How SME exporters benefit from freer trade
DFAT detailed in its submission examples of SME exporters benefiting from the opportunities offered by FTAs to increase the value of their exports to FTA-partner countries.
Some of the examples highlighted by DFAT are from sectors with a high proportion of SMEs, including:
exports of table grapes to China have increased to $148 million in 2017, up from $15.3 million in 2015 (before ChAFTA);
exports of shelled macadamias to Korea have increased to $14 million in 2017, up from $4.5 million in 2014 (before KAFTA);
exports of chipping potatoes to Korea have grown to $11.6 million in 2017, up from $4.3 million in 2014 (before KAFTA);
exports of blankets and travelling rugs to China have increased to $8.4 million in 2017, up from $1.5 million in 2015 (before ChAFTA);
exports of natural honey to Japan have grown to $2 million in 2017, up from $500,000 in 2014 (before JAEPA); and
exports of handbags to Japan have grown to $1.4 million in 2017, up from $51,000 in 2014 (before JAEPA).
DFAT shared one lesson learnt from its and its portfolio agencies Austrade and EFIC’s interactions with SMEs is that the “trade intermediary sector is of key importance in assisting SME exporters to use FTAs, in the same way that a business may outsource its taxation or legal services”.
According to DFAT, data from the PwC research suggests SMEs lag behind large enterprises in their use of trade intermediaries, similar to the lag in FTA utilisation.
The Government would like to encourage greater, cost-effective use by SMEs of skilled trade intermediaries as one mechanism to assist them in their FTA utilisation.
Economic analysis of the impact of FTAs on SMEs
Economists Dr Giovanni Di Lieto and Dr David Treisman submitted that the empirical evidence demonstrates that small and medium enterprises (SMEs):
Display sufficient productivity and profitability levels to fully benefit from Australia’s comparative advantage in key FTA partner countries.
Do have access, but largely underutilise FTAs relative to their contribution to the domestic economy.
Pay lower wages than large exporting enterprises on average.
Dr Di Lieto and Dr Treisman claimed this indicates that “underutilisation of, and not access to FTAs is the fundamental cause of the low levels of exports and below average wages in SMEs”.
Furthermore Dr Di Lieto and Dr Treisman believed the empirical evidence refutes the existence of all but two of the key barriers identified in the 2016 KPMG report on leveraging FTAs for Australian trade growth, namely:
Opaque trade regulations.
Multi-jurisdictional supply chain challenges.
Dr Di Lieto and Dr Treisman noted Australia’s SMEs maintain “disproportionately low levels of exports relative to their contribution to gross domestic product and consequently attain lower than average wage rates, despite being profitable and productive in most of the sectors under analysis”.
Leveraging FTAs for SMEs through a border adjustment tax (BAT)
Dr Di Lieto and Dr Treisman recommend the introduction of a destination-based cash flow form of border adjustment tax (BAT).
In general, this kind of measure is based on a simple idea to impose a flat tax rate on imports, and to grant corresponding tax rebates on exports. In other words, exports are untaxed, while imports are taxed. Border adjustment measures are normally used under a value added tax, like the GST, which applies to all consumption. The BAT also excludes any goods or services that are produced domestically, but consumed abroad.
Dr Di Lieto wants the Government to consider a new tax system on trade.
My recommendation to the Australian government is that they should closely monitor whether the cash-flow border-adjustment tax works in the US.
Overcoming FTA barriers and anticipated benefits of a BAT for SMEs
Dr Di Lieto and Dr Treisman suggested implementing the destination-based cash flow BAT would raise government revenue at any time when Australia’s balance of trade is in deficit.
For instance, if Australia adopted a blanket 20 per cent cash flow border adjustment tax in the last financial year, which in official data registered a total trade deficit in goods and services of about A$14 billion, the Treasury would have raised A$2.8 billion at the net of tax breaks for exporters.
More importantly, the proposed destination-based cash flow BAT would provide a strong economic incentive for SMEs to fully utilise FTAs and expand their export markets, thus boosting production, growth, jobs and wages in underperforming sectors.
Dr Di Lieto and Dr Treisman warned this type of tax may also come under the scrutiny of the World Trade Organization, which normally allows for border adjustments only through indirect taxes (for example on transactions, such as sales and payroll), and not so indisputably through direct taxes on individuals or businesses.
However, on the surface BAT measures do not distort trade, as long as the import tax and export rebate offset each other and also do not discriminate between economic sectors and trading partners.
Assisting regional SME exporters
The Sunshine Coast Council submitted that regional exporters would be assisted if the “compliance cost of administration prior to their first export activity could be better explained and documented”.
More support is needed to provide guidance and specific information to potential exporters on the FTA documentation, process and costs so they can understand the business costs and impact of entering the new market. An understanding of potential non-tariff barriers in destination markets is also important so that the exporters can understand the potential issues, mitigate these and manage possible costs/issues so that it does not have a material impact on their home business.
