SMEs’ Big Deal

With the RCEP in force, SMEs gain easier access to the regional market and greater ability to overcome supply chain disruptions

By Xie Xin

The Regional Comprehensive Economic Partnership, or RCEP, contains a specialized chapter detailing provisions for small and medium-sized enterprises (SMEs), which has received rave reviews from many smaller businesses throughout the Asia-Pacific region.

According to a 2019 report from Mastercard, SMEs account for over 95 percent of businesses, employ a half of the workforce, and contribute 20 to 50 percent of GDP in the Asia-Pacific region.

“The inclusion of a dedicated SME chapter was commendable,” said Ho Meng Kit, CEO of the Singapore Business Federation. “We are heartened that governments in the region recognize the important role of SMEs in the regional economy and are committed to addressing the unique challenges SMEs face in utilizing trade agreements.”

“The SME chapter aims to create a broader platform for cooperation among SMEs, encouraging them to proactively utilize the free trade pact and economic cooperation projects generated by the FTA so they can integrate into the regional value flows and supply chain faster and more extensively,” read an introductory statement released by China’s Ministry of Commerce.

A production line at a rubber glove factory in Klang, Selangor, Malaysia. (ZHU WEI)

Massive Market

The RCEP’s most direct and obvious benefit for SMEs is opening a huge barrier-free regional market, connecting them to a marketplace of 2.2 billion consumers through significantly reduced tariffs.

“RCEP provides a great opportunity for Malaysia and enables its small and medium enterprises to more easily tap into the China market and generate more exports,” said Datuk Seri Mustapa Mohamed, Minister in the Malaysian Prime Minister’s Department (Economy). “The SMEs must meet this challenge with confidence and innovation.”

Joachim von Amsberg, Vice President of the Asian Infrastructure Investment Bank (AIIB),underscored the impact of market access on SMEs in an interview, calling it “just as important as the reduction in tariffs is for large enterprises that are trading in commodities or industrial goods.”

“The RCEP is by no means a ‘game changer,’” opined Stephen Olson, Research Fellow at the Hinrich Foundation, “but the free trading bloc does encourage SMEs to participate in trade, given their low utilization of free trade agreements (FTA). To the extent however that RCEP simplifies procedures (such as through a common rule-of-origin) or minimizes red tape, thereby allowing more SMEs to participate in trade, it should be applauded. FTA utilization rates in the SME-dominated region are abysmal – by some estimates, roughly 25 percent.”

Unchained Potential

Demand from a much wider consumer base is not the only RCEP benefit for SMEs. On the supply side, they are now being further integrated into a stable regional supply chain, which helps to ensure smoother business operations during severe supply chain disruptions, which are currently caused by the still-raging pandemic, parts and supplies shortages, and shipping capacity gaps.

“One big advantage of the RCEP Agreement is the wider accumulation area for raw materials,” explained Ramon M. Lopez, Secretary of the Philippine Department of Trade and Industry (DTI). “This means our MSMEs [micro, small, and medium enterprises] can source inputs from the 15 RCEP Parties, process the products here in the country, and export the same to the region at a preferential arrangement. So, a Philippine manufacturer can source raw materials from China and export the finished product to Japan, South Korea, Australia or New Zealand.”

Ho Meng Kit, CEO of the Singapore Business Federation (SBF), said that the RCEP will “enhance regional cross-border trade,” which is essential for the city-state’s “open and export-oriented economy.” “The RCEP helps local companies make use of regional cumulation to enjoy greater flexibility in sourcing from a larger pool of suppliers in the region,” he added.

The entire process of supply chain integration will accelerate under the RCEP, according to Malaysian political economist Firdausi Suffian, a lecturer at Universiti Teknologi MARA. “The main expected benefit is the hope that it will bolster regional supply chain integration by liberalizing rules of origin,” he said. “This should encourage traders to source intermediate goods from any member countries and need only one certification of origin.”

Protection and Capability

As COVID-19 continues sending shock waves through the global economy and crumpling the supply chain, the RCEP will protect and secure the region’s more vulnerable SMEs “from being immobilized,” according to Eric Balan, consultant and research fellow with BinaPavo, a business advisory firm based in Selangor, Malaysia. “A key feature of the RCEP is to promote and protect the investment environment, and this in turn helps in the operational ability of SMEs.”

A free trade bloc will strengthen SMEs’ capacity as well. SMEs, especially those based in the RCEP’s less developed members, are set to become better tech-equipped, through increased technical cooperation with companies from more industrialized countries.

