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04/01/12 - The idea of free trade only works in the academic world

An alternative vision of trade in the 21st century

A guest blog by RICHARD SMITH

Richard is an independent commentator on the textile, leather and footwear industries.

The topic ‘International Trade - New Challenges' was of one of the panels at the World Leather Congress recently held in Rio de Janeiro on November 9th 2011. What was interesting was that the subject of "trade" had come up during the World Footwear Congress held at the same venue two days earlier. In a nutshell there was no agreement on trade - free or fair - between presenters representing developed and developing nations.
Speakers from Italy, for example, defended "free trade" as they wanted to export footwear to the growing Brazilian market but are being charged the 35% import duty on their products as permitted by the World Trade Organization and this tends to make them uncompetitive.

Cleto Sagripanti, President of the Italian Footwear Association (ANCI), said that he "wanted zero tariffs". The Brazilians, on the other hand, had little faith in how free trade is currently being practiced. Milton Cardoso, President of the Brazilian Footwear Association (Abicalcados) said that "societies should be asked if it wanted free trade". The director of JBS Group, Marcus Vincius Pratini, stated clearly in his presentation; "The idea of free trade only works in the academic world".

If you are from Europe the mantra of "free trade" is everywhere since, according to Sagrpanti, the EU is the most liberal trade regime in the world. This is true from the point of view of trade in itself but what about the huge subsidies funding the EU's Common Agricultural Policy to benefit European farmers? Such subsidies are an affront and gross contradiction to the idea of free trade but are ignored by European politicians, entrepreneurs and economists who want free movements of goods and services worldwide.

The point is that you cannot have it both ways. In the big picture of world trade it is impossible to extract say, leather and footwear out of the mix, and have zero tariffs on them when other products and commodities are being subsidized or have import duty imposed on them. Emerging countries are frowned upon for having a similar policy by the developed world. Argentina was criticized during the World Leather Congress for applying export duties to hides being exported to Europe. (What about EU tariffs on Brazilian agricultural products entering Europe?)

Alongside the "squeaky clean" mantra of free trade, which is not really free at all but a convenient verbal deception, goes the unpardonable sin of being "protectionist" by imposing duties on products from other countries or imposing export duties on raw materials which your local industry might actually need - the classic case being Argentine hides for Argentine tanneries. In fact, if you think about it, until the current deception surrounding the western definition and practice of free trade is clarified then subsidies render it the same as being protectionist.

To prove this point it is worth quoting former President of the World Bank, James Wolfensohn, who stated on March 3rd 2004 that the developed countries fund their agriculture - directly and indirectly - to the tune of US$300 billion per year - that is, almost US$1 billion per day and do not want their trading partners to do the same and then want to sign free trade agreements with them.

In the current scenario "all countries are equal, but some are more equal than others", to paraphrase George Orwell, with economically powerful countries holding the whip hand in many trade related matters.

Even the President of the Guanajuato Footwear Chamber (CICEG) in Mexico, Armando Martín Dueñas, is concerned about his country being opened up to zero tariffs on imports of Chinese footwear from December 11th 2011. He is concerned that there are still hidden subsidies on such production in China which will render his members' footwear uncompetitive in Mexico itself and could destroy the industry.

In a short conversation with Martin Dueñas, who is a convinced advocate of honest free trade, it was abundantly clear that Mexico had suffered a similar fate in the recent past. Mexico was self-sufficient in corn until the North American Free Trade Agreement (NAFTA) came into force with Mexico itself, the US and Canada on January 1st 1994. Over the years Mexico has imported more and more corn from the US since it is cheaper due to USDA subsidies for farmers. Now Mexico is almost 100% dependent on US corn imports for its staple diet of tortillas and has little or no corn production of its own, even though corn is a cultural mainstay of traditional Mexican life and cuisine. Now, will the same happen to Mexico's footwear industry in the context of "free trade" - which is apparently neither "free" nor "fair" in many cases? And what will the government do about the resulting unemployment and the probable demise of a traditional Mexican industry?

