Address to the SME Leap Summit. CPTPP – Six Ways and More to Help

ADDRESS TO SME LEAP SUMMIT

AUCKLAND, 31 JANUARY 2018

STEPHEN JACOBI, EXECUTIVE DIRECTOR , NEW ZEALAND INTERNATIONAL BUSINESS FORUM 

CPTPP – SIX WAYS AND MORE TO HELP #SMELEAP

It’s great to be here and thank you Tenby Powell for the invitation and for your leadership in putting this event together.

Tenby has not only shown considerable foresight in arranging this LEAP Summit the day before the meeting of the APEC Business Advisory Council (ABAC) here in Auckland, but also an uncanny sense of timing in that it takes place just days after the announcement of the conclusion of CPTPP in Tokyo.

CPTPP – that’s the Comprehensive and Progressive Agreement on Trans Pacific Partnership – quite mouthful, and, as I’ll explain, quite an opportunity!

Even for someone like me who has been following CPTPP closely, the announcement came as something of surprise – a real Hallelujah moment for those of us working for better market access and better trade rules in the region.

Today I’d like to cover three things:

• first, I’d like to talk about SMEs and international trade
• then, a closer look at what’s in CPTPP for SMEs
• and lastly, I’d like to suggest what we – you and me – need to be doing now to prepare to “leap” at the CPTPP opportunity.

I’m speaking myself as the owner of a small consulting business among whose clients are a number of enterprises grouped in the NZ International Business Forum – known more by our Tradeworks campaign which seeks to explain trade to New Zealanders (please sign up to our website www.tradeworks.org.nz and follow us on Facebook, Twitter, LinkedIn and Youtube).

 SMEs and trade: what’s the problem?

Let me start with something I can’t stress enough – the benefits of trade are not just for larger companies.

As a small, open economy, New Zealand makes its living largely through trade and is mostly made up of small and medium-sized businesses.

It follows that if New Zealand wants to take a new giant leap forward into the global economy, it must do so off the back of SMEs.

But there is a disconnect – the statistics on SMEs and trade tell us that 80% of New Zealand MSMEs have never generated overseas income.[1]

This isn’t just a New Zealand thing: in economies around the Asia-Pacific region, smaller firms contribute on average around half of GDP, but less than a third of direct exports, and in some economies only a tiny fraction of that.[2]

Research shows that small firms which export employ more people, for higher wages; enjoy higher productivity; are more innovative; and expand faster.[3]

So, what can we do to ensure that SMEs are more successful at trade?

 Surveys by MBIE[4] and others in New Zealand reveal that small firms say they find it hard to get hold of market intelligence and the information they need about trade requirements.

They often struggle to access foreign distribution networks and customers.

There’s clearly an information deficit, and a need to build deeper and broader international connections.

Many New Zealand SMEs also cite distance from markets as a barrier and services such as logistics and transport tend to cost proportionately more for SMEs.

SMEs are also particularly impacted by the domestic business environment, typically much more so than larger firms.

That’s an ongoing challenge I know a lot of speakers will cover today.

But there’s a cross-border element too: red tape and compliance costs for meeting standards or regulatory requirements in overseas markets disproportionately affect small firms.

SMEs trying to operate across a lot of different markets can face the extra challenge of having to meet a myriad of diverse and often conflicting or unjustified requirements for the same product or service.

In the jargon we call these “non-tariff barriers or NTBs – we need to do something about those too.

Finally, access to finance is seen a major impediment to SME participation in Asia-Pacific trade.

More positively recent MBIE survey reports that 94% of SMEs say they can access debt financing on acceptable terms, and 88% can access acceptable equity finance.

But specific trade-related financing may be a different story.

Now, if these trade barriers hurt small firms more than bigger firms, then removing obstacles to trade in turn should also benefit SMEs more than larger firms.[5]

What’s CPTPP got to do with it?

Here’s the thing – CPTPP, and other high quality trade agreements like it, can offer SMEs a real springboard into trade.

