Tariff Escalation in Leather and Leather Products, 2003Table 2: Tariff Escalation in Leather and Leather Products, 2003Table 2: Tariff Escalation in Leather and Leather Products, 2003Table 2: Tariff Escalation in Leather and Leather Products, 2003

Country Stage of Processing Raw Material Semi-Finished manufactured Products

US 0.0 2.3 11.7 European Union 0.1 2.4 7.0 Japan 0.1 10.4 20.7 Korea 9.4 11.1 19.8

countries. Developing countries like India are gradually losing the tariff preferences under the generalised system of tariff preferences in the EU.

Concerns about consumer safety, ecology, “unfair trade” and ethical preferences have motivated the EU and the US to prescribe regulations, standards, ecolabelling, compliance with domestic waste discharge standards, packaging requirements, ethical treatment of animals and so on. Germany leads the EU in this regard.

Limits have been prescribed for various toxic-chemicals and metals in leather products. The restricted substances are pentachlorophenol (PCP), azodyes, formaldehyde, chrome VI, short chain chlorinated paraffins (SCCPs), tetrachlorophenols (TCP), nickel, phthalates, specific flame retardants, disperse dyes, extractable chromium, biocides, tri butyl tin (TBT) and N-methylpyrolidine. Specific test protocols have been prescribed for testing consumer products for the presence of various restricted or banned items.

The EU directive on packaging and packaging waste sets certain requirements for the composition, recycling and recovery of packaging, which the importers have to comply with. In some cases, consumers demand compliance with their environmental requirements, e g, ecological properties of goods. Some green activists, consumer organisations and People for Ethical Treatment of Animals (PETA) campaign against cruelty to animals. Boycott of purchases of leather products from countries allegedly indulging in cruelty to animals is becoming more frequent in recent years.

Eco-labelling is a voluntary method of environmental performance certification based on life cycle consideration. There are international standards such as ISO 14020, ISO 14024, ISO 14021 and ISO 14025. Many countries develop their own eco-labels. Some eco-label schemes aim at leather properties while others also take account of the ecological consequences of leather production. Functional requirements are included in some schemes. Some schemes set concentration limits for restricted substances.

These requirements are becoming more complex and stringent in recent years. Some of these requirements, especially in the EU are higher than the international norms and hence they affect the entry and cost of market access to developing countries’ exports. Some importing countries also insist on evidence of compliance with domestic environmental requirements. The certification procedures cause delays and increase the costs to the exports.

The exporters of leather and leather products have to incur expenditures to meet domestic environmental norms as well as satisfy the environmental requirements of the importing countries. As for the domestic environmental compliance is concerned, the producers can undertake either end-of-pipe treatment activity by erecting their own treatment plants or being connected to common effluent treatment plants, or adopt clean technologies. It is well known that the unit pollution abatement cost is higher for small firms than for large firms because of economies of scale in pollution abatement. Technological upgradation requires new investments and for majority of the units access to the capital markets is limited. Therefore, government support in the forms of technical and financial assistance is needed.

Hides and Skins Supply and Availability

The production of hides and skins depends not only on the number of livestock but also on the offtake rate and the average weight per animal. While the developing countries had 78 per cent of the bovine stock in 1999-2001, their share in production of hides in terms of wet salted weight was only 54 per cent. India, with about 21 per cent of the world stock, accounted for only 7 per cent of the production. India’s poor record is due to the low offtake rate, which is due to a ban on cow slaughter, and the poor rate of collection of hides from the fallen animals, and the low average weight per animal of about 10 kg compared with the world average of about 18 kg. As a result, India’s share in the world production of bovine hide in 1999-2001 was even below the shares of Brazil and China. China augmented the availability of bovine hides via imports. India’s hide is also of poor quality because of pre-mortem and post-mortem defects.

The share of developing countries in the world production of sheep and goat skins increased from 53 per cent to 67 per cent. While the increases in the shares of Brazil and India were small, China increased her share by more than 200 per cent. China also augmented the availability by imports. As a result China had nearly one-fourth of the global output of leather production (Table 4).