The aim of free trade is to build wealth between nations so that everyone can benefit. The theory is fine but what about subsidies - normally hidden subsidies which make products cheaper and therefore more competitive? These can range from local tax breaks; property tax rebates; cheap electricity; discounted payroll tax; no import taxes on imported raw materials and components; little or no environmental care; no collective wage agreements; no trade unions; no social security payments for workers, currency manipulation.....and so on. If some of these elements that contribute to reducing the unit cost of a product are out of balance within a bilateral trading partner, then this cannot be classified as free or fair trade. Someone somewhere has an unfair advantage.

What do we do about subsidies? Independent audits would have to be carried out if unfair or illegal subsidies were suspected much in the same way as nuclear power plants are inspected in the context of the Nuclear Non-Proliferation Treaty. If you really want honest and fair free trade this is a vital requisite to enable it - otherwise it is at best semi-protectionist. By expanding and redefining the constitutional global mission of the World Trade Organization (WTO) to include the environment, this organization could undertake the auditing task.

Look at the number of disputes that take place every year before the WTO. Currently there are 14 cases open against China leveled against its footwear exports for unfair trading practices. If trade is free and fair then manufacturers should benefit from their profits and not from obscure subsidies which violate the spirit and even the mantra of free trade. The problem is that people pretend that such subsides are "normal" which somehow makes them legitimate. Nothing could be further from the truth.

So what is the solution to this conundrum of facts, opinions and contradictions?

Replacing the current system with "Sustainable Trade"

International Trade has to be taken out of its traditional vacuum and linked directly to manufacturing procedures - and by this I mean that trade has to be linked to sustainable or environmental manufacturing.

Trade is ubiquitous and for this reason it is already implicitly linked to environmental concerns. Toxic financial products have endangered the global financial system and we must not allow toxic consumer goods to do the same to the global environment. With the world population expected to reach 9.3 billion by 2050 sustainable practices will become even more important since, without a healthy environment living creatures, including man, will not be able to survive longer term.

During the World Leather Congress, the lead speaker on the panel dealing with International Trade - New Challenges, Sergio Miranda da Cruz of The United Nations Industrial Development Organization (UNIDO) concentrated on trade and environmental concerns in the leather industry. "The sector will have to consider environmental management even more in terms of renewable energy. It is impossible for us to continue in this way since resources are limited," stated Cruz.

This is certainly part of the solution for the environment but how do we link this to trade and take on "New Challenges" when the "old challenges" have still to be resolved?

Despite programs aimed at consumers to recycle waste in many countries this is simply not enough to decisively benefit the environment. It is papering over the cracks since it is industrial production which produces 70% of harmful environmental and air borne waste. Thus, industrial practices must be tackled and given our attention. They must be the Number 1 priority, rather than concentrating on consumer actions when disposing of household garbage, for example.

Manufacturing and trade have been regarded as separate activities but in reality must be inextricably linked together. Sustainable manufacturing should be rewarded, by products made in this way having lower tariffs imposed on them. Products manufactured or produced with harmful discharges for the environment or are not biodegradable should have punitive tariffs imposed on them. In other words manufacturers, farmers and tanners will be rewarded for promoting and implementing an environmental service to society by limiting harmful waste and discharges into the environment.

A major obstacle to be overcome is that it is developing economies that lack the skills and/or financial and other resources to produce the newest and latest techniques. They have the will but not the means but if developed consumer nations want "green products" then they will have to accommodate (i.e. help pay and at least finance) the technology and environment machinery necessary to preserve the environment.

This idea goes beyond Free Trade - or "free for all or unregulated trade" and even beyond Fair Trade, since it ensures that environmental protection and sustainable practices are at the forefront of industrial production even before a product enters the international commercialization chain.

In the case of the footwear industry, and as proposed by Mike Redwood, Visiting Professor in Business Development in Leather at the University of Northamptonat, during the IUTIC conference in Mexico in November 2010, the carbon footprint of footwear manufacturing would be reduced if some effort was made to promote time zone manufacturing. For example, shoes for the Americas would be produced in that continent, cutting back the transport times, component delivery times and the fuel consumption needed to deliver shoes to market from Asia - half way around the world. Shoes for Europe could be manufactured there and even in Africa.

