Trade rules assisting SMEs to compete better
JB Cronjé, tralac Researcher, comments on the WTO’s recently-published World Trade Report 2016, subtitled ‘Levelling the trading field for SMEs’
The 2016 World Trade Report of the World Trade Organization (WTO) focuses on the participation of Small and Medium-sized Enterprises (SMEs) in international trade. SMEs are usually defined as firms employing between 10 and 250 people whereas those with less than 10 employees are classified as micro firms. Micro, Small and Medium-sized Enterprises (MSMEs) are estimated to constitute more than 95 percent of all enterprises in developing countries. About 80 percent of all MSMEs in developing countries and Least Developed Countries (LDCs) are classified as micro firms. According to the Report, most micro firms (85 percent) and SMEs (72 percent) operate in the trade and services sectors. SMEs are also a large source of employment. In a majority of countries, SMEs contribute more than two-thirds of formal non-agricultural private employment. However, SMEs pay in general lower wages, provide less job security and are less likely to offer training to employees than large firms.
According to the Report, the average contribution of SMEs to Gross Domestic Product (GDP) is roughly equal to 45 percent, which is lower than their contribution to employment. This could, at least in part, be attributed to the fact that they are less productive than large firms. Their lower productivity could be ascribed to an inability to take advantage of economies of scale, lack of access to credit and resources, and informality of contracts with suppliers and clients. Innovation is the main way to increase productivity but SMEs lack the resources to innovate through Research and Development (R&D). They often improve their performance in terms of new products, processes and services. The Report also argues that geographical proximity to clusters can contribute to knowledge spillovers and involvement in value chains can improve the technical efficiency of SMEs.
Unfortunately, SME participation in international trade, including through e-commerce and global value chains remains limited. Some of the main obstacles to trade include standards, border requirements and lack of information about foreign distribution networks. The Report also states that the main problems SMEs face with e-commerce are data protection and ICT security requirements; payments; and logistics. Equally, the main challenges for SMEs to joining production networks include logistic and infrastructure costs, regulatory uncertainty and access to skilled labour.
More and more Regional Trade Agreements include provisions on SMEs. In fact, about half of all RTAs notified to the WTO contain at least one provision on SMEs. According to the Report, about 80 percent of all RTAs entering into force over the last five years (2011 to 2015) included provisions on SMEs. These provisions differ in terms of structure, language, scope and legal commitment. The SME-related provisions in RTAs refer mainly to cooperation on SMEs, services and investment, government procurement, e-commerce, trade facilitation, intellectual property, and transparency. In recent mega-RTAs such as the Trans-Pacific Partnership (TPP) and Comprehensive and Trade Agreement between Canada and the European Union new types of SME-related provisions on government procurement, transparency and investment dispute resolution are included. The TPP provides that each state party must maintain a website containing information on the agreement. It may also contain relevant information such as customs regulation and procedure, regulations concerning intellectual property rights, technical regulations, standards, sanitary and phytosanitary measures, foreign investment regulations, employment regulations, business registration procedures, and taxation information. It also establishes a committee to exchange best practices in supporting and assisting SME exporters and facilitating the development of programmes to assist SMEs to integrate effectively into global value chains. The TPP also contains specific provisions to facilitate the participation of SMEs in government procurement and encourages parties to publish procurement information on a single electronic portal, allow electronic procurement and make tender documents available free of charge.
Some of the Regional Economic Communities (RECs) on the continent also provide for initiatives to support SMEs. For example, the Treaty establishing the Economic Community of West African States (ECOWAS) provides Members must adopt measures that would create an enabling environment to promote SMEs. The West Africa Common Industrial Policy also identifies support for and development of MSMEs as a priority. The Treaty establishing the Common Market for Eastern and Southern Africa (COMESA) provides in chapter twelve for cooperation on industrial development. It provides for the development of an industrial strategy including the promotion of SMEs. In line with this mandate, the COMESA Secretariat developed a Regional MSME policy for its member states in 2013. It identifies all of the challenges highlighted in the World Trade Report. Equally, the Protocol on Trade of the Southern African Development Community provides for the development of an industrialisation strategy. As a result, SADC Members recently adopted a series of measures to advance SMEs as part of its Industrialisation Strategy and Roadmap 2015-2063. The SADC Industrial Development Policy Framework of 2014 also identifies SME development as a key intervention area. Some of the actions identified in the Policy Framework to support SMEs in the region include the development of a portal on the SADC website to provide SMEs access to trade and industrial information and for use as a marketing tool. Other actions include the facilitation of joint investment and export promotion initiatives for SMEs and improving the industrial competitiveness of SMEs in agro-food processing, mineral beneficiation and pharmaceutical sectors as part of national Industrial Upgrading and Modernisation Programmes. These are all important and commendable initiatives. Hopefully, Members of the African Union currently negotiating the establishment of a Continental Free Trade Agreement will build on the existing programmes of the different RECs and adopt specific SME-related provisions. For example:
Enhancing transparency of trade-related domestic regulation by publishing business registration requirements, intellectual property regulation, foreign direct investment restrictions, employment regulation and taxation measures on an official government website and promoting due-process in policy-making will reduce trade costs on SMEs;
Less cumbersome and costly visa and work permit requirements and procedures will assist entrepreneurs to interact with customers and build networks with other SMEs across borders;
Addressing specific domestic regulation such as online consumer protection, privacy and cybersecurity, network neutrality rules, not requiring access to source code of software or the establishment of local data centers as market access conditions will assist SMEs in overcoming e-commerce challenges.
WTO, 2016. World Trade Report 2016: Levelling the trading field for SMEs Available [Online] at https://www.wto.org/english/res_e/booksp_e/world_trade_report16_e.pdf