Leather Production and Availability

Tanning of hides and skins into finished leather is the intermediate stage in production of leather products. Tanning is the most polluting stage in leather production. Even in tanning more than 80 per cent of the pollution load results in the first stage when raw hides and skins are converted into wet blue or East India tanned leather [Sankar 2003; Sahasranaman 2003 and Odegard 1998]. Unfortunately, the ITC, FAO and HS databases do not give the output information by stage of leather tanning. The FAO gives leather output data under three categories – bovine heavy leather, bovine light leather and light leather from sheeps and goats.

Developing countries’ shares in the world production of bovine heavy and light leather increased by 50 per cent during the 15year period. While the shares of Brazil showed slight increases, China’s shares increased by five times. On the other hand, India’s shares of both types of leather fell. Brazil and India remain net exporters of both types of leather while China is a large importer of light bovine leather (Table 5).

In production of leather from sheep and goat skins also, the share of developing countries increased from 46 per cent to 72 per cent. The share of Brazil decreased, the share of India increased but the share of China increased by seven times. While Brazil and India remain net exporters of the leather, China has become a large importer (Table 6).

More than three-fourths of the leather exports from Brazil in 1997, in terms of weights, was wet-blue leather. Thus, Brazil was specialising in the most polluting and least value added stage of tanning. From 1991-92, India had been exporting only finished leather because of export restriction on semi-finished leather.

Leather Products

In the production of leather shoes, the share of developing countries increased from 39 per cent to 75 per cent. While the share of Brazil fell and that of India improved slightly, the share of China increased by four times (Table 7).

In terms of the export value of leather and leather products, China has become the largest exporter since 2000, overtaking the position held by Italy for a long time. Brazil and India occupied the sixth and eighth positions in 2002. China’s export basket is well-diversified. She occupied the first place in leather

Table 3: Number of LivestockTable 3: Number of LivestockTable 3: Number of LivestockTable 3: Number of LivestockTable 3: Number of Livestock

(Per cent)

Country/Region Bovine Animals Sheeps and Goats 1984-86* 1999-2001* 1984-86* 1999-2001*

Developing countries 69.77 78.16 64.75 76.53 Brazil 9.33 11.35 1.80 1.35 China 5.91 8.40 9.98 15.84 India 19.46 20.66 9.16 10.24 Developed countries 30.23 21.84 35.25 23.47

* Annual average Source: Derived from FAO (2003) as in Sankar (2005).

Table 5: Production and Availability of Bovine LeatherTable 5: Production and Availability of Bovine LeatherTable 5: Production and Availability of Bovine LeatherTable 5: Production and Availability of Bovine LeatherTable 5: Production and Availability of Bovine Leather

(Per cent)

Country/Region 1984-86* 1999-2001* Production Availability Production Availability

A Heavy leather (tonnes) Developing countries 40.63 39.09 63.21 63.32 Brazil 4.89 4.61 5.53 4.42 China 6.24 6.44 29.58 28.96 India 10.79 10.73 10.41 10.30 Developed countries 59.37 60.91 36.78 36.68

B Light leather (sq ft) Developing countries 40.06 37.87 59.41 70.34 Brazil 4.09 3.55 5.82 1.84 China 3.45 4.93 15.02 40.16 India 6.10 4.79 5.27 4.95 Developed countries 59.94 62.13 40.59 29.66

* Annual average Source: Derived from FAO (2003) as in Sankar (2005).