In this context Peter Geisler, President of the Swedish safety and occupational footwear manufacturer, Arbesko AB, stated at the World Footwear Congress that he had calculated how far some shoe components had to travel on average before reaching the retail shelves. The distance is twice around the world or approximately 80,000 km! This cannot be good business or environmental practice no matter how it is spun and is perhaps one of the manifest absurdities of unbridled globalization.

Time zone manufacturing does not mean that factories would lose business since they could set up manufacturing facilities in the required time zone and operate there. For example, Chinese or Vietnamese factories could set up operations in Latin America (there are already examples of this in Colombia) or Central America, as is the case with Taiwanese apparel manufacturers. Sustainable manufacturing would be rewarded; transport times would be shorter; employment would be created locally and manufacturing leading to international trade would not be focused just on profit and cost per unit, but environmental concerns would be an integral part of the manufacturing process. Thus sustainability would play an important role in establishing a competitive selling price for the finished item or pair of shoes.

To enforce such practices it would be necessary to involve UNIDO and the WTO (which would have to focus on the environment as well as on trade) with national and regional governments participating and patrolling the industrial processes and environmental cost. The name for this could be termed "Sustainable Trade". Longer term, this practice of Sustainable Trade will be more important than the traditional concepts of "Free Trade" or even "Fair Trade" since these two ways of doing business internationally do not encompass the greatest challenges mankind will face in the next 40 years in terms of planetary environmental protection.

Some may argue that a system of carbon credits which can be bought and sold will aid sustainable manufacturing but I disagree with this assertion. Carbon credits will favor countries and companies with large amounts of money behind them and will automatically place smaller manufacturers in developing countries at a competitive disadvantage.

The environmental impact of producing a piece of finished leather or a pair of shoes should not be offset by buying a carbon credit. To protect the environment production must have a lower impact and in the system of Sustainable Trade, the more competitive its price will be in the market place. This will encourage sustainable practices rather than using the loophole of buying carbon credits to continue to manufacture unsustainably.

Another objection could be that international and government regulations would interfere with investment and industrial production. This is an objection whose roots are embedded in a free trade ideology when the absolute priority must be to protecting the environment. Free Trade never has and never will subordinate profits to the environment. Voluntary restraints would simply not work. We are all dependent on the environment for survival and legal constraints and/or punitive fines would have to be applied and enforced by regulatory bodies.

Does it not make consummate sense - products fabricated unsustainably should be less competitive than products manufactured with the environment in mind. If you cannot sell a product due to a high environment tax levied on it, no one will manufacture it and in this way unsustainable or "toxic" products will be gradually excluded from the commercialization chain.

The whole trade paradigm needs to be rethought if industry is to act responsibly across the board and protect the environment. As Moacir Berger, President of AiCSul, said at the end of his presentation at the World Leather Congress, "Environmental policy is as important as commercial policy". The phrase Sustainable Trade encompasses both of these policies and with a decisive combination of political and commercial will it could be applied for the benefit of the expected 9 billion plus inhabitants of the Earth in first half of this century.

 

Let the debate begin!

This topic will be the subject of a debate to be held at the Prime Source Forum which runs from March 28th - 30th 2012 in Hong Kong entitled "Localization vs. Globalization" and will address the many challenges pertaining to this issue. Don't miss this debate if you are in Hong Kong. It is bound to be stimulating for all concerned!

 

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15/11/11 - Brazil: JBS sets new standarda

Guest comment from Richard Smith of APLF, based in Venzuela.  I was with Richard at the Rio Sumit on the 9th November and travelled with him to JBS

JBS - Setting New Standards

RICHARD SMITH - Richard is an independent commentator on the textile, leather and footwear industries.

The day after the World Leather Congress on November 10th a group of 35 industry experts were invited to a tour of the JBS tannery at Itumbiara in Goias state, some 1100 km north west of Rio de Janeiro.

