The effect of export tax on the competitiveness of Ethiopia's leather industry

Abstract

Most countries have implemented export-oriented development strategies with the objectives of improving their economic stability and improving resource allocation efficiency. Export tax, which has been an integral part of trade policies for centuries, has not been given adequate attention by the World Trade Organization (WTO) or the economic literature. Export taxes on primary commodities serve as indirect subsidies to manufacturing and processing industries by lowering the domestic price of inputs, and also have a positive effect on government revenue. Conversely, export taxes can have a negative impact on the producers of raw materials and externalities for trade partners. The government of Ethiopia applied a 150% export tax on raw hides and skins (RHS) and semi-finished leather products in 2008, and another 150% export tax on crust leather in 2012 in order to encourage the leather manufacturing industry. The aim of this study is to examine the export trends of Ethiopia s raw hides and skins and finished leather products, and to analyse the effect of export tax on Ethiopia s leather industry s export competitiveness. A linear trend analysis model was used to analyse the export trends of raw hides and skins and finished leather products. This study evaluated export volume data from 1997 to 2014 in order to estimate the trend coefficients. The results of the model showed that Ethiopia s RHS and semi-processed leather products export had declined by -38.06% and significant at 1% significant level; this is due to the heavy export tax imposed by the government to increase the production and export of finished leather products. Meanwhile, finished leather products and footwear have increased by 75.34% and 44.37% respectively, and significant at 1% significant level. The comparative advantage analysis was used to examine the revealed comparative advantage (RCA) of Ethiopia by comparing selected countries. The results indicated that Ethiopia was a RCA of raw hides and skins and semi-processed leather products more than one (RCA > 1) before 2008; after the export tax implementation in 2008, the RCA became decreased, conversely, the RCA of Ethiopia s finished product more than one for the period 2006 to 2014 and increased more after 2008. South Africa has comparative advantage only on the export of raw hides skins and semi-processed leather product (RCA>1). Nigeria was not stable RCA for both raw hides and skins and finished leather products and in most year revealed comparative advantage greater than one (RCA >1). The RCA indexes of footwear for all three countries were less than one except Ethiopia in (2007, 2008 and 2012). The RCA provides information on advantage to exports, such as product comparisons with other competitive countries. However, the RCA does not show the sources of advantage (growth), therefore the constant market share (CMS) model was used to indicate the source of advantage. The CMS model has been used to evaluate the competitiveness of Ethiopia s leather products. The export value data of 2007 were used as the base year, whereas data in 2013 were considered as the year after the export tax implementation and increase. The results indicate that the implementation of the export tax has reduced the competitiveness of raw hides and skins and semi-processed leather products, but increased the competitiveness of the finished leather products in the world markets. The overall results showed positive export growth (2.55), which is most likely achieved by an increase in the export competitiveness of the leather industry of 2.25. The positive competitiveness value indicates that Ethiopian finished leather products are competitive with other exporters in selected markets (Italy, China and Hong Kong). Conversely, Ethiopia s leather products have negative commodity composition effects and market composition effects (-0.132 and -0.262, respectively). The negative commodity composition effect shows that, because of the export tax, the export of Ethiopian raw hides and skins and semi-processed leather products have decreased, while the imports of these products have grown faster in selected markets. The same is true for negative market composition effects; because of the export tax, the demand for raw hides and skins and semi-finished products decreased in selected markets.