Table 6: Production and Availability of Light Leather fromTable 6: Production and Availability of Light Leather fromTable 6: Production and Availability of Light Leather fromTable 6: Production and Availability of Light Leather fromTable 6: Production and Availability of Light Leather from

Sheeps and Goats (sq ft)Sheeps and Goats (sq ft)Sheeps and Goats (sq ft)Sheeps and Goats (sq ft)Sheeps and Goats (sq ft)

(Per cent)

Country/Region 1984-86* 1999-2001* Production Availability Production Availability

Developing countries 46.25 37.21 72.10 67.43 Brazil 1.86 1.43 1.35 1.16 China 3.45 4.31 25.50 31.66 India 14.31 8.66 15.89 11.79 Developed countries 53.75 62.79 27.90 32.57

* Annual average Source: Derived from FAO (2003) as in Sankar (2005).

goods, non-leather footwear and saddlery and harness; the second place in leather footwear, footwear components and leather garments, and the fourth place in leather. Brazil occupied the third place in leather, the fifth place in leather footwear and the ninth place in non-leather footwear but her rank is 11 or below in other products. India’s export basket is diversified as in China. She occupied the third place in leather garments and saddlery and harness, the fourth place in leather goods, the fifth place in footwear components, the eighth place in leather and the 28th place in non-leather footwear (Table 8).

It should be noted that, unlike countries like Italy and Spain, markets for the products of the three countries are either in the medium-priced or the low-priced product segments. Despite its large export share of 53 per cent in terms of number of pairs of leather shoes in the world exports, China’s share in the world export value of leather footwear in 2002 was only 21 per cent. Unlike Brazil and India, China by relying on large-scale imports of hides and skins and leather, concentrates her effects in production of leather products, which are labour-intensive and where value additions are higher than in the early stages of production.

This section identifies the policy responses in China which enabled her to become the largest producer and exporter of leather and leather products by 2000. It also traces the factors for the relatively poor performances of the leather industry in Brazil and India, despite their better initial positions in terms of the raw material availability.

China’s dominant position in production and exports of leather products, particularly footwear, is attributed to the Taiwanese element, Hong Kong’s financial, logistic and trade infrastructure and Chinese government’s policies.

Escalating labour cost in Taiwan in the 1980s induced Taiwanese leather manufacturers to shift their operations to China. The Chinese government’s open door policy, special preference treatment to Hong Kong, Chinese and Taiwanese to travel and invest in China, joint venture tax incentives like a twoyear exemption and 50 per cent discount in income tax in the third year, a one-stop shopping centre for getting all approvals within a few days for foreign investment into China, streamlining of government structures and procedures, and delegation to local authorities of the power to approve foreign investment attracted a large flow of investment. The share of Taiwanese investment in the foreign investment in the 1990s was about 80 per cent of the total investment in Chinese footwear sector.

The well-established banking, financial and trade infrastructure of Hong Kong facilitated this shift and boosted the trade in leather and leather products. In Shiling Leather City, which accounted for half of China’s leather production and home to a large number of famous brands of leather goods, Hong Kong’s investment was about 90 per cent of the foreign investments. The Chinese government opened up the state-owned enterprises for private acquisition and reduced the social responsibility of these enterprises to improve competitiveness. The distribution structure with a short transaction cycle of five to 20 days between production and delivery, centralised locations for wholesale distribution, production only on orders received and well-developed components markets enabled the exporters to reduce the costs of supplying leather footwear and leather goods.

Table 7: Production and Availability of Leather Shoes (Pairs)Table 7: Production and Availability of Leather Shoes (Pairs)Table 7: Production and Availability of Leather Shoes (Pairs)Table 7: Production and Availability of Leather Shoes (Pairs)Table 7: Production and Availability of Leather Shoes (Pairs)

(Per cent)

Country/Region 1984-86* 1999-2001* Production Availability Production Availability

Developing countries 38.80 29.51 75.29 53.15 Brazil 5.60 2.36 4.76 2.21 China 10.03 7.66 42.43 25.81 India 3.66 3.46 3.88 3.07 Developed countries 61.20 70.49 24.71 46.85

* Annual average Source: Derived from FAO (2003) as in Sankar (2005).

