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Misguided protectionism PDF Print E-mail
Tuesday, 27 August 2013 00:00
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Export tariffs on raw materials don't benefit anyone

 

Not surprisingly, given the shortage of iron ore following the ban on mining in many areas, and the 54% hike in scrap imports to feed domestic steel plants over the past two years, it is not surprising the steel industry is opposing the move to reduce export tariffs of 30% on ore. It is not even buying the commerce ministry’s argument that, given that Indian steel mills cannot use the large quantity of iron ore ‘fines’ that are mined, it makes sense to allow them to be exported with lower export tariffs. It makes more sense, the steel ministry has said in response to a commerce ministry Cabinet note on the matter, to use the ore for producing and exporting steel since the value addition is much higher.

 

Seductive as the logic is, it doesn’t take into account that competitiveness doesn’t come from cheaper raw materials, it lies in the production process of the final product. So, just because India is competitive in exporting iron ore doesn’t necessarily mean it will also be competitive in steel production—and this doesn’t even take into account the commerce ministry’s argument that Indian steel mills don’t have pelletisation plants and so cannot use ore fines. In this case, the fact that the markets are quite distinct is best brought out from the FY13 data where ore exports slumped to $1.6 billion from $4.6 billion in FY12 while iron & steel exports remained steady at $6.2 billion in comparison with $6.6 billion in FY12.

Indeed, going by the steel ministry’s logic, it would be a good idea to ban India’s big export items like cotton yarn and textiles, or put high export duties on them, since this will help India’s readymade garment exports. Once again, the logic doesn’t hold; indeed, while India is competitive in exports of cotton, yarn and even textiles, it loses a lot of the advantage when it comes to readymade garments where countries like Bangladesh have a higher share of the exports market. Which is why, in the last 4 years, while exports of readymade garments rose from $10.9 billion in FY09 to $12.9 billion in FY13, exports of other textiles which include yarn and fabric rose from $8.4 billion to $13.5 billion. Those using the value-addition argument to make a case for high export tariffs on raw materials would do well to remember that one man’s output is another’s raw material—a higher export tariff on ores may benefit steel producers, but a higher export duty on steel would benefit manufacturers of automobiles or machine tools.

 

 
 

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