After a journey by air and coach starting at 5am the group arrived at this impressive facility around 11:10am. After an introductory talk and video presented by JBS Marketing Manager Fernando Bellese, the group was taken on a tour of the plant.

The Itumbiara facility is geared up for retanning and finishing starting from wet blue which comes from another JBS plant some 30km away. Installed capacity can handle 10,000 crust and 6,000 finished hides per day and at present is expanding production to reach that level after the recent installation of the latest Italian and Swiss equipment valued at some US$30 million.

Production of finished leather is aimed 90% for upholstery and 10% for footwear. 13% of leather production is for the internal market and 87% is exported, mainly to China and Italy. The facility has its own water recycling plant and does not dump waste of any kind into the nearby Paraná River.

What is most impressive about the Itumbiara facility is its cleanliness, organization, modern equipment for maximum automation and productivity but, above all, the positive spirit of the 1400 workers, all uniformed, which was palpable to the whole group.

Many of the visitors had been in tanneries all over the world but the general consensus was that this JBS plant was by far the most advanced seen so far. Setting New Standards is the only phrase which does justice to this facility. 

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14/09/11 - UK Leather Federation New Strategy Launch

On Tuesday the 13th September the UK Leather Federation launched a new strategy document in a combined meeting with the Institute for Creative Leather Technologies at the House of Lords in London. Reg Hankey of Pittards spoke on behalf of the UKLF and gave an excellent speech. Here it is in full:
"The purpose of this event is to launch our strategy for the UK leather industry - as a whole - manufacturers and support organisations. I speak as a manufacturer, and isn't it refreshing to see that politicians, and others, are now talking about manufacturing as an activity that is important to the country.
I am also talking about the leather industry - which on a global scale annually produces over 20 billion square feet of leather, worth over 40 billion us dollars. And it is part of a huge international trading chain - international trade in hides, skins, leather and leather footwear is worth 63 billion us dollars a year, which is far greater than many other important commodities. T put UK trade into context, in 2010, the UK exported hides skins and leather worth £307 million
It is an opportunity also to remind everyone that while the UK leather industry may be quite small on a global scale, we can claim that technically, environmentally and socially it is just about the most advanced in the world. It was no accident that when the world leather journal instituted the "tannery of the year" awards in 2010, based on technical/environmental/social and economic criteria - the Scottish Leather Group's Bridge of Weir plant was named European tannery of the year and the Pittards' Ethiopia Share Tannery company was named world tannery of the year.
This recognition is due, not least, because of the unparalleled support infrastructure of education/training/technical/business support available to the industry in the UK from the university of Northampton, BLC, Leather Wise, Satra and others, and of course UK leather federation.
This new strategy has been devised to build on this position and to take the industry forward. It outlines 6 main strategic areas to focus on.
1 research & development - the UK industry can't compete in today's world purely on price - we need to produce leather better, quicker, more cleanly, more consistently as well as cheaper, within the constraints that exist. We need to maintain and energise the collective scientific base that underpins all of these.
2 environment - this has always been a key issue for our industry - and because the challenge is so great, the tanning industry globally, and especially in the UK has tackled many of the issues in advance of other sectors and, indeed, the UK is ahead of other countries. On one hand this gives us a collective advantage, but we also have to keep up our efforts to meet the twin challenges of ever tighter controls at home, and less regulated competition from overseas - and at the same time there is a clear need to minimise the export of pollution - it is better to do it here!
3 brand - we need to maintain a strong national trade association linked with our european and international colleagues. Through this we will seek to protect and promote the leather industry and the image of leather - for example against misdescriptions and consumer confusion in the marketplace.
4 carbon footprint/sustainability - the way in which the leather industry is perceived by its customers is taking on a new dimension as regards carbon footprints and sustainability. While leather producers can exert influence over their own performance, there is an urgently growing need for the industry to work with its partners to establish sensible, authoritative methodologies to measure performance that are not grossly skewed by factors outside the control of the leather industry.
5 UK raw material - the UK has an abundance of raw material to supply the leather industry, in terms of cattle hides, sheep skins - and others such as deer skins - but the industry collectively does need to work on ways in which this supply can best be utilised for the benefit, not just of the leather industry, but the whole production chain. If the material is not processed in the UK and is exported raw, then it becomes just another world commodity, with minimal value added in this country.
6 education and people - it may sound like a cliche, but, truly, people are our most valuable asset and we are very fortunate in this country to have the facilities of not only the University of Northampton, with its comprehensive range of education courses on leather and leather related subjects, but also other technical training providers such as BLC, Satra and Leatherwise to support our industry's need to have a well educated and well trained workforce.
So, in brief, we have a small but competitive, specialised and technically advanced leather industry in the UK, with a very strong support base of internationally respected education, training and technical organisations. This is a situation that we need to recognise, to keep and to enhance."

