But state officials say slashing the tax is a step that must be taken if Latvia wants to join the European Union (EU).
To help the two sides see eye to eye, the Parliament's European Affairs Commission went to the western coastal city of Liepaja Sept. 7.
According to the EU Association Agreement, Latvia has to abolish the 100 percent export tariff on scrap metal this year. Benita Imbovica, head economist for Liepajas Metalurgs, claims this move would cost the company 2.3 million lats ($3.9 million) in losses and says both production and the number of employees would shrink by at least one-third.
Fearing this decision would send the company back in the red after it had just successfully started privatization and renovation of its production facilities, Liepajas Metalurgs appealed to the Parliament to amend the law on export tariffs that was designed to meet the EU directive.
Liepajas Metalurgs wants another two years - the time the company expects it will take to finish privatization - before the export tariff is scrapped. But the Economics, Finance and Foreign ministries said Latvia can't protect one company's interests at the expense of the nation's welfare.
MP Edvins Inkens, head of the European Affairs Commission, said Latvia can ask the EU to abolish the tariff later if Latvia proves this is necessary. He made a point that Latvia can't avoid abolishing the tariff forever because, according to World Trade Organization regulations, it has to be lifted by the end of 1999.
"We can't fight with the whole world," Inkens said. He asked the Foreign Ministry to start negotiations with the EU immediately to postpone the directive for one more year.
Valerijs Terentjevs, executive director of Liepajas Metalurgs, said this decision does not solve the problem but at least it gives the company time to prepare for the consequences of abolishing the tariff.
Latvijas Metalurgs uses about 450,000 tons of scrap metal a year, buying up to 60 percent of this raw material in Latvia. The rest is imported from Russia. A ton of local scrap metal is 8.60 lats ($14.30) cheaper than a ton of Russian metal, which is subject to transport expenses.
If the tariff is abolished at the end of the year, Imbovica said local companies will start exporting scrap metal, leaving Liepajas Metalurgs with no raw material.
The company would then be forced to buy more scrap metal from Russia. The unstable situation in the neighboring country, worsening economic relations and a possible price increase for scrap metal make this an unwelcome alternative, Imbovica said.
"We can't afford to increase the share of Russian scrap metal," she said.
After the tariff is abolished, Latvian companies that continued to sell scrap metal to Liepajas Metalurgs would likely raise prices.
Terentjevs said not only the company would suffer if the tariff is abolished this year but also the city of Liepaja. The company employs about 2,500 Liepajans. In addtion, another 1,500 people whose fates are tied to Leipajas Metalurgs could find their jobs in jeopardy as well - local employees at cafes, hospitals and other businesses in the area that service the company.
Terentjevs said the prime cost of the company's products will jump by 20 percent, which would affect exports.
The company exports up to 90 percent of its products to the United States, Brazil, Mexico, Honduras, the Dominican Republic, Singapore, Thailand, Hong Kong and China.
Inkens said only the EU Association Agreement and free trade agreements with Iceland, Liechtenstein, Norway, Switzerland, the Czech Republic, Slovenia, and Slovakia call for abolishing the tariff at the end of this year. The share of Liepajas Metalurg's export to the EU countries is less than 1 percent.
"Since the company does not export to these countries, the effect should be insignificant," Inkens said, noting that the tariff would still be in effect for export to other countries.
According to the Finance Ministry, postponing the abolition of the tariff is a double-edged sword. If Latvia changes the conditions of the free trade agreements that might be unfavorable to another country, the latter might set forth conditions that are unfavorable to Latvia.
Normands Popens, head of the foreign economic policy department at the Foreign Ministry, said if the tariff is not abolished, those countries to which Liepajas Metalurgs exports may start antisubsidy sanctions.
Liepajas Metalurgs is registered in the Liepaja Special Economic Zone, which gives it significant tax reductions. According to Valentina Andrejeva, state secretary at the Finance Ministry, these tax reductions give Liepajas Metalurgs advantages compared to its competitors abroad. She said there is a risk that other countries may start antisubsidy actions against Liepajas Metalurgs.
"This tariff has to be abolished because it undermines fair competition and scars Latvia's image," Popens said. "We can easily prove the need for import tariffs, but not for export tariffs."
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