Table 8: Exports of Leather and Leather Products in 2002Table 8: Exports of Leather and Leather Products in 2002Table 8: Exports of Leather and Leather Products in 2002Table 8: Exports of Leather and Leather Products in 2002Table 8: Exports of Leather and Leather Products in 2002

Country Export Value Share in the Country Rank (US $ Billion) World Exports (Per Cent)

Leather and leather products

Brazil 2.564 4.02 6 China 16.161 25.34 1 India 1.878 2.94 8

Leather

Brazil 0.959 6.96 3 China 0.958 6.96 4 India 0.506 3.68 8

Leather footwear

Brazil 1.269 5.57 5 China 4.816 21.14 2 India 0.394 1.73 13

Footwear components

Brazil 0.068 1.65 15 China 0.409 9.90 2 India 0.191 4.62 5

Leather garments

Brazil 0.001 Neg. 44 China 1.931 49.97 2 India 0.272 7.05 3

Leather goods including gloves

Brazil 0.088 1.23 11 China 2.080 29.06 1 India 0.433 6.05 4

Saddlery and harness

Brazil Neg. 0.04 43 China 0.102 23.29 1 India 0.043 9.95 3

Non-leather footwear

Brazil 0.180 1.55 9 China 5.865 50.36 1 India 0.037 0.32 28

Source: CLE (2003).

annual production of less than 30,000 pieces of equivalent cattle hides should be shut down by the local governments above the country level. It also mandated that the production capacity of any newly-constructed tannery factories should not be less than 1,00,000 pieces of equivalent cattle hides. China’s compliance with domestic environmental standards is partial.

China has a pollution charge for excess discharge over concentration-based discharge standards. The charge is based on one pollutant which violates the standards most. The charge is collected by local environmental protection agencies but 80 per cent of the charge fees are retuned to enterprises for pollution control [Wang 2001].

China developed an early-warning system for making proactive responses to technical trade barriers. In 1994, the China Association of Leather Industry registered the certification trademark

– genuine leather mark – at the State Administration of Industry and Commerce and simultaneously the trademark was internationally registered in 14 other countries including Germany, the international registration number being 705857. After seven years’ preparation the China Leather Industry Association pushed out “Genuine Leather Mark Eco-Leather” from July 2003. The GLM Eco-Leather specifies the requirements (1) to enable the domestic leather industry to adapt to international rules, apart from regulations on ordinary physical and chemical indexes of leather, the standard stressed regulations on hexavalent chromium, forbidden azo-dyes, free formaldehyde, and PCP that possibly exist in leather and (2) to adopt the national standards for testing of physical and chemical indexes and the German standard for testing of special chemicals.4

Brazil

Odegard (1998) notes dramatic structural changes in the Brazilian tanning industry to economic liberalisation and environmental regulation. First, the industry passed through a regressive restructuring since the late 1980s. Between 55 and 65 per cent of the companies went out of business, and many of the serving companies are heavily indebted. Second, concentration of production had increased. Stronger domestic tanneries and foreign investors bought the bankrupt or weak tanneries. In 1997, Italian investors owned 10 per cent of the production capacity for wet-blue leather and had owner interest or rented production capacity in companies that did another 30-40 per cent of the total production. Third, relocation of tanneries from the south to the interior and northern regions of Brazil has taken place to take advantages of the incentives, lower labour costs, less unionisation and being closer to the hide source.

Brazil’s main exports have been leather and leather footwear. Of the leather exports, 77.5 per cent in 1997, in terms of weight, was wet-blue leather. It accounted for 87.2 per cent of the pollution costs. The value per kg of wet-blue leather was only US $ 2.3, while the value per kg of finished leather was US $ 14.9.5 The dominant share of wet blue leather in the total leather export was due to the tariff policies of Brazil and Italy. Brazil imposed an export tax only on salted hides. Italy had zero import duty on salted hide and wet-blue leather but levied import duties on crust and finished leather. As a result Brazil specialised in a low-value added and highly polluting activity. Brazil started imposing export duty on wet-blue leather in 2000.

In the leather product market, Brazil’s comparative advantage is on leather footwear. Until 1990, Brazil did not import leather shoes. Increased import of shoes from China affected Brazil’s shoe production. Domestic shoe output halved from the top year of 1986 to 1994. Brazil responded by raising the import duty from 20 per cent to 63 per cent in 1995; then it lowered the duty to 36 per cent in 1997.