The increase in FTA look-up tables has been positive, according to the Sunshine Coast Council, which would support a continuation and expansion of this resource for exporters, as well as better marketing of this facility.
In addition, it would be helpful if the look-up feature provided “next steps” to potential exporters so that they know how to go about getting appropriate documentation/certification to meet FTA requirements as well as indicative costs.
Australian SMEs require long term strategies
The Manager of Luckypole Limited, a trading company based in Hong Kong that imports Australian food, Mr Brian Mallyon, submitted that developing a new market overseas will require SMEs to take a long term outlook.
Australian small business has traditionally been risk averse – concerned with resources employed, costs involved and time taken to become established.
Access to FTA’s and grants, while being positive, has also pushed companies to export for the wrong reasons. Attend any food/wine fair in Asia and many will tell you they are there because of the grants provided.
Mr Mallyon observed from Hong Kong that Wine Australia has done an exceptional job of putting Australian wines into the international arena, part of which is the result of the Government providing grants and subsidies.
There are however many, many wineries who fail to get any traction at all, because, once the fair ends, that is also the end of their exposure to the market, or they partner with an importer out of desperation only to find nothing comes of it.
Luckypole Limited warned that all new trade entrants can easily make the mistake that China is “the opportunity”, but in fact there are several markets within Asia alone that are suitable to promote Australian products.
A Shanghai based food consultant once told me that companies without deep pockets shouldn’t enter the China market, to which I replied, it would be a shame if consumers only ever had exposure to products from the multinationals. But there is some merit in what I was told.
Each Asian market is different, and each has its pros and cons, according to Luckypole, and even the market within China itself is by no means homogeneous.
Understanding the market is vital. That requires “on the ground” assistance either by way of local support in the intended market, or an overall level of government support in excess of or substituting for the monetary assistance that comes from the FTA or grants.
Luckypole cautioned against expectations of quick access to the China market as Australian product/service may take in excess of 12 months to get to market when taking into account, market research, the building on any sort of relationship, packing for the local market and meeting local regulations.
A small company is often not resourced for that, meaning a consultancy doesn’t have any incentive to be involved. End result is often a slap dash approach or reluctance to even try.
SMEs contribute to reviews of FTAs and make changes
FTAs have built-in Committee mechanisms to varying degrees and many, according to DFAT such as the China-Australia FTA, the Japan-Australia Economic Partnership Agreement, and the ASEAN Australia-New Zealand FTA (AANZFTA), have mandated periodic review mechanisms.
DFAT uses feedback and lessons learnt from SMEs to make changes to FTAs. For example, the First Protocol to amend AANZFTA simplified origin requirements in response to requests from SMEs and other businesses.
The Australian Industry Defence Network Victoria outlined that non-tariff barriers remain significant impediments to its SME membership and are not addressed effectively in FTAs and believes the Government needs to demonstrate where FTAs have resulted in better entry to new markets.
The AIDN-VIC highlighted how acquisition of goods through foreign defence forces are often managed outside of negotiated trade pathways included in FTAs.
What is Government doing to ensure that existing and emerging FTAs have been coordinated in such a way as to provide benefit and easier entry to market with foreign defence forces and their associated acquisition processes.
The Defence Teaming Centre outlined how its members found “Certificates of Origin continue to be burdensome and complicated for SMEs to manage”.
The Government might like to consider simplification of this requirement.
Sports diplomacy and building trade with China
Mr Andrew Hunter, the General Manager for China Engagement at the Port Adelaide Football Club that has been promoting and playing AFL matches in China since 2017 believes Australia is starting to recognise the potential of sports diplomacy.
…there is an understanding that sport can be leveraged to achieve a broader diplomatic agenda. In our particular case I think the relationships that can be built through international sporting events are real. The growing connection between the business communities in our particular case in Australia and China and the capacity to bring them together around sport I think offers a tremendous opportunity.
Mr Hunter observes from his experience the trade agreements that are struck, where they are of benefit to particular sectors, “axiomatically are a good thing for those businesses involved in the sectors”.
If you look at our particular experience, we're dealing between Australia and China with a specific focus on small businesses. The trade agreement will not overcome the impediments to doing business in China. Doing business in China means to do business in a fundamentally different cultural, historic, linguistic, economic and political context, and the understanding that's needed for small businesses that don't perhaps have the time to be able to invest in intercultural understanding, in language materials to be able to be successful in those contexts, in the understanding required to navigate fundamentally different regulatory environments or the IP and certification needed in China.
The idea that a free trade agreement will be the end point and naturally lead to success for small businesses is flawed and I think far greater investment and resourcing is required for small business to be able to take that leap and to be able to overcome these very real impediments for businesses that are constrained in terms of time and resources.