CPTPP linking eleven economies in the Asia Pacific region does this in at least six important ways.

First, CPTPP cuts tariffs and improves market access, especially in the four economies with which we do not already have free trade arrangements –Japan, Canada, Mexico and Peru (that’s over $4 billion of trade in goods and over $1 billion trade in services).

Some improvements are also made to existing FTAs with Malaysia and Viet Nam.

Over time tariffs are reduced and eliminated on New Zealand’s key export products – dairy, meat, horticulture, wood, wine, seafood, manufactured products like agricultural machinery and medical devices.

You can find the detail by using MFAT’s tariff finder at https://tariff-finder.fta.govt.nz.

This reduces the cost of doing business – costs which weigh even more heavily on SMEs than larger enterprises.

Second, CPTPP includes disciplines to address those non tariff barriers.

Identifying and addressing NTBs is never easy, but CPTPP helps this process by providing ways to limit the impact of technical barriers to trade like rules, regulations and standards and promoting sound regulatory practices.

Much of this draws on practices and experience we have become used to in CER and APEC.

MFAT has established a new web portal for companies reporting specific problems to have these investigated and addressed – check this out at https://tradebarriers.govt.nz – it’s a great new resource for exporters.

Third, CPTPP addresses not just goods but services– a range of measures to open services markets and are designed to assist our services exporters in sectors like consultancy, education and information technology.

Services are distinct from goods – they have been described as anything you can’t drop on your foot – but they represent an increasingly important part of international trade and are often directly connected with the export of goods.

CPTPP provides for better conditions for services trade including the right to establish operations in other markets, to obtain visas to visit the market and to engage in cross border e-commerce.

For those of you look to add value in smart, innovative, knowledge-heavy sectors such as consultancy, technical services, transport, logistics, distribution or computer services and IT, CTPP should generate some great new opportunities in overseas markets.

Fourth, CPTPP includes the first-ever commitments in a trade agreement to promote an open digital economy.

E-commerce and digitally-provided services have meant that SMEs can engage across borders in a way that could not have been imagined even a decade ago.

Smaller firms can connect directly, immediately and at low cost with any number of customers offshore.

Restrictions on cross-border data flows, expensive Customs processing for the small shipments that are typical with e-commerce, and restrictive rules on e-payments, can all undermine the benefits of digital transformation.

CPTPP puts in place new rules to ensure that the lifeblood of the digital economy – data flows – continue to circulate freely subject to reasonable safeguards for privacy and consumer protection.

CPTPP requires governments to secure the necessary tools for trade in the digital environment by enabling e-payments and allowing express delivery services.

CPTPP prevents governments from requiring firms to store customer details in local data centres, so-called ‘forced data localisation’; it prohibits customs duties on electronic transmissions.

All of this is aimed at ensuring SMEs can sell services and goods to customers around the world without needing to invest in local infrastructure or rely on expensive or insecure payment systems.

Fifth, CPTPP contains specific commitments designed to make it easier for SMEs to do business in the region.  

Remember that one of the major impediments that SMEs have identified is a lack of information about markets and trade requirements.

CPTPP governments have agreed to set up websites containing information about all aspects of the agreement – whether SMEs are looking for tariff rates, or Customs regulations or procedures, or information about technical standards or regulatory requirements, or relevant business, tax or employment regulations.

A working group will meet regularly to share experiences on best practice to support SME exporters, to identify ways to assist SMEs to take advantage of the new commercial opportunities generated by the agreement, and to develop capacity-building programmes, training and other forms of assistance, for example around trade financing.

All of this should help to mean that, where the other chapters of CPTPP open the door for SMEs to trade, it is also enabling those small firms to walk through that door with confidence.

Sixth, the beauty of CPTPP is that it sets up a framework of rules designed to strip out exactly those trade costs and other hurdles that make life so difficult for SMEs in the international arena.