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17/08/11 - Warren Weinstein: a dynamo for good

In the small environment of the global leather industry you get the chance to meet some very fine people. For me one of the best I have worked with in recent years is Warren Weinstein the country director for Pakistan for the American consultancy JE Austin. 

I was privileged to work with Warren to help develop a strategic plan for the Pakistan leather industry. Warren has been in Pakistan for quite a number of years and is well settled with a great team of locals working for him, out of the large ground floor office in the house in Model Town Lahore.  The leather project was not a US AID funded project but one directly for the Ministry of Light Industry. My understanding was that at least part of the reason  JE Austin were awarded the contract was because of the excellent work Warren  had completed in other sectors such as marble, furniture and the dairy industry. 

While I was there I stayed, as so many others must have done, in the house in Lahore. The office occupies the ground floor and basement while on the first floor is an entrance into Warren's apartment and a separate entrance into a guest room for visitors.  It was an excellent set up to keep guests away from having to stay in hotels and for making early starts to reach factories out of town.

Warren is really quick witted and intelligent. The knowledge he brings to every subject is immense, and he soon grasped the issues that the leather industry has to deal with.  Raw material supply and quality, environment matters, labour content at different stages of the value chain are just a few.  We spent hours and days discussing these and the implications for Pakistan where despite a large population the home market is not really very able to absorb that much in the way of finished product.  Yet there is a growing demand for footwear and we talked about all the new regional markets. We envisaged a future in which Kasur could build on its small tannery sector, its effluent treatment facility and its shared finishing set up to become a creative centre for design and production of leather products.  This would build on its small streets and its ancient history of sandal making. We went through all the options for towns like Sialkot which has some excellent plants and a super laboratory facility but little effluent treatment and a hangover from the lost days of making soccer balls for Nike. We spent a long time in Karachi looking at both the educational institution but also some top rate tanneries and leather goods factories with many staff who had been educated in leather in the UK. 

Warren travels with two phones (and provides guests like myself with a local one to use while in Pakistan to save on costs) and while travelling and in meetings regularly takes calls from his staff on one or the other. "Does the value chain diagram look right?", "how is the timeline for meeting the next deliverables?" or "can we get the next SWOG meeting organised for Lahore tomorrow?"  SWOG was a term new to me for Strategic Working Group.  Perhaps it is a standard USAID term, or a Pakistan one, or just Warren's.  It was a good idea as for us it included a lot of key industry personnel to ensure that the work was not done in a vacuum. Whether or not you agreed with the outcomes the process was well thought out and thorough. We looked at production, productivity, innovation, training at all levels, markets routes to markets.  Warren is clearly respected in the ministries as quite often staff from them went with us on visits, such as to the Fashion School in Lahore which Warren was keen I should see.  An excellent facility with first rate people where Warren is really well introduced.

This report is the first time I have experienced a government Minister being willing to quote directly from something I have been involved in writing in a major speech.  I was deeply impressed in how much was implemented of what we suggested. It did not satisfy all sections of the industry as some wanted more government financial support and others wanted bans on export on semi processed material.  You have that uncomfortable situation where the domestic manufacture of products needs lower priced leather than should come from much of the excellent Pakistani raw. The world recession and the huge loss of herds in the floods have badly affected the industry and invalidated some of what we wrote, but far from all.  The basics I remain convinced are sound.

