Small and Medium-sized Enterprises (SMEs) play vital roles in national economies particularly in terms of providing innovation, growth and job creation, more than might be expected from their relatively smaller share of international trade than large multinationals. Information compiled by the WTO suggests that SMEs provide around two-thirds of total employment in both developing and developed countries. Moreover, SMEs contribute around 35% of GDP in developing countries, and around 50% of GDP in developed countries. Yet exports make up less than 8% of sales of SMEs in developing countries, as compared to 14% of sales of large firms.(1) It's a similar story in developed countries, large firms export much more than small ones.
SMEs could contribute more to world trade.
One persistent obstacle for SMEs is divergent standards and regulations. Just to give one example, SME textile producers have to deal with different regulations and testing procedures for flammability of clothing in the EU and US.(2) The cost burden of double testing can prevent small producers from gaining access to one or the other market, while larger rivals can more easily spread these costs across a larger number of sales. To give another example, a Nepalese SME that exports coffee faces demands from buyers in Japan or Australia for different organic or quality certifications. Because the cost of these different certifications is very high, the SME can't diversify its export markets.(3)
A European Commission report (2015) on SMEs and TTIP showed that regulatory issues (SPS (Sanitary and Phyto-sanitary) and TBT (Technical Barriers to Trade) are the most frequent challenge facing European SMEs when exporting to the United States, representing around 30% of all issues raised by some 869 European companies (responding to an online survey).(4) The perspective from the other side of the Atlantic is much the same. Standards and regulations are identified by American SMEs as one of main trade barriers for accessing the EU market according to the United States International Trade Commission.(5) And these are two economies, given their major efforts at providing the public with information and lengthy bilateral relationship, between which one would expect the easiest access. One can assume that the rest of the world is no better.
So what is the problem?
Transparency is not at all as good as it could be, and it hits SMEs especially hard. Overcoming lack of information about requirements and how to comply is a cost that smaller firms find difficult to bear. The unexpected introduction of more stringent regulations can be the final straw for SMEs that are already fighting hard to reach markets against fierce competition, high costs and the capacity of larger rivals to locate, influence and adjust to standards.
Unnecessarily high costs from standards which are unnecessary or unjustified are particularly difficult to swallow. To gain access , foreign manufacturers may need to redesign products specifically for that one market when the required level of health or safety protection is already achieved by its existing products; or when products must undergo duplicative or excessively burdensome inspection, testing or certification procedures.
A recent (2016) ITC (International Trade Centre) study found that a 10% increase in the frequency of regulatory or procedural barriers to trade decreases export revenue of large firms by 1.6%, while for SMEs, export revenues decrease by 3.2%.(6)
These types of barriers can prevent SMEs from expanding their share in international trade, and deprive economies of the multitude of important benefits they provide.
NTMs and standards
Non-tariff measures (NTMs), like regulations and standards, pose a particularly thorny challenge for trade policy.
On one hand, they are essential public policy tools for governments, used to protect vital interests such as health, safety or the environment. On the other hand, they can be particular malignant trade barriers. While a tariff might make a product more expensive, it usually does not completely block access to the market. If you don't meet standards, you can't get in the door.
Regulatory barriers are often nebulous, yet very technical, and information about them is at a premium. A small business owner might be able to see the tip of the iceberg from afar, but she likely does not know the extent of what lurks beneath the ocean's surface.
These barriers don't just affect a handful of sectors; they infect trade all across the economy. A recent UNCTAD study looking at data from December 2017 covering 109 countries and 90 per cent of global trade, found that TBT measures are the most frequent form of NTMs, affecting 65 per cent of world trade in terms of value, and 35 per cent of product lines.
Yet we can't live without standards and regulations. They are necessary for compatibly and interoperability in an ever more interconnected world with value chains that are fragmented and geographically dispersed. They are critical tools for addressing shared global challenges in spheres from health to the environment, and living up to our shared commitment to the SDGs. Standards help deliver needed trust and confidence throughout the supply chain. More than that, standards provide incentives to innovate and cooperate, and help disseminate innovations.
