SMEs should take advantage of the benefits and vast investment opportunities under the mega-trade agreement of the Regional Comprehensive Economic Partnership (RCEP).
This free trade agreement involves 15 countries – Australia, Brunei, Cambodia, China, Indonesia, Japan, South Korea, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, Thailand and Vietnam. It is made up of 2.2 billion people and accounts for almost a third of global GDP.
Among Southeast Asian countries, Malaysia is expected to be the largest beneficiary of the China-backed RCEP in terms of export gains, with a projected increase of US$200 million. It is anticipated that RCEP may remove up to 90% to 93% of trade barriers, and together with lower preferential tariffs. SMEs trading in this new big, open market should gear up for more intense competition.
However, many SMEs are still not aware of RCEP, the world’s largest free trade agreement (FTA) which came into effect in Malaysia on March 18, 2022. Of the 3,000 members in the Small and Medium Enterprises Association (SAMENTA), more than 50% are aware but at different levels of understanding.
“Many may have heard about RCEP but have not understood how they can improve market access and the harmonised rules to exploit the lower tariffs. “They should seek the help of the Ministry of International Trade and Industry (MITI) to build capacity with technical support from the more developed countries like Japan, China, South Korea and Australia,’’ said SAMENTA honorary national secretary Yeoh Seng Hooi.
Other advantages of RCEP include further liberalisation of trade, removal of non-trade barriers, increased trade facilitation, improved government procurement practices, e-commerce and others.
Ernst & Young Tax Consultants Sdn Bhd Malaysia Private Client Services Leader and Partner, Bernard Yap highlighted that SMEs should be provided with information on doing business in other countries and how they can build their businesses beyond
“This knowledge can help them avoid unwanted situations such as inadvertently misunderstanding the rules, which can negatively impact them from a business and reputational perspective,’’ said Yap.
Among them, SMEs should understand the concept of regional value content to benefit from the components or raw materials coming from RCEP countries that will fulfil the rules of origin; changes in tariff classification so that the products are considered originating products. Tariff reduction rates are different for each country; SMEs should check from the MITI website under RCEP, and study the schedule of tariff commitments for the countries they wish to export to.
Priorities To Consider
SMEs should review their existing or target markets, whether they are RCEP members, to utilise RCEP benefits. Next, they should evaluate whether the products imported or exported are listed in the RCEP agreement, are eligible for the benefits under their country of origin. SMEs should also look into their current resources to find out if they are able to meet the demand under RCEP.
To achieve economies of scale, as they are now catering to a larger market, they should review their manufacturing businesses and costs. Besides enjoying a larger sales market, the supply chain needs to be re-evaluated. New suppliers from RCEP countries and reduction in trade barriers, will potentially lead to lower production costs.
“Post-pandemic, this mega-trade deal is a key enabler for Malaysia to revitalise domestic and international business activities, especially for SMEs that utilise the RCEP,’’ said Deloitte Tax Services Sdn Bhd executive director Tan Eng Yew.
However, he noted that lack of financing may be an obstacle to be a member of RCEP. A springboard for future growth In addition, SMEs should consider strategic industrial clusters that can serve as a springboard for future growth. Acquisitions, mergers or joint-ventures may be required to build the necessary mass and knowledge for international expansion.
SMEs can take advantage of the double deduction on interest expenses or loans taken to fund mergers and acquisitions, and the stamp duty exemptions on mergers and acquisitions instruments, said Yap.
Other strategies include having an R&D department to regularly assess market positioning, product differentiation and relative cost leadership, as well as investing in productivity improvement processes and automation. Digitalisation, artificial intelligence and machine learning can help businesses get ahead of the curve.
“This will help them to strategise, build capacity and access the supply chains of developed countries within RCEP, and ultimately improve their overall performance,’’ added Yap.
Areas Of Competition For SMEs
Countries such as South Korea, Japan and China are well-equipped with the latest technologies, enabling them to offer more advanced products to consumers. SMEs in Malaysia are arguably lagging behind their market competitors in technological capability and expertise, especially in the electronics and electrical (E&E) sector.
“This ultimately boosts the overall competitiveness of SMEs in those countries compared to SMEs in Malaysia, especially in the E&E sector,’’ said Yap.
SMEs in Malaysia would also have to compete with more advanced supply chain management, with countries such as Japan, South Korea, Singapore and China maximising their supply chains within RCEP. Having said that, SMEs can leverage on their strengths and collaboration with Japan, China and Australia to service their multinational customers in the ASEAN region. Still, RCEP offers them a chance to be more competitive with the tariff reductions.
“Otherwise, we would have been disadvantaged against Thailand and Vietnam which ratified earlier,’’ said Yeoh.
Both Thailand and Vietnam had ratified the RCEP in October last year. With the opening of markets, competition will come especially in terms of product and service quality, costs and efficiency.
SMEs would need to embrace new technologies and consider investing in simple digital platforms, online training infrastructure and automation, artificial intelligence and machine learning.
The workforce also needs to be upskilled. According to the Budget 2022, the government will provide upskilling and reskilling programs to help employees embrace technology advancement and increase digital adoption.
To develop future business leaders, several agencies have been tasked to impart business and leadership skills through on-the-job training, mentoring and entrepreneurship programs.
Despite various initiatives to help SMEs enhance their competitiveness, there is still room for improvement. Currently, initiatives to help SMEs are managed by various agencies, making it a challenge to evaluate the effectiveness of these funds/grants disbursed by the public sector.
Also lacking are clear guidelines and transparency of the application process, as well as clarity to the SME community on which agency they should approach. Ideally, a dedicated one-stop center will help to make all incentives, grants and funding easily accessible to SMEs. New initiatives and opportunities will be quickly and clearly communicated, while the streamlining of the
application process and guidelines for these initiatives will ensure efficiency and ease of monitoring.
“The one-stop center should have helplines and online channels which can be used to obtain advice and information,’’ proposed Yap.
To ensure that we are on the right track, there are still lot of preparations ahead to reap the full benefits of RCEP. With a healthy partnership between the private and public sectors, the growth and success of SMEs locally and regionally will require further strategic collaboration between them.
Many areas of co-operation listed under Article 14.3 of the Schedule of Tariff Commitments are beneficial to SMEs in ASEAN countries that are on board the RCEP.
“The issue is how fast and responsive our public agencies are in working with trade associations like SAMENTA to leverage on this co-operation,’’ said Yeoh.
For example, the exchange of experiences, best practices, adoption of technology and innovation or promotion of e-commerce, are areas that can benefit SMEs. Thailand and Vietnam already enjoyed first-mover advantage with the earlier ratification, Malaysia should accelerate its pace to plug into the opportunities offered by RCEP.