In our latest Trade Working blog Stephen Jacobi and Stephanie Honey look at prospects for #WTO #MC13.
ASEAN FORUM: Doing Business in ASEAN – Digital, Dynamic, Diverse
SMEs: Unlocking the Potential in ASEAN – and Beyond
Remarks by Stephanie Honey, ABAC New Zealand and NZIBF
Tuesday 17 September
Good morning. My name is Stephanie Honey, and I’m here to tell you about the great potential for small Kiwi businesses in ASEAN – but also to acknowledge that finding success as a small business can be a pretty hard road, even somewhere as friendly as South-East Asia.
My main message today is that trade is being disrupted. It is being disrupted in both bad and good ways. But SMEs should be bold about surfing the disruption wave – with a little help from their friends if they need it!
It’s a great privilege to be able to share some thoughts with you on this topic. I’m a former New Zealand trade negotiator and now a trade policy consultant. I am involved in a range of trade spheres that touch on both small businesses and ASEAN.
Who I am
I’m speaking today primarily from the perspective of the APEC Business Advisory Council, where I am a policy advisor. ABAC is a group of senior business representatives from around the Asia-Pacific, including of course ASEAN. It was set up to provide recommendations to APEC Leaders on the concerns of the business community.
Helping SMEs is a big priority for ABAC. Last year, ABAC New Zealand member Tenby Powell, who is also the chair of the New Zealand Small Business Council, and I championed a big research project on empowering SMEs in trade. I’m going to talk about that later on.
I’m also the Associate Director of the New Zealand International Business Forum, a group of outward-looking New Zealand companies and peak business bodies that seek greater global connectivity for New Zealand, including through deeper integration with ASEAN. Our website is www.tradeworks.org.nz and it’s full of great resources.
I have also had the privilege to be closely involved, thanks to the Ministry of Foreign Affairs and Trade, with our ASEAN-CER Integration Partnership Forum since 2011.
Finally, I am co-founder of a (small!) business called Global Trade Insights that provides trade policy courses for officials and businesspeople here and overseas. Our mission is to strip away some of the mystique from trade, which is often seen as pretty impenetrable, especially by SMEs.
Benefits of trade for SMEs
One of the themes that is common to all of this work is that:
- trade has huge potential pay-offs for SMEs;
- …but also that the ‘little guys’ face some pretty big challenges around understanding, connecting and competing successfully in trade.
On the benefits side of things, research shows that businesses that export are more productive, more innovative, employ more people, pay higher wages, and have access to more investment. So there’s a pretty clear value proposition for SMEs to get involved in trade that goes well beyond earning export dollars – although of course that’s important too.
Exports of goods and services from New Zealand to ASEAN were worth $7.5 billion in the year ending June 2019, imports about half as much again. ASEAN has just edged out the United States and Japan as our fourth-largest two-way trading partner, after China, Australia and the EU, although as an export destination it slips back to fifth. Five years ago exports were worth around $6 billion; this year that figure is up 25 percent. Maybe we can even grow it by another 25 percent with more SME engagement!
Challenges for SMEs in trade
But it’s not all rainbows and unicorns. On the challenges side, there are two dimensions:
First, the environment that SMEs are operating in is increasingly complex and uncertain, even as new opportunities are also being created.
Second, there are some innate challenges of capacity and connectivity that make life as an exporting small business particularly hard – even in a fairly benign environment like ASEAN.
Let’s start with a quick survey of the landscape.
Asia is unquestionably now the centre of global economic gravity. This chart shows the shares of middle class consumption out to 2050 – those are the people who have both the lifestyle and income to buy and consume the high-quality goods and services that New Zealand produces best. You can see that this enormous middle class will be dominated by the two giants, China and India. But ASEAN is pretty key too, both as a production hub and consumer. To put it another way, there’s potentially a large, growing and dynamic market for New Zealand SMEs in South-East Asia for the foreseeable future.
We are also living in the age of disruptive business models. We have seen the rise of global value chains, where production take places in stages across different markets, using inputs of goods, services, capital and know-how from different sources, all enabled by technology – increasingly digital. ASEAN of course was in at the ground floor of the GVC model alongside China, Korea and Japan, with “Factory Asia”.
Thanks to GVCs, New Zealand SMEs have the opportunity to integrate more deeply with ASEAN. The example I’ve put on the slide is a fantastic New Zealand company – AllBirds, which has a sustainable supply chain incorporating inputs and processes from New Zealand, Italy, Brazil and Korea. This kind of model, in food and beverage, niche manufacturing, or even gaming or tourism, has huge potential for New Zealand SMEs to connect even at small scale with partners in South-East Asia and beyond – the challenge will be to position ourselves most firmly at the high-value-adding end of the chain. New Zealand’s growing portfolio of trade agreements with ASEAN and in the wider Asia-Pacific region is a key underpinning for this.
