SMEs: small businesses with big potential

Small and medium-sized enterprises (SMEs) are integral to the economies of the Member States of the Association of Southeast Asian Nations (ASEAN). According to a report of the Asian Development Bank (page 10), from 2010 to 2019, SMEs contributed to each state’s Gross Domestic Product at an average of 41.1% and national workforce at 69.4%. The important role of SMEs, as enablers of national productivity and local employment, needs to be recognised and leveraged. The Regional Comprehensive Economic Partnership Agreement (RCEP) affirms this role, but if no further action is taken at the regional and national levels, ASEAN Member States may not succeed in leveraging the potential of SMEs.

Affirming SMEs’ role through RCEP

RCEP entered into force in January 2022 and is the largest regional free trade agreement (FTA) in the world. It comprises the ten ASEAN Member States and five other states in the Asia Pacific region (Australia, China, Japan, Korea, and New Zealand). The agreement aims to utilise economic partnership to achieve equitable development. Accordingly, RCEP has declared the importance of SMEs in promoting economic growth and employment.

In Southeast Asia, FTAs generally suffer from low utilisation due to limited awareness of market access opportunities and onerous procedures for preferential tariff qualifications. These challenges disproportionately affect SMEs, which often lack the scale, productivity, and export capacity of larger businesses. RCEP included provisions to address the challenges of SMEs and increase their ability to benefit from the opportunities created by the agreement.

Provisions related to SMEs

SMEs are specifically covered in Chapter 14 of the RCEP with the objective of promoting information on sharing and cooperation. States are required to share information by establishing and maintaining publicly accessible platforms, and by exchanging best practices. They also commit to strengthening cooperation in areas such as encouraging efficient and effective implementation of facilitative and transparent trade rules and regulations, and improving the access of SMEs to markets and participation in global value chains by promoting and facilitating business partnerships.

Complementing Chapter 14, RCEP provides a framework in Chapter 15 for economic and technical (ecotech) cooperation to pursue mutual benefits and narrow development gaps among states. Ecotech cooperation involves activities in several focus areas, including SMEs with priority of assistance to Developing and Least Developed States.

RCEP introduces single Rules of Origin (ROO), which help to solve the ‘noodle bowl’ effect due to the entanglement of FTAs between State Parties. Products can still qualify for preferential tariffs provided they meet origin requirements, including Goods Wholly Obtained or Produced under Article 3.3 of Chapter 3 and Product-Specific Rules in Annex 3A, and are excluded from tariff differential lists. As a result, the single ROO would allow SMEs to diversify their supply chain, making it easier to obtain raw materials from different countries without the complexities of navigating different ROOs under different FTAs.

Constraints

There are, however, inevitable losers in economic integration. Economic integration is a win-win proposition among states at the national level, but results in uneven distribution of costs at the sector/industry and firm levels. SMEs – particularly those that are domestically oriented – and vulnerable groups, such as smallholder farmers, are particularly affected. In Thailand, the agricultural sector is expected to face increased pressure from lower-cost fruit and vegetable imports from China. Similarly, concerns have been raised in the Philippines over potential losses in domestic agriculture due to government subsidies in other RCEP States. Overall, comprehensive research on RCEP’s adverse impacts on SMEs and the development of support measures are limited. Such measures could include job placements for workers or technical assistance for SMEs.

Moreover, whereas the information sharing provisions are concrete and ready for operationalisation in the short term, the ecotech cooperation provisions are broad. For the purpose of finalising a coherent regional work programme specifying cooperation activities, it is necessary to identify specific gaps addressing SMEs’ needs. An assessment should also be made of existing national policies and ASEAN SMEs initiatives. The RCEP Ministers’ Meeting on 22 September 2024 reiterated the importance of narrowing implementation gaps. However, the status and progress of the ecotech cooperation activities for SMEs remain unclear.

Future outlook

It is unlikely that RCEP will be able to maximise the role of SMEs unless ecotech cooperation provisions are meaningfully implemented and monitored at both regional and national levels, and uneven outcomes are addressed.

From a regional perspective, the Subcommittee on Sustainable Growth should prioritise ecotech cooperation activities for SMEs by identifying implementation gaps, finalising a dedicated work programme, and launching activities. States themselves should identify sectors and enterprises that will be negatively impacted by RCEP, the challenges they face, and appropriate support measures.

The debate has started – will ASEAN Member States be able to utilise RCEP in leveraging the potential of SMEs as drivers of economic growth and local employment?

This blog was written as part of an assignment for the Advanced LL.M. in Public International Law. The task was to highlight a regional instrument and critically analyse how it contributes to addressing sustainability challenges.