Those rules take in all aspects of doing business, including, for example, the right to sell into government procurement in CPTPP economies, as well as the need to promote good environmental practices and decent labour standards.

CPTPP is about creating the best possible conditions for modern models of business and trade, such as so-called “global value chains”.

In a global value chain, production is fragmented across multiple markets, using inputs of goods and services from a range of different countries, sourced from large and small firms, before the finished output gets to the final consumer.

New Zealand SMEs, where they do participate in trade, report that they mostly sell goods or services for use by other businesses in those global value chains, rather than directly to end consumers. And that’s typical around the region for SMEs.

Because CPTPP streamlines the rules for trade across markets, it gives small firms the opportunity not only to step onto the international ladder, but also to move up the rungs as they develop capability, efficiency and innovation thanks to the connections they make and the skills they gain from working in value chains.

Other GVC-friendly elements of the CPTPP that will help SME goods producers include new rules that try to smooth out Customs procedures, facilitate goods trade, and provide frameworks for developing consistent, evidence-based technical rules, biosecurity and food safety measures.

All of these new rules will help to reduce the costs of doing business and address non-tariff barriers for SMEs, in whichever sector they may be operating.

So what do we do now?

I’ve outlined six ways in which CPTPP could work to assist SMEs, but it will not happen by magic.

CPTPP still needs to be signed and ratified but there are things we collectively – and most particularly you, with our help – need to be doing to get ready.

First, be informed.

That applies particularly to business with interests in Japan, Mexico, Canada and Peru who need to familiarize themselves with the market access outcome.

Check out MFAT website (www.mfat.org.nz); there will be seminars etc after 8 March signing – watch out for those.

Get the business organisations you belong put out info to members and organize discussions with MFAT, NZTE, MBIE and other agencies.

Second, organize.

Work in clusters to figure out the change CPTPP could make to your sector.

Review your strategic plan and business plan, particularly from the perspective of how you can link more closely to global value chains.

Third, influence.

The ratification process in New Zealand will also require submissions to the Parliamentary Select Committee – think about participating in the public debate that will invariably come back about the benefits of the agreement.

Engage with officials – when it comes to the implementation of this agreement, and the negotiation of others in the pipeline, they need real-word stories of challenges, problems and successes in offshore markets.

Report the problems you are facing in offshore markets.

Only business knows how business is done; only SME owners know the challenges they face.

I am certainly hopeful that the discussions you will be having around this Summit will put in place the structures required to enable more effective sharing of information between SMEs and officials.

Conclusion

I said at the beginning: the benefits are not just for the bigger companies.

CPTPP has been conceived with SMEs in mind and its success for New Zealand will ultimately depend on SMEs making use of those six benefits I have outlined.

I’d like to leave you with another simple idea: it’s that all of us in this room, and New Zealand SMEs across the board, need to raise our eyes above the New Zealand horizon and look more ambitiously outward to the world beyond and particularly the Asia Pacific region.

The Asia-Pacific will be the centre of economic gravity for at least all of our lifetimes, and very probably for the lifetimes of our children too.

In New Zealand we are blessed with fantastic commercial prospects as well as the potential to develop our skills, productivity and competitiveness: now also we have the means through CPTPP to engage more easily and seamlessly across borders.

New Zealand SMEs should seize those opportunities – and trade agreements like CPTPP give us a perfect leaping-off point to do so.

[1] MBIE Small Business Sector Report 2014

[2] https://www.apec.org/Groups/SOM-Steering-Committee-on-Economic-and-Technical-Cooperation/Working-Groups/Small-and-Medium-Enterprises

[3] WTO (2016), ‘Levelling the Trading Field for SMEs’, World Trade Report 2016, page 75; see https://www.wto.org/english/res_e/booksp_e/world_trade_report16_e.pdf

[4] Ministry of Business, Innovation and Employment, Small Business Sector Report, 2014, page 47. See also WTO (2016), page 77.

[5] WTO (2016), pages 78-106.