Brazil’s law of environmental crime came into effect in April 1998. It calls for incarceration of those who commit crimes against nature. There are regional variations in the enforcement of environmental laws. A few states like Panama ordered closure of tanneries not complying with environmental regulations. States in the west-central and northern regions relax the environmental rules to attract new investments.

Even though the effluent treatment cost in leather tanning is less than half of the value in Italy, the Brazilian tanners have been reluctant to invest in pollution abatement/clean technologies. The reasons are (a) lack of demand for ecological leather either in the internal or the global market, and (b) fear of losing competitive advantage in leather and leather footwear because of competition from China and other Asian countries. But trade liberalisation and environmental requirements abroad have put pressures on the exporters to comply with the EU requirements on the use of chemicals, and through foreign partnerships they get access to better tanning technology and capital at low interest rates.

India

India’s potential supply of bovine hide is much larger than the actual supply. The Central Leather Research Institute (CLRI) (1987) found the offtake rate for cattle in India at 10.8 whereas the average for the world was 20.2 and for the US it was 35.7. It estimated that non-recovered hides accounted for 23 per cent of the potential supply in the case of cattle and 14 per cent in the case of buffaloes. It recommended establishment of slaughter houses and abattoirs. The task force on animal husbandary for the Tenth Plan noted ante-mortem and post-mortem defects in hides and skins which affect the quality of leather.6 The problems affecting the quantity and quality of hides and skins are well known but the problems remain unsolved.

According to the CLRI, there were 2091 tanneries in India in 1998, of which more than 80 per cent was in the small-scale sector. Even though the Water (Prevention and Control of Pollution) Act was enacted in 1974 and the CLRI (1986) undertook a study of erection of common effluent treatment plants (CETPs) in industrial clusters in 1986, the construction of CETPs commenced only after 1990, because of public interest litigation by the affected people in tannery areas. The Supreme Court order of 1996 forced tanneries either to have individual effluent treatment plants (IETPs) or connected to CETPs or face closure. Most of the CETPs and IETPs do not have the facility to reduce the TDS level or to treat the solid wastes. India initiated modernisation of tanneries programmes but the progress has been slow. The environmental legislations and management practices of the CEPTs rely on the regulatory approach rather than on incentive-based economic approach [Sankar 2001 and Sankar 2004].

The Kolkata Leather Complex was conceived in 1996 to relocate 500 odd highly polluting tanneries in the eastern fringes of Kolkata. The complex has not yet become operational. Reservation of tanneries for small-scale industries and permission for tanneries in large-scale sector subject to a export requirement continued till 2002. The first joint venture in tanneries came only in 2005.

In leather manufacturing also, until recently, the government’s industrial policy was to encourage the growth of small-scale units via licensing and reservation of products. In 2002, except in the non-footwear segment, 80 per cent or more of the products came from the small-scale sector. Most items of leather manufacture were dereserved by June 2003. Even though India introduced an eco-label for leather it lacks market recognition. The campaign by organisations like People for Ethical Treatment of Animals (PETA) resulted in boycott of Indian leather by 40 foreign companies. Recent changes in policies relating to reservations, export requirements, foreign direct investments and technology transfers have attracted 10 foreign direct investments, eight joint ventures and 14 technology transfers, mostly in the footwear segment [Sankar 2005]. The Foreign Trade Policy 2004-07 contains special focus initiatives for the leather sector.

India responded to the global environmental requirements for leather exports. Manufacture and use of PCP has been banned in India. The CLRI in collaboration with the India-German Export Project has set up special testing equipment for PCP at six centres. Suppliers of dyes have already stopped producing unacceptable azo dyes. Two modern physical and chemical testing laboratories have been set up. The chemical manufacturers were alerted to the other restricted substances so as to enable the industry to meet the environmental requirements abroad substitutes for banned/restricted substances are sold by Indian and foreign companies in India.

India’s policy responses to the challenges of liberalisation and globalisation have been reactive rather than proactive. The speed of response has been slow as it is evident in realising the potential supply of hides, tannery modernisation and relocation; and restructuring of leather manufacturing units.

