Small and Medium Enterprises need more than information chapters in trade agreements to allow them to compete on a fair basis with large multinational corporations.
It is typical in Europe that the majority of exports come from larger companies with more than 250 employees, yet the majority of employees work for companies smaller than this. Even more striking is that the overwhelming majority of companies are small.
The traditional view of trade economists and officials is that only large companies really matter. It is natural to focus more on problems encountered by the likes of Rolls Royce, which has been estimated to account for 2% of United Kingdom exports alone, than on a small business.
This focus overlooks large companies already having large teams devoted to facilitating trade. It further distorts economies towards large incumbents, and leaves the majority of employees working in companies struggling to trade if they do so at all.
In recent years governments have recognised more should be done in trade policy for small and medium enterprises – SMEs. But as yet resulting actions would seem to fall some way short of seriously addressing the issue, centred as they are on providing information. This is not least as it isn’t a shortage of information that seems to be the primary problem preventing smaller companies trading more.
Genuine trade liberalisation is particularly important for small companies
Hearing stories of trade from companies of all sizes is essential, even if this is admittedly harder in the times of fewer meetings and events. For example smaller companies in the UK have recently been raising with some frequency the problems of obtaining work visas, the future basis for providing services in the EU, and the paperwork requirements for imports and exports.
The UK has of course recently seen a dramatic rise in trade barriers with the EU, and anecdotal evidence since that happened has been of SMEs particularly badly affected. These stories however also reveal companies who are not experienced in trade policy language, and instead looking at general issues such as the volume of paperwork.
This speaks to the importance for smaller businesses of genuine trade liberalisation. Tariff reduction is helpful, but more powerful are the removal of restrictions on trading across borders which are typically based around diverging regulations.
It is the plethora of such regulatory barriers that do most to advantage larger companies able to employ teams specifically to deal with resulting requirements, spreading the cost over a high volume of production. Such costs are simply a greater proportion of export value for smaller companies. They may not even get that far, as often it is the overall uncertainty that prevents trade in the first place.
Free trade agreements need updating
EU and UK trade agreements now include a dedicated Small and Medium Enterprises – SME – chapter, stating that both sides shall provide information, establish a contact point, and talk periodically about encouraging more trade. While it is hard to be against the provision of information, it is really not evident that this is a particular problem for SMEs.
There is no shortage of information available from the EU or UK governments, whether on tariffs or regulations. The UK government Border Operating Model for example runs to 315 pages, for just a fraction of a firm’s exporting story.
It would be interesting to know how many businesses decide against exporting simply from being overwhelmed by the information available.
What should be clear is that such specific provisions are nothing like sufficient to address the trade issues faced by SMEs. The reduction of paperwork suggested by mutual recognition or regulatory cooperation may be more promising, but results in these areas have so far been limited. As yet such initiatives are also not typically linked to the experiences of smaller companies, and that needs to change.
Red tape reduction and facilitating online transactions
More broadly it should tell us something that the specific chapter in EU FTAs targeted at 99% of all enterprises in the bloc mostly says they should be provided with more information. It is unlikely that large company lobbyists would settle for an outcome in which they are provided with more information. Instead they will press for particular clauses that facilitate their business in particular ways.
In terms of the value of exports it might make sense for governments to address the specific barriers faced by large companies. But it also means they are being given preferential treatment, likely to come on top of similar in terms of helping shape regulations.
It is time to take smaller enterprises rather more seriously than thinking their problem is insufficient information and providing information enough to help. That starts with recognising the particular difficulties and biases in trade policy. A very serious question needs to be asked about whether the services of governments to resolve export barriers that are available to the largest companies should also be available to smaller ones. At the very least we need to consider in trade agreements a red tape reduction service specifically targeted to SMEs.
Beyond the specific issues we also need to gear our trade policy more towards the general issues encountered by smaller companies. This could mean separating their visa issues from the Mode 4 that more commonly is of relevance to inter-company transfers for multinationals. It probably means specifically removing barriers to online transactions made by small companies without the services of larger platforms.
Doubtless there are more ideas that could be brought. They need to be taken seriously. In short, we need to stop trade policy being discriminatory against small companies.
David Henig runs the column ‘Perspectives’ on the politics of global trade for Borderlex. He is also a UK director at the think tank ECIPE.
Views expressed by columnists at Borderlex are strictly their own.