The opportunity through global value chains is just one facet of the disrupted trade models. Trade used to be the purview of big business, but we are increasingly seeing SMEs coming to the fore, including in B2B activities. Why does this matter? Well it simply means that, with this greater diversity has also come a greater focus on getting the policy settings right for SMEs. That means governments are keen to give a helping hand, which is great news.
Another major disruption is that trade is now more digital – meaning new products, new ways of trading, and new opportunities. The very first customer of a small New Zealand business can be in Indonesia, or Viet Nam, or the Philippines – and the costs of finding, connecting with, and getting products to those customers are vastly reduced thanks to digital channels such as e-commerce platforms and streaming services, trade-facilitating tools such as digital logistics and digital Single Windows, and innovative fintech and cloud computing to take care of the back office stuff.
But – the landscape is also littered with stumbling blocks for small businesses.
One of the big challenges is around ensuring that the opportunities and benefits of trade are widely shared within economies. Why would this issue around “inclusion” matter to a New Zealand SME, you may be wondering?
At the most obvious level, more prosperous and stable economies which have a broader base of consumers are a much more attractive proposition for exporters. It also means that digital and physical infrastructure are likely to be more accessible and efficient – also key for small businesses. But perhaps most importantly, a more inclusive model is central to sustaining the “social licence for trade” – in other words, popular support for trade liberalisation, for open markets and for agreed trade rules. That is crucial for New Zealand SMEs, as tiny players on the world stage. The more economies in our neighbourhood that champion those ideals and stick to the rules, the better.
There are also challenges for small players due to the proliferation of different trade agreements, each with their own quirks – sometimes called the “noodle bowl”. SMEs can find it hard to know which of this plethora of different rules to follow – and sad to say, some of the worst tangle is in ASEAN’s backyard. If you wanted to get philosophical, of course, this also means that there are lots of potential opportunities – the noodle bowl is half-full, not half-empty! But SMEs may need a hand to find them.
The final external challenge for SMEs comes from the current unprecedented turbulence in global trade.
There are a couple of worrying things about the “trade war” for small businesses. First, even if we’re just concerned with exporting our wonderful high-quality New Zealand goods and services to ASEAN, we may end up as collateral damage as trade flows from China or the US and from elsewhere get dislocated and in turn disrupt our existing business.
Now certainly, some ASEAN economies are short-term winners from the trade war. The onslaught of US tariffs has seen supply chains and investments moving out of China and into markets such as Malaysia and Viet Nam. However, those countries could also lose as a result of disruption to other GVC and trade links, and that has implications for their trading partners. Overall, while the trade war outlook is worrying, it’s probably fair to say that the agile, smart and well-informed SMEs can find opportunities that big firms cannot.
Equally worrying is a growing instability in the WTO rules-based system, accelerated by US trade policy approaches. And we have also seen a broader rise in protectionism since the Global Financial Crisis, including in parts of ASEAN. Robust trade rules and open markets are key for small businesses.
Immediate impacts aside, the trade war and rising protectionism pose some big long-term economic risks. China has long been the engine for Asia-Pacific growth, but the trade war is exacerbating the economic slow-down that had already started to emerge as a result of domestic structural factors. More broadly, the trade war is having a dampening effect on business and investor confidence. The global economy is likely to grow only sluggishly. And even here, in our little corner of the world, a recent ANZ forecast put New Zealand’s growth at around 2.0% year-on-year – the softest pace since 2013. The ASB has even breathed the word “recession” in public. Consumer and business confidence are both down – and no wonder, given the global environment.
None of this is great news for small businesses – but a more compelling reason than ever to keep engaging with global markets.
Innate challenges for SMEs
The work that we are collectively doing in the region is crucial: negotiating new trade agreements, chipping away at bad policy and isolationist mindsets through APEC, supporting the social licence for rules-based trade and – above all, for those of you in this room – deepening our commercial, business, social and cultural ties with ASEAN, to shore up the real foundations of long-term prosperity – that is, connections among people.
But SMEs have a number of specific challenges here – challenges which might be existential for an exporting SME, but which larger firms may regard as “just the cost of doing business”. Let’s take a closer look.
ABAC report on enabling SMEs (including women-led SMEs) in trade and GVCs
To illustrate the case, I’m going to talk about the report on SMEs we did in ABAC last year. We asked the University of Southern California’s Marshall School of Business to look at how we could enable SMEs, especially women-led SMEs, to be more successful in trade and global value chains in the Asia-Pacific. They interviewed over 500 firms, policymakers and thought-leaders.
The Marshall School team came up with six areas in need of attention.
First, the team found that being a good business at home was crucial to export success. Things like securing finance to scale up or innovate, having business expertise and an entrepreneurial mindset, being alert to market opportunities, being proficient in technology, and being able to leverage good networks. But due to their size, many SMEs struggle with complete “business readiness”.
Women-led SMEs faced some additional challenges, including having to contend with social and cultural and sometimes even legal gender biases around accessing networks, finding mentors and building capability.