In arranging, managing and supporting my trip and work on the project I could not have been better looked after.  Warren was demanding, as he clearly is with all his staff, but clear and direct. He bubbles with energy, nothing slows him, and he works all the hours that exist. Watch him work, how he interacts with all people, how he thinks and you see a man who loves the Pakistani nation and is committed to this work to help them. I was surprised to hear that he might retire, despite his age. He is someone that goes on forever.  I know he was concerned about security. He is a clever man and understands far better than most the issues that run through world politics and the intricacies of the complex Pakistan Society.  He took care but he was never going to hide. I am sure that he felt that by doing his job diligently he gave himself the best chance of staying secure. I was told by a colleague that he was working in the coffee shop of the Karachi Marriott when it was blown up and his reaction was to move upstairs to the executive lounge and carry on working. 

After our project has ended it was not over for Warren, and he has kept his interest in the industry.  His two phones are always in use.  His interest in the leather industry and what it can do for Pakistan remains.  My picture is of him in a snowy UK, just after he had helped me push my little MX5 out of a snow drift. We have criss-crossed London to ensure we can get together and keep up to date.  I hope most sincerely to soon be able to do it again with him.

 

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20/07/11 - COTANCE complains against the adoption by the EU of a penalising descriptor for Leather on Textile

This press release is self explanatory:

The representatives of the European Leather Industry meeting in Council in Rome regret the approval of the EU Regulation on Textile Names and Labelling of Textile products by the European Parliament last 15 May 2011. That vote opens the way to a compulsory labelling for leather trims on clothing to be sold in the EU that penalises leather with a denigrating descriptor.

The presence of leather as a trim in a textile clothing will have to be indicated with the mention “Contains non-textile parts of animal origin”.

Such a mention denies the material “Leather” the right to be called by its name! Describing leather by other than its name is likely to cause confusion and dis-educate consumers to the detriment of the sector’s cultural and industrial heritage.

Allergic sufferers – the alleged beneficiaries of the rule - are not served by a mention that does not specifically address the cause of their problems while the adopted message associates a negative image to a number of products of animal origin that have a well gained legitimacy. It is highly concerning that the affected sectors have not been consulted at all by public authorities and that the economic and social consequences on supply chains have not been assessed.

COTANCE expressed its objections to the EP amendments implementing this provision in a letter to the European Commission, the European Parliament and the EU Council Presidency in March 2010. COTANCE regrets that its views have been simply ignored and its concerns unanswered.

The European Leather industry calls on the EU institutions to reconsider the implementation of this particular label indication and to finally develop the much-expected Regulation of Leather Terms and Labelling of Leather articles that the leather sector and European consumers deserve.

Rome, 16 June 2011

The representatives of the European Leather Industry meeting in Council in Rome regret the approval of the EU Regulation on Textile Names and Labelling of Textile products by the European Parliament last 15 May 2011. That vote opens the way to a compulsory labelling for leather trims on clothing to be sold in the EU that penalises leather with a denigrating descriptor.
The presence of leather as a trim in a textile clothing will have to be indicated with the mention "Contains non-textile parts of animal origin".
Such a mention denies the material "Leather" the right to be called by its name! Describing leather by other than its name is likely to cause confusion and dis-educate consumers to the detriment of the sector's cultural and industrial heritage.
Allergic sufferers - the alleged beneficiaries of the rule - are not served by a mention that does not specifically address the cause of their problems while the adopted message associates a negative image to a number of products of animal origin that have a well gained legitimacy. It is highly concerning that the affected sectors have not been consulted at all by public authorities and that the economic and social consequences on supply chains have not been assessed.
COTANCE expressed its objections to the EP amendments implementing this provision in a letter to the European Commission, the European Parliament and the EU Council Presidency in March 2010. COTANCE regrets that its views have been simply ignored and its concerns unanswered.
The European Leather industry calls on the EU institutions to reconsider the implementation of this particular label indication and to finally develop the much-expected Regulation of Leather Terms and Labelling of Leather articles that the leather sector and European consumers deserve.
Rome, 16 June 2011

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