SMES’ BIG DEAL

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

The Regional Comprehensive Economic Partnership, or RCEP, contains a specialized chapter detailing provisions for small and mediumsized 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 theregional economy and are committed toaddressing the unique challenges SMEs face inutilizing trade agreements.”

“The SME chapter aims to create a broaderplatform for cooperation among SMEs,encouraging them to proactively utilize the freetrade pact and economic cooperation projectsgenerated by the FTA so they can integrate intothe regional value flows and supply chain fasterand more extensively,” read an introductory statement released by China’s Ministry ofCommerce.

Massive Market

The RCEP’s most direct and obvious benefitfor SMEs is opening a huge barrier-free regional market, connecting them to a marketplace of2.2 billion consumers through significantlystreamlining 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.

“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 article titled 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.”