As for the trade dimension itself – spoiler alert, exporting is hard, and expensive! SMEs often don’t know how to get started. They can find it hard to get hold of useful market intelligence. They can struggle to make connections with foreign customers or distribution networks. And costly trade barriers are a big share of revenue for a small company, which may also lack in-house technical expertise. By that, I mean things like understanding and meeting trade requirements, or dealing with non-tariff barriers such as complex labelling regulations, unscientific biosecurity rules, delays in Customs or other kinds of red tape. Ambiguous or fast-changing barriers can be particularly hard to manage.
Speaking of trade barriers, the team identified services trade as a big opportunity for SMEs to move up the value chain, especially with the very modern intersection of the digital economy, services and trade. But unfortunately, services trade is still an area hemmed in with restrictions. These can be things like burdensome licensing requirements, lack of recognition of professional qualifications, slow visa processing or discriminatory equity caps for subsidiaries – all a big headache for SMEs.
The team found that trying to leverage the global value chain opportunity was potentially more promising for SMEs than direct trade. But the downsides of taking part in GVCs included how to engage effectively with multinationals, challenges around getting paid, and how to manage divergent requirements and standards for different customers.
Digital technology was identified as a key enabler. Digital strips away many of the challenges around cost, scale and distance that have traditionally hamstrung SMEs in trade. To succeed digitally, though, SMEs need good digital literacy, affordable, fast digital infrastructure, access to competitive e-commerce platforms, reliable online dispute resolution, and minimal barriers to data flows. But many SMEs still have a way to go to be truly “digital natives” – a sizeable number of Kiwi SMEs don’t even have a website – and the digital economy is not always regulated in trade-friendly way. In some parts of ASEAN, for example, we see restrictions on transferring data out of the country, or on the use of innovative e-payments, or duty thresholds for e-commerce packages set discouragingly low – all of those make life harder and more expensive for SMEs.
So what are the answers?
- Thoughtfully-designed national SME strategies
- Upskilling in “business readiness”
- Eliminating or reducing trade barriers
- Better access to information on trade requirements and market intel
- Better access to trade financing
- Connecting better with distribution networks and customers
- Building better capability to comply with trade rules and requirements
- Having recourse to effective online dispute resolution
- and accessing government procurement opportunities
Pretty easy, right?
What trade agreements can (and cannot) do
Policymakers have been thinking hard about how best to design trade agreements that might tackle at least parts of this list.
One recent agreement, the Comprehensive and Progressive Agreement on Trans-Pacific Partnership, or CPTPP, has tried to break new ground for SMEs. CPTPP involves New Zealand as well as Singapore, Viet Nam, Malaysia and Brunei, plus six other non-ASEAN economies. Others from ASEAN, including Thailand, might join in time.
The CPTPP countries have signed on to an ambitious package of trade liberalisation and facilitation for goods, services, investment and data flows. This will enhance the environment for trade, GVCs and digital – and that alone makes it good for SMEs. But beyond that, the CPTPP members have also agreed to set up websites to act as a one-stop-shop of information for SMEs. And they have formed a Committee to share experiences on best practice, capacity building and training programmes for SMEs.
We might hope to see similar approaches coming out of two current regional negotiations. These are of course the Upgrade to the nearly ten-year-old ASEAN-Australia-New Zealand FTA, and the ASEAN-led Regional Comprehensive Economic Partnership. It would be fantastic for SMEs if these new agreements had as a central theme how to help small businesses overcome some of the challenges I’ve talked about.
Practical help for SMEs
But what can be done at the more day-to-day level? One of the things that I come across frequently in my trade policy training courses is that trade is seen as mysterious, and scary.
As they say – we need to feel the fear and do it anyway. But a range of practical tools exist that should help make understanding and building capacity a bit easier for SMEs.
MFAT has great tools such as the Tariff Finder for goods (and is planning a similar tool for services), an Exporter Advisory Service for businesses, and a portal where you can report non-tariff barriers, so that the MFAT team can get to work on tackling them.
NZTE too has an excellent network of both in-market and sectoral experts who can give advice and make connections. And MPI and Customs can help respectively with certification, tariff classification and rules of origin, while the Export Credit Office at Treasury can help with trade financing.
Export New Zealand, along with our kind hosts the ASEAN New Zealand Business Council, and sponsors the South-East Asia Centre for Asia-Pacific Excellence and the Asia New Zealand Foundation, all have programmes designed to take some of the stress out of the equation for small businesses by enhancing their capabilities and networks, for example with training, in-country trade missions and networking events. New Zealand Story can help with branding and storytelling. And innovative business networks, such as the Kiwi Connection Tech Hub set up by one of our earlier speakers, Mitchell Pham of Augen Software, are also crucial.
Finally, at the regional or international “policy” level, there are organisations like ABAC and APEC – which New Zealand will host and help shape in 2021 – working hard to foster the right policy environment for SMEs.
In sum, I think small Kiwi businesses should not be too daunted by the brave new world of trade disruption. There are challenges to be sure, but at the same time there have never been better opportunities in ASEAN for small businesses.
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