The pros and cons of protectionism

The Redwood Blog
Published:  22 April, 2014
Mike Redwood

Follow down the value chain from hide to leather products of all sorts and you see one thing - jobs. Lots of them. This is why the footwear industry has been so footloose in pulling the leather industry around the world as it chased lower costs from ever cheaper labour. While the nature of the location debate is changing today as the result of rising costs in China, as power moves from management to workers - see the current problems at Yue Yuen - and different approaches to high quality, craftsmanship and automation in footwear manufacture, countries with hides and skins would generally still like to keep or develop their leather industry jobs.

Restricting exports of hides and skins is seen as the quickest way to do this and in recent years India and more recently Ethiopia have been seen as good examples of what determined government intervention can do. As a buyer of skins from Ethiopia twenty years ago when the government changed and decided to offer their tanneries for sale I was certainly an advocate for buying a tannery and processing there. It seemed to me that tanning the Ethiopian raw material in Ethiopia was a better thing than exporting raw or in pickle. Ethiopia deserved the jobs that would come from a fully-fledged leather industry rather than just being left with the environmental load of tanning alone. After all Europe had been profiting from these skins for about 100 years.

The issue of free trade has divided the industry badly over the last few decades, and its complexity cannot be underestimated. The latest country to enter the debate is Colombia where the highly esteemed Dr. Luis Gustavo Flórez, President of ACICAM (the Tanners and Shoemakers Association), has indicated the industry’s determination to protect 100,000 jobs as high world prices upset the supply of domestic raw material into the local market.

At the same time Europe is worried as increasingly it looks at a world where very little raw material is freely traded. Europe has some fine quality hides and skins, which could be vulnerable to a big buyer choosing to upset the market. Should Europe now change from its free trade policy and protect its own raw material, given that the policy of openness has failed?

Underlying all this is an assumption that Europe and the US grew their industrial wealth through free trade. This is of course quite untrue. The US retained huge levels of protection for 100 years until 1913. In the UK the textile industry, the primary driver of wealth for much of the last 1000 years was protected heavily from the 14th century onwards. Study Joe Studwell’s recent book on “How Asia Works” and you will see that Asia’s three early success stories of Japan, Korea and Taiwan protected their nascent industries and financed them heavily to compete on the world market.

Only when nations are strong do they adopt the expectations of the WTO and other trade and international finance organisations. Until that time subsidies, tariff barriers and all manner of legal tricks are used to help domestic industries advance.

On the other hand the higher the barriers the greater the opportunity for illegal and counterfeit trade. The illegal trade in footwear is a big unmeasured part of the world footwear industry, with containers reportedly arriving routinely into Panama to be broken up and distributed throughout the region.

Given the balance of economic opportunity right now it is hard to oppose nascent African countries giving themselves the lift that Ethiopia has done, and the WTO rules support this to a degree; but it will be a different situation if Europe tries to reverse its policy Perhaps Stephen Sothmann, President of the US Hide Skin and Leather Association has it right when he says “do we want an open market or a protected one? We can’t have it both ways.”

Mike Redwood

mike@internationalleathermaker.com

Follow Mike Redwood on twitter: @michaelredwood

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