The Impact of free trade agreement on SMEs in Asia

As of 2023, there are over 300 active Free Trade Agreements worldwide, with Asia being home to a significant portion of these. The Asia-Pacific region alone accounts for approximately 150 of these FTAs, highlighting the region's emphasis on trade liberalization and economic integration. They have been pivotal in shaping the financial landscape of Asia, fostering regional integration and growth. For small and medium-sized enterprises (SMEs), which account for more than 95% of all businesses and employ over 50% of the workforce in many Asian countries, FTAs offer significant opportunities and challenges.

For Instance, The implementation of the Regional Comprehensive Economic Partnership (RCEP) is expected to increase intra-Asian trade by approximately $42 billion annually by 2025. This agreement, which includes 15 Asia-Pacific nations, represents nearly 30% of the world's GDP and population and is projected to significantly boost economic integration and trade among member countries, providing substantial benefits for SMEs by expanding market access and reducing trade barriers within the region. This alone is a shining beacon of how FTAs can uplift struggling economies, and this is just the tip of the iceberg.

Market Access and Expansion

The number of companies that have failed being unable to navigate the red tape of foreign markets is innumerable. FTA’s provide SMEs with enhanced access to foreign markets by lowering tariffs and simplifying customs procedures. For example in the aforementioned RCEP, offers vast market opportunities for the member nation’s SMEs.

FTAs often include provisions that facilitate smoother market entry through mutual recognition of standards and regulatory cooperation. For instance, under the ASEAN Economic Community (AEC), member countries work towards harmonizing product standards and regulations, which simplifies the export process for SMEs. This harmonization means that once an SME's product meets the standards in one ASEAN country, it is more easily accepted in other member countries, significantly reducing the time and cost associated with market entry.

Vietnamese textile company Vinatex has leveraged the CPTPP to expand its exports to Canada and Mexico, markets previously challenging due to high tariffs. By taking advantage of reduced tariffs and simplified trade regulations, it has significantly increased its market reach and revenue. Currently, it is the second largest textile exporter, trailing behind China.

"The first block that any business faces is access to finance. Finance is crucial for growth, and it must be readily available for seizing opportunities like acquisitions, market expansion, or technology adoption," Rajiv Bhatia, President, Analytix Solutions.

Cost Reduction and Competitive Pricing

The most alluring aspect of the FTA is the tariff elimination clause, which paves the road to lowering the cost of imported and finished goods. This cost-saving advantage enables SMEs to offer more competitive prices domestically and internationally. On top of this, streamlined customs procedures and reduced non-tariff barriers decrease the time and expenses associated with cross-border transactions, further driving cost efficiency.

FTAs also provide SMEs with the opportunity to optimize their supply chains by accessing a broader range of suppliers and partners in the region. This optimization can lead to better quality inputs, improved production processes, and ultimately, higher quality products at competitive prices. Malaysian electronics manufacturer Globetronics has benefited from AFTA by reducing input costs, thereby enhancing its competitiveness in both domestic and international markets. Streamlined customs procedures and reduced non-tariff barriers have further contributed to cost efficiency, enabling Globetronics to price its products more competitively.

"The modernization of finance operations emphasizes key technologies like artificial intelligence and machine learning to improve efficiency and decision-making," Md. Omar Faruq, Chief Financial Officer, BSRM.

Enhanced Supply Chain Integration

The major cause for the fall of the world’s largest toy retailer was its inefficient supply chain. The case study surrounding that proves that irrespective of size, poor supply chains can spell the downfall of any company. FTAs counter that by promoting integrated regional supply chains. SMEs can source raw materials and goods from partner nations at lower costs, thus fostering the development of efficient and robust supply chains. This feature is particularly beneficial in industries such as semiconductors, textiles and automotives, where cross-border production networks are more prevalent.

By working with suppliers and manufacturers across the region, SMEs can leverage diverse expertise and technologies, leading to the development of higher quality and more innovative products. For instance, the textile industry in Vietnam has benefited from RCEP by accessing advanced textile machinery and technologies from Japan, resulting in improved production capabilities and product quality. The South Korean automotive parts manufacturer Hyundai Mobis has utilized the provisions of the Korea-ASEAN FTA to establish a robust supply chain across Southeast Asia, significantly reducing production costs and improving delivery times. This integration has enabled them to enhance their operational efficiency and competitiveness in the global market.

"Success in the APAC supply chain demands collaboration, innovation, and a steadfast commitment to sustainability," Matthew Monaghan, Head of DSJ Global, APAC.

The future of SMEs in Asia, in the context of an increasingly integrated global economy, hinges on their ability to navigate and capitalize on the opportunities presented by FTAs. Policymakers, industry associations, and SMEs themselves must work in tandem to ensure that the potential of FTAs is fully realized. This collaboration will not only empower SMEs to thrive in the competitive global market but also ensure that the economic benefits of trade liberalization are widely shared across the region.

Ultimately, the success of SMEs in harnessing the power of FTAs will shape the economic landscape of Asia, fostering innovation, resilience, and prosperity.