Extracts from the SauerReport

Despite many rumours which include requests by American authorities to the Chinese to 'rethink' the new import rules and even the mention of a delay until July 1, there is nothing official which prohibits implementation as of January 1, 2006.

This means that raw hide and skin imports are subject to 5% import duty and 17% VAT payable on arrival of the goods in China. Upon re-export as finished leather and/or finished leathergoods, 13% VAT will be refunded. Existing 'customs books' remain valid until expiry date.

Wet-blue imports destined for finished leather export or final product export will continue to enjoy the advantages of the 'custom book'. This means deferred import duty and VAT. Wet-blue importers (who re-export) do not have to put up cash in advance as raw hide importers must do now. They never actually pay the import duty and the VAT if they re-export since it is all deferred.

Raw hide importers pay and lose the 5% import duty (even if they re-export) and only get 13% VAT of the 17% paid up front, if they re-export.

Thus, there is a 9% advantage when importing wet-blue for export over importing raw for export. This is one of the arguments raw hide importing tanners raised. They call this unfair competition with the colleague tanners who import wet-blue. They do admit, however, that it meets the government objective to reduce pollution.

Importers who do not re-export, of course, lose everything. Import duty on finished leather is 8%.

Further reactions from China to the new import rules indicate that for foreign-owned and joint-venture companies which decide to stay, it might be more interesting to sell to the domestic market than re-export.

This would create more competition on the domestic market and force out the weakest players there. Since these foreign companies would find it too risky to under value/invoice etc, or play some of the other classic tricks to save on taxes, it would make domestic business more transparent.

Problems between the provincial and central government could be expected about the division of the VAT they collect. At the moment, VAT charged on imported goods goes partly to the provincial government concerned and partly to the central government. The VAT return after export, however, is to be paid out by the provincial government only. This would mean that in a leather export heavy province like Guangdong, the local government would have to pay out more than they cash while the central government is the silent winner. They would only take the cash and not pay anything. This could cause trouble between the authorities.

When exporting to/through Hong Kong, tanners will receive their tax refund quicker. It will, therefore, be interesting for a tanner close to Hong Kong in Guangdong province to export his leather to Hong Kong, collect his tax refund, and then send the goods back to his neighbour, the shoemaker in Guangdong, to whom in the past he trucked directly. It would mean unnecessary transport costs and needlessly increased delivery times.

Apparently the Treasury and Customs Departments in China would be more than happy to see the new import duty policy carried out. The reason is they both will benefit immediately from the 'new' income.

It is estimated the shoe industry employs more than one million workers (not including allied trades). However, most of the labourers in the shoe sector are on a low income and the income tax they contribute is minimal so the government will not lose much on that side. And a few hundred thousand unemployed because of the new policy would not be a major concern to the two Departments mentioned. Apart from the direct financial benefits, they can also proudly claim they support the Government's 11th 5 Year Plan, which aims to curtail polluting or high energy consuming industries by forcing them to pay up for their unpleasant and unwanted characteristics or to close their doors if unable to do so.

Taking a closer look at the problem, one sees that most foreign-owned or joint-venture tanneries are export/re-export orientated. This counts for the shoe, leathergoods, furniture and garment sectors. They would not get a license to operate unless they invested heavily in their effluent control to comply with the rules.

These tanneries rely heavily on imported raw material since the local Chinese production is either insufficient or not of the right quality. This means they are also the ones to cough up the import duty and the 17% VAT (until they eventually get the 13% refund after export).

The real polluters are the domestic Chinese owned tanneries in interior provinces such as Henan, Hebei, Hunan and Xinjaing who use mainly domestic raw material. In Xinjaing, a lot of hides are worked from central Asia. Hence forcing export orientated tanners using imported raw material to pay import duty and VAT will not stop these home grown tanneries from polluting the environment.

It has been confirmed that the confusion about new import regulations in China has already resulted in leather orders being diverted from China to Italy. This confirmation concerns upholstery leather. Interesting in this specific case is that furniture and leather were until now both produced in China but that the manufacturer now prefers to have the leather made in Italy, then has it shipped to China to be turned into furniture (for export).

It is not only China which has improved the upholstery leather business in North Italy since the summer holidays. Also the stronger US dollar has helped improve sales to North America. The advantage for the Italian tanners is in the region of 10% (currency advantage minus increased production and transport costs).

Better orders coming to Italy, for upholstery, fashion articles and 'specialities' mainly, do not mean they bring a better profit or any profit at all. As far as 'diverted orders from China' are concerned these orders came at Chinese prices also. And clearly Italy cannot produce at the same cost the Chinese can. But for the moment, all are happy there is more business. The next step is to make it a profitable business. Another structural change in the trade is the disappearance of clearly defined seasonal orders and the lack of longer-term programmes. But these are things that do not date back to yesterday and one may presume tanners (also outside Italy of course) have adapted to these new facts and by now know how to live with them.

Major producers of calfskins such as France and the Netherlands continuously look for better prices but important buyers like Italy will not pay more. Finished leather prices are only coming down they say. The ironic part of the story is that the finished goods manufacturers who buy these skins (top handbag and shoe brands mainly) report better results and higher profits all the time while they are the ones who want to pay the tanners ever less.

In Spain, a number of tanners already reported that 2005 will end worse than 2004. Fewer orders, less volume and less profit. Many have not been able to work at more than 60-70% of their capacity. Redundancies have been plenty but may still not be enough. Skin tanners were happy with lower prices this year for their domestic raw material (about 10% a fellmonger says) but quality was not that good which of course had a similar effect on leather sales prices.

Printer friendly version

Email this article to a friend