The burden stems from divergence. Too many different standards and regulations quickly multiply the costs of international exchange. According to a 2016 OECD report, regulatory differences hit SMEs particularly hard, since they must spread fixed costs of compliance across smaller amounts of revenue.(7) Internationally agreed standards which provide a common reference point help bring regulations closer. Greater alignment on the basis of international standards eases the burden on SMEs, as they no longer are faced with a need to comply with an array of divergent requirements.
SMEs and standards – challenges and opportunities
The situation of SMEs and standards in global trade today presents a range of challenges and opportunities. I will highlight four areas, and share some ideas.
1. Improving access to information and transparency
Gaining access to information on product requirements imposes costs on firms engaging in trade, and for SMEs this can be a substantial barrier to market entry.(9)
WTO Members are beginning work in this area that holds considerable promise. At the WTO's 11th Ministerial Conference in Buenos Aires in December, 88 countries accounting for 3/4 of world trade laid down foundations for new work on SMEs in the WTO. They formed the Informal Working Group on MSMEs which is discussing and exploring ways to make the multilateral trading system work better for SMEs. Improving transparency and access to information is one focus of this work. You can contribute. Member governments can use your guidance as to where you see the problems and how best to solve them.
Another avenue for making a contribution: The TBT and SPS Agreements have well-functioning notification procedures that give members and stakeholders the opportunity to comment on other members' draft regulations before the enter into force. In 2017 alone, more than 4000 new or changed regulations were notified, which disseminates information about requirements freely accessible to all. The WTO (in cooperation with ITC and UNDESA (United Nations Department of Economic and Social Affairs) ) also has an alert system for notifications called ePing, allowing the private sector, and in particular SMEs, to get email alerts on measures that might affect their market access. (https://www.epingalert.org/en/). Nearly 50% of subscribers to ePing are from the private sector, and we have received a lot of positive feedback as to efficiency gains in obtaining access information on notified regulations of interest. I recommend it to you. In addition, the Global Trade Helpdesk, a joint ITC-UNCTAD-WTO initiative, is another important effort building upon ePing and other mechanisms to improve access to trade-related information for MSMEs, including on TBT and SPS measures.
The WTO has a vibrant set of Committees that enjoy strong private sector input through WTO member delegations. Discussion of specific trade concerns in the TBT and SPS Committees builds on the foundation of the transparency and notification system, to find solutions to regulatory differences that are impeding trade. Usually the interests of larger firms are better represented, but there is no reason the SME voice can't be heard just as loudly.
Transparency is a mainstay of the normative work of the Committees, building up guidance and best practice through recommendations. The ongoing Eighth Triennial Review of the TBT Agreement, which will conclude in November 2018, will likely culminate in recommendations to improve the notification process and the functioning of enquiry points.
2. Standards makers or takers?
It is important for SMEs to recognize the significance of the standards development process. SMEs should help formulate standards, not just take them. SMEs need to enhance their voice in the standards development process (both nationally and internationally). You are of course well aware of the constraints you face, such as lack of resources, or knowing what the relevant standard is and assessing its implications. Standardization is a long term investment. But it is absolutely essential to overcome these constraints and make that investment. You should have a seat at the table to ensure the rules of the game – in which you also play a significant part – also address your interests.
International standards bodies have great responsibility to ensure that their standards are relevant and appropriate. The TBT Agreement Code of Good Practice and TBT Committee Six Principles (See Annex) provide important guidance in this respect to ensure transparent, open, coherent, relevant and impartial standards development processes, which take into account concerns of developing members and firms of all sizes. The SME voice is part of ensuring consistency with the spirit of the TBT Committee's 6 principles (e.g. transparency for "all interested parties"; and impartiality in standards development process so as not to "favour the interests of particular suppliers").
Standards bodies should consider how to enhance transparency on their draft standards to give SMEs better opportunities to engage throughout the process of setting and articulating standards. Once standards are published, standards bodies should explore better ways to help SMEs gain access to adopted standards.
