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. Last Updated: 07/27/2016

IKEA Fights Plan to Hike Import Tariff

IKEA said Wednesday it will "fight, fight and fight again" to stop an import tariff hike on imported furniture proposed by local producers, adding that it is consumers who will ultimately suffer.

Domestic manufacturers, represented by the Association of Furniture Enterprises and the Woodworking Industry, and foreign importer IKEA want to combat unfair competition and boost the quality and volume of local production, but they have vastly different proposals for how to accomplish that.

The association says local enterprises will go extinct without higher tariff barriers against cheap imports. They want six years of bolstered trade protection while they prepare to better compete.

IKEA counters, saying the domestic industry would be well served by losing inefficient enterprises. Tariffs as they stand today are already too high, the Swedish furniture retailer says. If they rise any higher, it will reconsider its presence in Russia, its executives said.

"Nobody can explain why these tariffs are healthy," Lennart Dahlgren, head of IKEA Russia, said Wednesday.

"The problem for the Russian furniture industry is simply bad management. There are too many remnants from the Soviet system."

IKEA has invested about $400 million in Russia, $50 million of that in local production, and intends to invest the same amount again in the next three years, Dahlgren said Wednesday. It is disadvantaged because it pays all taxes and duties while many of its competitors do not, he added.

Olga Gurleva, general director of the local producers' association, said Wednesday that domestic furniture makers' market share has suffered since import tariffs were lowered three years ago.

Imports account for about 52 percent of today's market.

Ruble inflation, rising energy prices and tariffs on raw material imports put local producers at a competitive disadvantage against importers, she added.

"We are all for competition," she said. "Russian industry cannot meet international market standards, but if tariffs rise, interest in Russian products will rise."

Import tariffs are set at 20 percent of the declared value, or 0.6 euros per kilogram, down from 2 euros per kilogram in 1999.

The tariff on unassembled furniture is 0.5 euros per kilogram, Gurleva said.

The true value of imported furniture is often underdeclared, so customs staff frequently calculate tariffs based on weight. But this practice has indirectly lowered the import tariffs, she said, because declared values have risen while weights have steadily fallen.

Since local producers are concentrated in the lower end of the market, the association advocates a two-tier system.

Furniture valued at more than $2 per kilogram should face 20 percent duties, based on value, Gurleva said, and lower-value furniture should face weight-based duties of 1.1 euros per kilogram.

The association's proposed tariff change was on the table at a foreign trade commission meeting Saturday, but the discussion was postponed.

Much of IKEA's furniture would fall into this lower bracket and be disproportionately penalized, Dahlgren said.

Under the present system, IKEA pays $50 to import a cabinet whose wholesale value is $40. The proposed tariff regime would boost the duty to $65.

Such tariffs, in excess of 100 percent, drive retail prices at Russian stores up to West European levels, Dahlgren said, adding that as much as half of the sticker price shoppers here pay reflects the item's import fee.

This creates perverse incentives to overvalue imports, because in the higher-value bracket, the 20 percent tariff on that same cabinet would be only $8.