“Technical cooperation with advanced industrialized countries like Japan, South Korea, New Zealand, and Australia will assist ASEAN SMEs in developing better, more competitive products–the telecommunication services and agriculture industry are likely to boom with businesses competing regionally,” wrote Michael Malvenda in an analysis article published on the portal of ASEAN Briefing, a Dezan Shira & Associates publication focused on business information related to the region.

Digital Boost

The RCEP features an e-commerce chapter that encourages SMEs to cash in on the rising digital economy and cross-border e-commerce.

With the COVID-19 still casting a cloud on the world economy, businesses are fast-tracking their transformation to e-commerce while streamlining business operations through digital technologies. Under the RCEP, digitization is more than a method for businesses to reach customers and streamline business operations—it is also a means to a more efficient and streamlined trade ecosystem.

A worker checks fish for export to Japan, China, Brunei, Thailand, and Malaysia at a facility in Banda Aceh, Indonesia, on October 27, 2020. (CHAIDEER MAHYUDDIN)

“The RCEP is notable in its language on cooperation among member states to assist SMEs in the use of e-commerce, facilitating trade using paperless trading and acceptance of cross-border electronic signatures,” wrote Audrey Cheong, Regional Vice President of Southeast Asia Operations of FedEx Express. “These rules will help create a more conducive digital trade environment for businesses.”

The digitized process is helping to eliminate considerable red tape that has been restricting small companies from engaging in global trade as robustly as their bigger competitors. And it will cut costs for many in the greatest need of savings. “With digital processes, SMEs can look forward to a reduction of paperwork and administrative procedures required for trade, a key barrier to participating in global value chains compared to larger companies,” added Cheong. “This could lead to less strain on manpower and more time to prepare goods for shipment. The inclusion of an e-commerce provision reduces the need for costly and cumbersome paperwork processes.”

MSME Funding: Mind the Gap

Traditionally, the MSME sector has been a blind spot for financial services. It is probably more true for RCEP members: According to a joint report released in 2017 by the International Finance Corporation (IFC) and the SME Finance Forum, the East Asia and Pacific region represents 58 percent of the total funding gap for smaller companies.

The RCEP might generate new solutions for this old problem, according to an article co-authored by Duong Nguyen, chairwoman of EY Consulting Vietnam, and Brian Thung, head of the firm’s ASEAN financial services division. They suggested that “financial services liberalization in the bloc could open the doors for regional MSME-focused lending providers to tap the large, under-served market.”

The article also noted the emergence of many non-traditional financing options for smaller companies. “Since the RCEP involves a mixture of high-income economies with a mature investor base, as well as both upper middle-income and lower middle-income economies, it creates a promising landscape for MSMEs and investors focusing on the regional bloc,” it stated. “Further, RCEP could also create opportunities for new e-commerce players, crowd-funding platforms, and P2P lenders in the region that would add non-traditional financing options for MSMEs.”

Increased Competition

With abundant opportunities arising from the expanding overseas market, SMEs are also facing increased competition at home. Tan Sri Ter Leong Yap, president of the Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM), called that trend “inevitable” and suggested local SMEs “focus on maintaining product quality and standards as well as branding development to stay competitive in international markets.”

Smaller companies have also been urged to proactively embrace the new environment under the free trade deal, by responding quickly to the new and different market space. “SMEs must understand where they stand in the entire supply chain,” said Eric Balan of consultancy BinaPavo. “SMEs must stay aware of their exposure and take measures to compete or to protect themselves. The RCEP facilitates SMEs to continuously engage in learning. SMEs which are rigid to change will definitely lose out from the benefits.”

But some industry insiders are not so optimistic. In November 2019, India opted out of the trade deal over fears that cheap imports could damage its largely unorganized small-scale producers.

In a recent move, 51 agriculture groups signed a petition to stop implementation of the deal in the Philippines, saying it will cause “import surges, price depression, and displacement of local production.”

Pessimists have emerged in other spheres, arguing that the RCEP will bring nothing to SMEs. “There is nothing that guarantees any benefits to small and medium enterprises, indigenous peoples, women or workers,” said Jane Kelsey, a Professor of Law at Auckland University, in an articletitled RCEP: Nothing to See and Everything to See. “The SME and cooperation chapters are weak and unenforceable.”

This view has resonated with the Philippine petitioners, who claim to have seen “continuing deterioration” with “minimal increases in exports, no expansion beyond traditional commodities, ballooning imports, and widening trade deficits,” according to a harshly-worded statement issued by the groups, “Nor is there any indication that our prospects will improve under RCEP. We, therefore, deem the claims regarding benefits from RCEP membership as overly presumptive, highly misleading, and manifestly deceptive.”

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