What do smaller firms need to thrive and grow? Many things, probably, but in the trade space they need the right enabling environment. This does not mean crafting special, separate rules for smaller firms, but instead creating policy with one eye firmly planted on the benefits and costs for small companies from the beginning.
It is important to remember that companies in the micro, small and medium sized categories (MSMEs) do not want to remain small forever. Even the tiniest firm has ambitions to be larger next year and grow significantly over the next three or five-year window and beyond.
Policymakers should not assume that MSME firms will always stay MSMEs. Yet frameworks in many economies seem designed to trap smaller firms into a set category and entrench them into a “small” mindset.
There will always be MSME firms. They form the backbone of most economies, as much as 97 percent of companies across Asia, employing the overwhelming share of workers.
The goal of MSME policies should be enabling the current crop of smaller firms to grow, allowing firms in the “medium” category to reach large scale in relatively short order, while encouraging new entrants to the MSME ranks.
Trade policy is one tool to help MSMEs grow. In most economies, the domestic market alone can be too small or even too competitive for success. E-commerce and digital technology, however, have allowed MSMEs to reach regional or global audiences.
Scale is important. A tiny firm can now specialize in very niche products or services that might never be competitive in the local market. Products that could quickly reach saturation levels in the home market may be a perfect fit for neighboring markets.
Within the e-commerce space explicitly, AMTC is looking for four things to be addressed:
1: Fixing policies to make it easier for firms to ship small size, low value goods. MSMEs do not send 40-foot containers, but a package with socks or greeting cards. Such companies cannot afford to be tangled in paperwork, tariffs and obstacles at the border.
2: Making it easier to sell services online. Most MSMEs are in the services sector. Even smaller firms that create goods, like greeting cards, are actually making a mark in the world through their service offerings. The greeting cards that do best tend to be personalized in some way and fit exactly what the customer wants and needs. Yet trade rules often make it difficult or impossible for firms to deliver services online or digitally, including a rising set of problematic rules on data privacy, tax policies, or even regulations that prevent offshore delivery of services entirely.
3. Sorting out data rules. As we have pointed out repeatedly, new rules coming in Asia (and elsewhere) are especially problematic for smaller firms. Companies that are struggling to survive do not have time to sort out complicated rules on managing data. They cannot pay extra to avoid using cloud-based services and want to use firms with better security protocols than they can manage on their own.
4. Getting paid is vitally important. This is a killer for small firms. Sales can be destroyed by an inability to manage payments or to do so at a reasonable rate. Of course, there are issues with inadequate banking and finance, but an urgent concern for MSMEs in e-commerce and digital trade is fixing today’s payment problems.
Now note what is not on this list—there is nothing about creating new agencies or specific trade agreement chapters focused on MSMEs. Such explicit focus is not necessary.
A dedicated MSME agency can assist smaller firms with learning the ropes of doing business and getting information into the hands of busy companies. These are useful steps to support firms.
Many have suggested that alongside specific MSME agencies, trade agreements should start to include MSME chapters. Many existing free trade agreements (FTAs) already do this.
For example, the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) does have an SME chapter. In reality, this chapter is not going to do much to help smaller firms. It basically requires members to create a website with MSME-friendly information and contact points. (And, as we have repeatedly pointed out, absent a dedicated Secretariat for the CPTPP, these links are likely to be quickly out of date and broken in any case.)
Most websites do not help smaller firms. MSMEs do not have time to look at another website with information. Websites are proliferating everywhere that are supposed to “enable” or “facilitate” trade for smaller companies. Everyone seems to want to create their “own” platform for MSMEs. [Admittedly an ironic statement for an outfit that runs the AMTC in the Asia Pacific which all smaller firms should join now!]
What small firms really need from a trade agreement is one that actually solves their practical problems. A trade agreement needs to address the four points (and more) discussed above. It is only when trade facilitation for small packages works that an MSME shipping greeting cards can effectively and efficiently send items anywhere easily. It is only when services are opened using digital means with limited licensing and qualifications requirements that firms can actually draft documents or create gorgeous websites for other MSMES and even large firms.
None of this will work if data rules get harder. When information flows are stopped or constrained, this is the end for most MSME export dreams. Big firms can navigate these obstacles, but small companies cannot.
Financial services have always been viewed as sensitive, but if e-commerce is to work for smaller firms, e-payments have to be reexamined. National payment systems are deeply problematic. Foreign MSMEs cannot access national systems in foreign markets. Since any MSME can be an exporter to another market, what seems like help for domestic smaller firms is also a barrier when other countries respond likewise by raising domestic payment obstacles.
These four points do not solve all issues. Access to digital is going to be an issue for many small companies. Skills are not always in place. Bank accounts do not always exist for firms or customers. This list of challenges could go on. But it does not make sense to wait until every single MSME in every market has a similar base before solving some of the most urgent challenges for companies.
Instead, it is time for governments to get on with making the right trade policy enabling environment to encourage MSMEs to trade across borders and grow.
***This Talking Trade was written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***