Compared with Brazil and India, China has been quick to seize the export opportunities. Her export of leather and leather products increased from US $ 11.432 billion in 1999 to US $ 19.241 billion in 2003, capturing 53.68 per cent of the incremental global export. The shares of Brazil and India in the incremental growth were only 5.46 per cent and 4.02 per cent. China could become the leader by increasing domestic availability of raw materials, both by increasing domestic production and imports, and enhancing her competitive advantage in leather manufacturing. China specialises in production of low-value added and mass-production goods. For example, the average export value per pair of leather footwear during 1999-2001 was only US $ 6.94, compared with US $ 9.04 for India, about US $ 12 for Brazil and above US $ 20 for Italy, Germany and UK. China could undertake industrial and trade policy reforms successfully perhaps because of the oneparty rule, provision of a safety net for displaced workers and technical and financial support from Hong Kong and Taiwan. However, the scale effect due to the rapid growth of the industry, particularly tanneries, and partial compliance with the domestic environmental regulations, would increase the pollution load in China.

There is need for a proactive strategy by developing countries in trade negotiations, standard settings based on the TBT and the SPS Agreements in developed countries, and ensuring implementation of technical and financial support promises from developed countries.

The 2001 Doha ministerial declaration of the WTO urged negotiations for increasing market access in products of export interest to developing countries via reduction in peak tariffs and tariff escalation in industrialised countries. The WTO Framework Agreement adopted on August 1, 2004 revived hope for the Doha negotiations. This agreement also reflects the concerns of developing countries relating to rural development and livelihood security as regards tariff reduction formula for developing countries.

The Hong Kong ministerial declaration of the WTO [WTO 2005] reaffirms the members’ commitment to the mandate for negotiations on market for non-agricultural products as set out in paragraph 16 of the Doha ministerial declaration. It says it will adopt measures which “reduce or as appropriate eliminate tariffs, including the reduction or elimination of tariff peaks, high tariffs and tariff escalation, in particular on products of export interest to developing countries; and take fully into account the special needs and interests of developing countries, including through less than full reciprocity in reduction commitments” (paragraph 14).

Regarding the stringency of environmental requirements, the developing countries should articulate that (a) the importing countries have the right to impose restrictions only when the product has pesticide or other environment damaging effect in the importing country; (b) when developed countries set standards higher than the international standards, the developing countries must be associated with the agencies responsible for formulating new standards/eco labels or other requirements; and

(c) developing countries should be given sufficient time to make the preparatory steps to cope up with the new requirements. The developing countries, in cooperation with the UNCTAD, the UNEP, industry associations and technical institutions must develop forewarning systems about the changes abroad and assist in ensuring smooth transition to the changed requirements in a cost-effective way.

Developing countries should negotiate for implementation of the Rio Principle “common but differentiated responsibilities” and seek technical support, financial assistance and capacity building effort in managing the challenges to globalisation and environmental protection.

m

Email: usankar@mse.ac.in

[An earlier version of the paper was presented at the International Conference on Environment and Development: Developing Countries Perspectives, April 7-8, 2005, at Jawaharlal Nehru University, New Delhi.]

1 Bhagwati and Srinivasan (2002) formulate a general equilibrium model to analyse the issues. We use the Marshallian approach because it is simpler and easy to represent the external cost.

2 For details see Sahasranaman (2005)

3 http://www.cestt.org.cn.english/english/online-services/sectors/ tannery%20industry%20.nt Downloaded October 1, 2004.

4 http://www.china-leather.com/english/new/glm/ecoleather/spec.htm Downloaded October 1, 2004.

5 Source ABICOURO, 1998, quoted in Odegard (1998)

6 This report is included in the Report of the Working Group on Leather and Leather Goods Industry for the Tenth Plan. See Government of India (Planning Commission) (2001).

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– (1987): Report of All India Survey on Raw Hides and Skins, prepared for the Ministry of Commerce, Government of India. Copeland, Brian, R and M Scott Taylor (2003): Trade and Environment, Theory and Evidence, Princeton University Press, Princeton.

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