Environmental Compliance of Indian Leather Firms in the Post-WTO Period

Published date01 October 2012
Date01 October 2012
Subject MatterArticle
Environmental Compliance of Indian
Leather Firms in the Post-WTO Period
Some Empirical Findings
Debashis Chakraborty
India is one of the major exporters of leather products. However,
the exporting firms need to conform to a number of environment-
related compliance requirements in foreign markets, which
function as a major barrier. For instance, the introduction of the
German ban on import of leather products with traces of PCP
and azo dyes in late nineties has been followed by similar product
and process related standards in other developed countries like
the US. The outward-orientation of Indian leather sector firms
has gone up over the years, accompanied by rising degree of
environmental compliance for exporting units. The objective of the
current paper is to analyze the determinants of environmental
expense of leather firms in India in the period following the imposition
of the stringent environmental standard through an empirical model.
The findings underline the reverse relationship between
environmental compliance and export orientation, but positive
relationship with firm size and ownership structure. The result
indicates that smaller players may encounter problems in undertaking
of the compliance expenditures, which requires policy intervention.
Keywords: Leather products, Trade and Environment
JEL Classifications: L67, F18
SINCE the inception of the WTO, a complex relationship between
trade liberalization, economic growth and environmental
compliances has been witnessed in several environmentally sensitive
sectors. In particular, the focus on “green” and “clean” production
has increased over the period. While the recent focus is based on valid
concerns, possible misuse of these provisions is not to be discounted.
The experience of the leather sector provides an important case in
point, which witness a high incidence of non-tariff barriers (NTBs)
(Mikic and Wermelinger, 2010).
The underlying reason behind the enhanced level of stringency in the
leather sector is the following. Technological innovations in the west (e.g.
EU, US) have led to a strong and strictly enforceable environmental policy
framework. On the other hand, in the post-WTO phase it was increasingly
believed that lower environmental compliance in the developing countries
act as a hidden subsidy to the local firms. Such non-compliance owing to
absence of stronger standards generally confers major cost advantages
to local units. This aspect became particularly important in the post-WTO
period because all Member countries had to reform their tariff after 1995.
Hence tolerance level for protectionist policies in trade partners grew
thinner. This fact, coupled with growing income of the consumers in the
“North”, provided additional rationale to government intervention on
environmental standards. It was observed that consumers in developed
countries generally supported the compliance related standards as income
growth was accompanied with demand for environmental quality.
These streams of events forced several developing countries
including India to increasingly attempt to control the chemical effluent
generation within their territories (Tewari and Pillai, 2005). In
particular, the adoption of various environmental standards such as
eco-labeling, ban by major leather importers (mostly the US and EU
countries) on carcinogenic chemicals such as Pentacholorophenols
(PCPs) and azo dyes by several EU countries has forced developing
countries to upgrade their production processes to comply with
stringent quality requirements. The introduction of several private
standards in recent period further compounds the problem (UNIDO,
2010). The new regulations have significantly influenced the
production process or the productivity of the Indian leather firms, as
the percentage of leather firms operating on the efficient production
possibility frontier have decreased considerably over the last decade
(Chakraborty and Chakraborty, 2007).
The Indian leather sector is one of the important sub-sectors of
manufacturing identified by National Manufacturing Competitiveness
Council (NMCC, 2006) and the exporting units consist of tiny, cottage,
small and medium scale enterprises. The small and medium-sized firms
especially suffer from: (i) lack of information, (ii) inadequate testing

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