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INTERNATIONAL ECONOMICS

Analysis of trade of leather goods between


India and Italy.
Identify the main source of comparative
advantage in leather products in these two
countries.
GROUP 5
Amit (3A)
Garima Kashyap (10A)
Nitin Sachdeva (19A)
Rupesh Agarwal (33A)
Shobit Razdan (36A)
Content 2

Brief Introduction
Indian and Italian Leather Industry
Trade Between India and Italy
Comparative Advantage (CA) in Leather Trade
Revealed Comparative Advantage (RCA)
Challenges for India and Italy in Leather Trade
Strengthening of CA
Cooperation between India and Italy
Brief Introduction 3

Leather industry both in India and Italy is centuries old


One of the key component of trade for both countries
Leather trade primarily done in two forms
Raw Hides & Skins (HS Code 41)
Articles of Leather (HS Code 42)
Leather based foot wear (HS Code 6403)
Indian industry is dominated by raw leather processing and leather shoe
manufacturing and of Italys it is by raw leather processing and apparels
Trade Statistics in % share of world trade is as follows -
HS Code HS 41 HS 42 HS 6403
Country Export Import Export Import Export Import
India 3.5% 2.3% 3.2% 0.5% 4.5% <0.2%
Italy 16.6% 12.5% 11.1% 4.6% 2% 6%
Indian Leather Industry 4

India is having largest available livestock in world


It is continuously influenced by the social, cultural, technological,
political and changes around it on both strategic and tactical terms
Unorganized sector fulfill needs of local customers, while organized
sectors fulfill needs of local as well as export requirements
Skill of manufacturing designer goods are primarily family controlled
and transferred from one generation to another Trend shifted
towards big corporates employing latest available machinery
Technological base in design, manufacturing and processing is
under developed in comparison to other established markets
Italian Leather industry 5

Largest in EU for both export and import


Known for its quality leather and artisan work
Supported by capital investment and advanced industry both in
leather processing and making finished goods e.g. apparel
Livestock resources are scarce in Italy, but it is still a leader in export
of raw leather processing (procured from EU countries)
With its highly advanced tanning industry, modern accessory
manufacturers and innovative designs, as well as high quality,
branded products representing the latest fashion; Italy refers to
upper income groups of the world
One of the countries leading the world fashion in leather apparel
Trade Between India and Italy 6

India is having positive trade balance with Italy in leather goods


India exports both raw material and finished goods to Italy
Italy trade is more concentrated towards finished goods of leather
Majority of items (HS42) India exports to Italy are leather shoes,
accessories, bags and other lost cost items
Items imported by India (HS42) are high end leather based fashion
items
Trade between India and Italy is as below -

Trade w.r.t. India (in Million USD) HS41 HS42 HS 6403


Export To Italy 130 112 127
Import From Italy 15 80 8
Tariff Rate on leather Goods 7

Tariff rate applicable for Export and India is as below -

HS 41 HS 42 HS 6403
Import 0% 10% 10%
Export 0% 10% 12.5%
Indias Position in Exports to Italy 8

India has largest available live stock, still India China in largest supplier of leather articles
is not major trading partner for Italy followed by India at 5th position
Comparative Advantage Indian 9

Leather Industry
Global leather firms are shifting manufacturing bases to developing
countries because of high wage levels and strict environment
norms, this is in favor of Indias leather trade and is evident from
India Italy trade data
Indias advantage of low cost skilled labor is quite relevant to labor
intensive manufacturing of leather goods and footwear
Availability of abundant raw material, production and processing
know-how is helping Indias trade
Presence of support industry like leather chemicals
Foot wear industry is environment and power friendly and leather
constitutes 20% of total footwear sector.
Comparative Advantage Italian 10

Leather Industry
Italian leather designer goods are considered to be one of the best
in world. Italy is house to renowned brands.
Italy's leather-making industry banks on quality, innovation and lean
manufacturing to beat low-cost competitors
Italy has worked on cluster model for leather industry Providing
resources at one place helps in reducing cost
Automation has helped manufacturers to improve quality and Yield
Presence of strong base of manufacturers of machinery used for
leather goods
Well established tanneries cater to 70% of EU
Revealed Comparative 11

Advantage - RCA
The revealed comparative advantage is an index used in international
economics for calculating the relative advantage or disadvantage of a
certain country in a certain class of goods or services as evidenced by
trade flows. It is based on the Ricardian comparative advantage concept.

RCAij = (xij/Xit) / (xwj/Xwt)


xij - country is exports of product j
xwj - world exports of product j
Xit - countrys total exports
Xwt - world total exports
If the index exceeds unity, the country is said to have a revealed
comparative advantage in the product.
RCA 12

India Italy In comparison to India, Italy has higher


HS41 2.12 5.70 RCA index in leather trade in HS41, HS42
& HS6403
HS42 1.97 3.80
HS6403 2.29 5.20
RCA Calculated using trade data available at www.trademap.org for year 2016

RCA Analysis for HS 41


India
Hides and Skins India Hides and Skins Italy Italy

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

http://wits.worldbank.org/
Leather Value Chain 13

India Area to Work On Italy

Possible Area of CA for India


Challenges Indian Leather Trade 14

Increased cost of production per unit area of finished leather due to


stringent environmental norms
Low level of technology in small tanneries
Poor capacity utilization in most tanneries leading higher financial
cost and overheads
Varying levels of technology in the factories depends on size of
factories
Stagnation in footwear production capacity and higher tax rate
w.r.t. apparels
Non availability of fashion design houses concentrating on leather
garments
Challenges Italian Leather Trade 15

Costly labor
Pressure from environmental support lobby and PETA against use of
leather for personal goods
Many non-EU countries maintain export bans and restrictions for raw
hides and skins
Strict environment protection laws increasing cost of leather
tanneries and in turn cost of end product
Challenge from dumping by China of cheap leather products
Strengthening of Comparative 16

Advantage - India
India focus is on leather processing which is evident from numerous
institutes in this area, for e.g. The Central leather Research Institute
(CLRI) Worlds largest research institute in leather technology
The GoI has also supported India leather industry and is evident from
following initiatives
Concessional duty on imported machinery and chemicals.
Free export and import of raw hides & skins, semi-finished and finished
leather.
The design development center at NIFT campus in New Delhi An
initiative to build design of leather garments
Footwear, Leather & Accessories sector is amongst 25 priority sectors under
Make In India
Strengthening of Comparative 17

Advantage - Italy
Well established design houses and training institutes
Advance level of work in design and style innovation
Thrust on sustainable development and overcoming challenges of
environment protection
Growth in manufacturing of machinery used in leather to make quality
and value products
International trade fairs to boost trade in leather goods
India Italy Cooperation 18

Bringing the successful cluster model of Italian companies to Indian


companies
Disseminating the best practices from Italy to Indian enterprises
Creating awareness on latest technology advances
Development of subcontracting and partnership exchange for
better capacity utilization, promotion of trade and business
partnerships
Queries? 19
RCA Example 20

Example: in 2010, soybeans represented 0.35% of world trade with


exports of $42 billion. Of this total, Brazil exported nearly $11 billion, and
since Brazil's total exports for that year were $140 billion, soybeans
accounted for 7.8% of Brazil's exports. Because 7.8/0.35 = 22, Brazil
exports 22 times its "fair share" of soybean exports, and so we can say
that Brazil has a high revealed comparative advantage in soybeans.