Raw deal: Brazil considers itself a value-added exporter, but Chinese shoemakers just want the hides.

The Brazilian leather industry is at odds with the domestic shoe companies that feed them. And exports to China are the reason. Shoemakers here are worried about their future, as high demand in China for raw leather materials has led to an export boom of "wet blue" cowhide. Wet blue is the second treatment phase after raw cowhide is delivered from the slaughterhouse to the tannery.

As a result, China, with Brazilian leather in hand, is exporting shoes to world markets, undercutting domestic Brazilian shoe companies, according to the association of shoe manufacturers in Franca, Sao Paulo, the nation's shoe-making hub. "Wet-blue exports are of primary concern for the industry," says Elsio Jacometti, president of trade group A.B.I. Calcados. "The government shouldn't make it is easy for companies to export this strategic raw material. High demand means higher prices and that hurts us here at home. We end up having to buy a lower quality leather at top quality prices."

In 2004, the government lowered export tariffs on wet-blue cowhide to 7% from 9%. This year, leather exporters were expecting a 4% tariff, but shoemakers pressured the government to keep it at 7%, a number they are still uncomfortable with. Argentina, by comparison, has a 15% export tax on wet-blue cowhide, according to A.B.I. Calcados. "We can't keep exporting raw materials that are going to hurt our domestic shoe industry," Jacometti says. "We're not feeling it hard right now. I don't have a crystal ball, but I think this is going to be a major problem for us in the near future,"

Over the years, Democrata Footwear in Franca has watched foreign trade increase sales and add much-needed jobs in states like Sao Paulo. In 1999, the export price for a pair of Democrata shoes was US$17.61, says Marcelo Paludetto, foreign and domestic sales manager at Democrata. Today it's more than $25, a 42% jump. The company produces 8,000 pairs of leather shoes a day. "There is a worry down market in the field because of various points, including labor, taxes and that Brazilian leather is going to our biggest competitor," says Paludetto.

By Democrata's own measures, the wet-blue export boom is costing the industry jobs, even though Democrata added 200 workers this year, bringing the private company to 1,400 salaried employees. The quantity of leather exported to China is enough to make an additional eight pairs of shoes per day at Democrata. Each pair requires 12 people to make. Democrata and its peers in the industry figure that's 96 jobs lost per shoe company.

At the Wyny do Brasil plant in Ibipora, fresh, raw cowhide lends a fishy aroma to the warehouse, where thousands of skins are given the wet-blue treatment. The smell doesn't bother Vlademir Rogerio Piocopi, Wyny's sales manager. "That's the smell of money," he says. "We have to be a little politically correct when talking about wet-blue exports," he says, but like it or not, "this industry and this company are moving closer to China," Piocopi knows the shoe executives of Franca personally. He even agrees that it would be better for Wyny to export higher-value products, but he says domestic demand would never match supply.

Cheaper. Piocopi says that 30% of the company's business comes from just one company in China. They have a sales manager in Shanghai right now, looking for more customers.

"The world market doesn't want finished leather. They want raw materials because these countries are also concerned about creating jobs," says Wyny exec Marcelo Furrier Rosa, now testing his Mandarin in China. "If we don't sell wet-blue leather to China, then Australia or Ukraine will do it and China will still sell shoes to Brazil and compete cheaper overseas."

The good news for leather shoemakers is that--for now--sneakers are China's beachhead into Brazil. From January to May 2004, Brazil imported $5 million worth of Chinese-made sneakers, putting it in the top third of the 100 products Brazil imports from China. In January 2005 alone, Brazil imported $2.4 million worth of sneakers, compared to $1.5 million in January 2004.

Comparatively, Brazil started the year exporting $11.4 million in leather in January, compared to $8.9 million last January. Sales of finished leather shoes to China, however, totaled just more than $200,000.