Regional trade deal a boon to micro, small and medium enterprises

An Indonesian woman sits in her cigarettes and snack sidewalk stall while waiting for customers in Jakarta on 20 March, 2018. (Bay Ismoyo / AFP Photo)

Negotiators of the Regional Comprehensive Economic Partnership (RCEP) have, for the past six years, weathered many rounds of negotiations and ministerial meetings but the trade deal still hasn’t come to fruition. However, it is slated to be completed this year under Singapore’s chairmanship of the Association of Southeast Asian Nations (ASEAN).

It is a popular narrative that China is the leader of the RCEP, as the trade deal was pitted against the previously US-led Trans-Pacific Partnership (TPP). However, in reality, the RCEP is ASEAN led as the initiative represents a move to broaden free trade and investment partnership in the region by creating a free trade area consisting of ASEAN and its existing free trade partners (China, India, South Korea, Japan, Australia and New Zealand).

Mooted six years ago, the trade deal not only impacts big businesses, but also small and medium enterprises (SMEs) which comprise more than 90 percent of business entities across the 16 participating economies.

Impact on SMEs

The biggest advantage for SMEs if the trade agreement follows through is market access. Comprising almost half the planet’s population and 30 percent of global income and global trade, the RCEP is a wonderful chance for these companies to spread their wings and exploit the immense market potential open to them.

Such opportunities have been hard to come by for SMEs. According to a November 2017 report by Commerzbank, SMEs have been hit the hardest by the trade finance gap – whereby over half of trade finance transaction requests by them are rejected worldwide.

A 2017 survey by the Asian Development Bank (ADB) revealed that the share of the trade finance gap in developing Asia was 40 percent of the world’s total of US$1.5 trillion in 2016. SMEs (including micro enterprises) face the biggest challenge in accessing trade finance – representing 74 percent of total rejections in 2016, an increase from 57 percent the previous year. This high rate of rejection translates to missed trade opportunities which only impedes economic growth.

“A sizeable trade finance gap is a drag on trade, growth, and job creation,” said Steven Beck, Head of Trade Finance at ADB.

Herein, the RCEP’s trade liberalisation features come to the fore as one of the trade pact’s targets is to support the growth of SMEs and their inclusion in the global value chain as part of the overall worldwide business landscape.

Source: Various sources

With market access unlocked, the world is an SME’s oyster. Trade financing would enable SMEs to easily export their products. As they grow larger, their inclusion in global supply chains would help them better realise economies of scale. Moreover, with technical cooperation with other more advanced industrialised nations like Japan, South Korea, New Zealand and Australia, SMEs elsewhere would be able to develop better, more competitive products.

This would also have a knock-on effect on the labour market. The ADB estimates that a 10 percent increase in trade finance globally could boost employment by one percent. Take for example the ASEAN market. According to the ASEAN Secretariat, SMEs employ between 52 percent and 97 percent of all workers. As SMEs grow and expand their businesses thanks to boons from the RCEP, they can create more job opportunities that would drive unemployment rates down.

However, there is still work to be done and challenges to be overcome.

With a liberalised free trade area, SMEs will also be in competition with larger multinational companies (MNC) that have financial prowess that SMEs can only dream of. This means that SMEs must work harder and smarter to compete with MNCs given their relative lack of financial resources.

The first step to focus on is attracting better human capital. This would lead to better productivity for the company and subsequently close the gap between themselves and their MNC counterparts.

According to Raymond Teo, adjunct faculty with the Singapore Management University, in a commentary published by Singapore Business Review, SMEs must move to more transformative practices in human resource (HR) development – especially by turning to HR analytics.

“HR analytics optimises human capital use in the company, leading to better business outcomes. Today, HR analytics is regarded as the next big thing in workforce management. Companies use it for recruiting, retaining, and motivating employees,” he wrote, adding that “the degree of enthusiasm in its adoption among SMEs seems muted.

The opportunities are plentiful for SMEs as the RCEP inches towards completion. With the prospect of the agreement being inked by the end of this year, SMEs must move quickly or risk ending up on the losing end.