The work of SBS is important here, and I encourage you to continue these valuable efforts. International standards bodies can and should better engage with SMEs to ensure they develop globally relevant standards, for all players in the economy.
3. Conformity assessment
Conformity assessment creates significant barriers for SMEs. While all firms face costs from unnecessary differences between markets in respect of testing, certification, audit or inspection procedures, the impact on SMEs is often particularly burdensome.
A recent survey of EU exporters conducted by the ITC found that conformity assessment producers is first (accounting for 32%) among the types of problems faced in connection with what were termed "burdensome" regulations.(10)
Similarly, in a European Commission report on SME access to the U.S. market, conformity assessment was highlighted as a particularly problematic barrier by EU SMEs for pharmaceuticals; chemicals ; textiles, wearing apparel and leather products; and machinery, electrical, electronic and other transport equipment.(11)
A key piece of the puzzle is access to quality infrastructure, including conformity assessment, standardization and metrology. This is a persistent challenge for developing and least-developed countries. Without access to adequate quality infrastructure, SMEs and other enterprises cannot engage successfully in trade.
Finding better ways to ease the burden of conformity assessment on SMEs is a priority. Duplicative or overly burdensome testing and certification requirements might be a frustration for multinationals, for SMEs it can be an insurmountable wall.
It is important to explore regulatory models that can lower the burden of conformity assessment on SMEs, without compromising health and safety protection. I am aware in the EU that there are some efforts to lower procedural burdens on SMEs of compliance,(12) I would encourage more research to identify other ways to help reduce conformity assessment burdens on SMEs.
The WTO Secretariat has engaged with international organization such as UNIDO (United Nations Industrial Development Organization) on how such issues can be addressed for instance in quality infrastructure policies.
4. Electronic commerce
MSMEs are going to account for an increasing share of world trade in the soaring area of electronic commerce. WTO Members are further exploring the issue of e-commerce. At our Buenos Aires Ministerial meeting, 71 WTO Members representing about three-quarters of world trade (77%) and world output (GDP) “committed themselves to a program of exploratory work which they expect will lead to negotiations" on electronic commerce.
Electronic commerce is helping to break down barriers to low SME participation in international trade. Reports from eBay found that around 97 per cent of internet-enabled small businesses export, while export participation rates for traditional SMEs range between 2 per cent and 28 per cent in most countries.(13)
Electronic commerce creates many new opportunities for SMEs to gain access to global markets, but not without challenges.
To reach its full potential, it is necessary to gain the trust and confidence of consumers and regulators. As electronic commerce grows, regulators may seek new or additional ways to ensure that products bought online are safe and comply with relevant standards and regulations. The burden of new regulatory solutions can be expected to fall more heavily on SMEs. It will be worth considering how the SME community can spark ideas, and avoid potential regulatory risk down the line (e.g. in addressing fraud, public controversies etc.). I encourage you to think of innovative ways to deliver confidence and assurance in products traded through ecommerce channels. Here new technologies could play a role (e.g. use of the blockchain to trace the supply chain of a product and pinpoint a source of risk). You of course will have better ideas.
Your support is indispensable for the work of the WTO of particular relevance to your interests.
The WTO welcomes your increasing your engagement in our work through your governments and in the WTO's interactions with the private sector. Use the transparency mechanisms and tools that are available. When you face problems, work with your trade officials to submit comments on drafts regulations, or raise concerns in WTO Committees. Talk to your trade officials about the importance of WTO agreements and how they should be improved. Tell them what initiatives you would like to see at the WTO to further your interests.
Trade is a vitally important driver of opportunities for SMEs, and provides benefits across economies. Winds of change in trade can have a disproportionate impact on SMEs, and this creates challenges as well as opportunities. Working with and through the multilateral system is an essential path through which to manage and overcome challenges you may face, as well as taking advantage of the opportunities.
We at the WTO look forward to helping to deliver on the promise of international trade.