[COLUMNIST] Inclusive trade: Navigating regulations through the lens of SMEs

TRADE regulations, particularly non-tariff measures (NTMs) are impacting inclusive trade, based on the weak representation of small and medium enterprises (SMEs) in the international market and global value chains (GVC). Complex regulatory requirements that result in high compliance costs disproportionately burden SMEs given their limited access to market information, resources (finance, technical/ digital skills), and business networks.

The concentration of Malaysian SMEs in food manufacturing (15.1% of total SMEs in manufacturing 2022; 2023 Economic Census), a sector which by default is subject to a higher incidence of sanitary and phytosanitary (SPS) measures, could also serve as barrier to trade inclusivity. For example, for the category of food products (defined by HS 2017 classification), SPS measures constitute 74.4% of the total import-related NTMs in the Association of Southeast Asian Nations (ASEAN) (calculated from UNCTAD TRAINS database). The top five SPS measures in the region include tolerance limits for residues or contamination by certain (non-microbiological) substances, followed by labelling requirements for SPS reasons, restricted use of certain substances in foods and feeds and their contact materials and testing and certification requirements.

Hence, it is not surprising to note that many local SMEs in the highly regulated food segment have not been able to go regional, or even global. One success story, however, is Julie’s Biscuits, a homegrown middle-sized company that has circumvented complex regulations and captured over 80 markets globally.

Accordingly, the recent 2024 ASEAN SME Policy Index recommends Malaysia strengthen its micro and small medium enterprises (MSMEs) capabilities to meet global standards, among others. Recognizably, the incidence of NTMs alone does not explain the difficulties of SMEs participating in cross-border activities, but rather the “regulatory distance” (differences in standards and requirements between countries), which imposes additional costs of compliance that makes it harder for SMEs to access markets.

While national policies and strategies exist to support SME exports, (divergent and distortive) trade regulations continue to pose significant challenges to SMEs participation in international markets.

How can efforts be directed to effectively promote inclusive trade?

Firm/industry targeting: To some extent firm size matters when it comes to having a better chance of success in export markets. As such, there should be more emphasis on, or targeted support for medium-sized enterprises (albeit they are small in number; 1.8% of the total number of MSMEs in Malaysia in 2023), as they may be better equipped to navigate complex international regulations relative to smaller companies. Aside from firm size, targeting specific industries of interest like (Halal) food under the 2030 Halal Industry Master Plan is also an effective strategy for medium-sized companies to expand their market reach.

Diversifying business modes: Online marketplaces can enable SMEs to reach international customers (B2C) and connect with international suppliers (B2B), and thereby help them expand their production capacities and derive better profit margins. Yet, SMEs in the country remain focused on domestic e-commerce. Again, the exception is Julie’s Biscuits that has experienced fast growth in China’s e-commerce space. Efforts should therefore be directed to increasing cross-border e-commerce engagement by SMEs, as even smaller companies can benefit and capture niche markets through this mode of business.

Diversifying target markets: There are some misconceptions of focusing on regional markets to avoid the higher intensity of regulatory compliance in extra-regional markets. To begin with, a 2023 ESCAP report based on a business survey suggests that NTMs applied by regional trade partners (in the broader context of Asia Pacific) can be equally burdensome relative to extra-regional partners. Greater emphasis should therefore be placed on medium-sized companies diversifying their markets beyond the region.

How can regulations be designed to promote inclusive trade?

While expanding the global market reach for SMEs appear critical, cooperation at the regional level is very much relevant to address regulatory transparency and disparities and subsequently promote inclusive trade. Domestic reforms in NTMs (either from the import and/or export sides) are only a pre-requisite for regional alignment of the regulations.

Aligning NTMs in accordance with global standards is also best done at the regional level to solidify the group’s negotiating power with external dialogue partners, especially when reciprocity is required to dismantle some trade-distorting NTMs. The reason being, NTMs within ASEAN are already diverse and are not well designed and therefore do not provide the needed support for SMEs to participate in cross-border trade. Procedural obstacles and the lack of standardization in conformity assessments (such as testing and certification) account for the poor implementation of NTMs and the lack of policy coherence region-wide.

Likewise, streamlining digital trade regulations, where digital trade involves the complex bundling of goods, services and data, is the next big thing for coordination under the Digital Economy Framework Agreement (DEFA) of ASEAN. This entails finding common regional rules and guidelines on data storage, processing and transfer, consumer protection and data privacy and de minimis levels. Restrictive digital trade rules, however, are not confined to the neighbouring countries, as even Malaysia was found to have complex rules on non-technical import-related NTMs compared to the regional average for Asia Pacific based on the 2023 Regional Digital Trade Integration Index (RDTII).

Apparently, the progress on reducing the high compliance costs associated with NTMs and putting in place a coherent structure for managing digital rules in the region have both been rather slow due to differences in national capacities and priorities. The hope, however, is that with more dialogue between Member States, the region may at the very least arrive at some point of greater policy certainty, and better policy design if not for all but certain Member States, to facilitate the participation of SMEs in regional and global markets.

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Evelyn S. Devadason is Professor at the Faculty of Business and Economics, University Malaya, and Vice-President of the Malaysian Economic Association. She is also an IDEAS Senior Fellow in International Trade, Economics and SME Development (1/6/2024 – 31/12/2025).

** The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the position of Astro AWANI or IDEAS Malaysia.

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