Boosting SME competitiveness through trade facilitation

15 November 2013

A Trade Facilitation Agreement, whether reached in Bali or later, will create the conditions for businesses in LDCs to join value chains and benefit from export-led growth.

An agreement on trade facilitation will bring benefits to developed and developing countries alike. By making  it easier for companies, including small and medium- sized enterprises (SMEs), to integrate into regional and global value chains, such an agreement has the potential to become a vital development tool for LDCs. Building capacity to export and trade is the key to unlocking the potential of SMEs , the world's largest potential source of jobs.

Trade must be at the heart of the post-2015 development agenda

Benefiting from rising foreign direct investment and urbanization in the last decade, many LDCs have registered important economic growth, and many of their citizens have escaped abject poverty. Still, far too many continue to face extreme poverty and low levels of human and social development. Even where growth is impressive, it is starting from a low base, and there is almost always a degree of economic vulnerability that inhibits the sustainability of this growth. Even the more successful LDCs still face massive obstacles to ensure that the benefits of development are equitably distributed and that the economic growth model is on a strong and robust footing.

The recent report by the United Nations Office of the high representative for the Least Developed Countries, Landlocked Developing  Countries and  Small Island  Developing states, state of LDCs 2013, noted that over the last couple of years, only limited progress has  been  made  towards meeting development targets in the areas  of health, water, sanitation, secondary education and gender equality.

Recognizing the need for sustainable growth, the 2011 Istanbul Programme of Action noted the importance of developing productive capacities to deliver development outcomes. Increased productive capacity will lead to more trade and increased earnings and in turn improved healthcare, education and welfare. The Millennium Development goals (MDGs ) have allowed LDCs and the international community to benchmark progress. There has been tremendous progress, but ‘tremendous' is still too little. What the MDG process has taught us is that multilaterally endorsed, measurable and monitored objectives can raise global awareness of the development gaps that exist and - more importantly - also serve as a call to action around these common objectives.

We must learn from the MDGs   and improve on them. One important way to do this is to ensure the right place for ‘economic empowerment' and trade in the post-2015 development agenda. Trade plays a key role in this process. Trade is a conduit for growth and development and is especially  critical for  LDCs as  a  means  to increase export production and to strengthen the local market.

SMEs : Generating jobs through joining value chains

LDCs need to increase not only exports, but also their labour intensity. It is only through increased entrepreneurship and employment that sustainable, large-scale improvements in living standards can be achieved.  In recent years, the need to generate sustainable employment through trade has become a central trade policy goal in many countries. Increasing the trade of SMEs, which typically constitute the most labour-intensive sector of economies, plays a key role in any economic development plan. SMEs are the inclusive growth vehicles of the future and the world's largest potential source of new jobs.

In fact,  the growing importance  of regional  and  global value chains in international trade provides a unique opportunity to increase SMEs ' exports through their integration into these value chains. SMEs can now engage in global trade without the need to be competent in all aspects of the production of a final output. Developing countries can thus move towards industrialization through vertical specialization in a narrowly defined segment of activities.

However, the fragmentation that lies at the core of global value chains requires goods to cross borders several times  during  the production  process.  Therefore, a country where inputs can be imported and exported within a quick and reliable time frame is an attractive destination to foreign investors looking to build value chains. As such, trade- facilitation measures are crucial to foster participation in production networks and global markets - and they are necessary for creating sustainable, export-led growth in LDCs. In a world of production chains, a trade Facilitation Agreement, adopted multilaterally at the World trade Organization (WTO), is of particular importance to LDCs and Landlocked Developing Countries (LLDCs). Landlocked countries will draw particular benefits from a new agreement, since rules are expected to bring more predictability to transit through neighbouring countries' ports. Since many developing countries and LDCs are landlocked, these rules could lead to a significant improvement in their export competitiveness.

Effective trade-facilitation measures are in the interest of all WTO members and countries in accession. At the local level, the private sector has identified procedural and regulatory barriers to trade as one of the key obstacles in developing the export base. At the regional level, regulatory elements addressing non-tariff measures and customs cooperation are increasingly becoming part of the discourse. And, at the multilateral level, a potential deal on trade facilitation at the ninth Ministerial Conference to be held in Bali is seen as an important signal that the international rules-based system works, and it could open the door to address other issues of importance on the negotiating agenda and provide new energy into the process that began in Doha.

LDCs bargaining  power  as  individual  states is limited by their lack of capacity.  The multilateral  system offers them opportunities  to cooperate and pool their  negotiating resources and increase the leverage they will have in interacting with their counterparts. In essence, multilateralism provides an extra edge to LDCs that they would not ordinarily have in trade discussions at the regional or bilateral level.

Conclusion

LDCs will need adequate technical assistance and capacity building to turn opportunities into tangible benefits  for increased  exports.  At the same time, SMEs   have to keep up with new requirements stemming from the ever-closer integration among value chains' multinational lead firms and their suppliers. SMEs need information, financial means and skills to integrate into these supply chains. In anticipation of Bali and in consultations for the post-2015 development agenda, the private sector has increasingly been calling for improved trade facilitation measures. As mentioned before, SMEs are the world's largest potential source of jobs, and to capitalize on that, we must first build capacity to export and trade.

Author: Arancha Gonazlez is Executive Director of the international trade Centre, geneva, switzerland.

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