Trade Facilitation challenges for SMEs

Trade facilitation measures, such as the provisions of the WTO TFA, make trade procedures and formalities faster, less expensive and more predictable. Lack of transparency, lengthy complex procedures, and unpredictability in the application of law and affect business worldwide. All importers, exporters and other supply chain participants are set to benefit from trade facilitation measures.

In recent years, many organizations and governments have studied whether SMEs can benefit from trade facilitation (*1), in particular vis à vis large companies. As a result of this research it is now widely recognized that a dedicated SME focus is needed when implementing trade facilitation to ensure that they can benefit equally to larger firms from reforms. The fear is that the specificities of SMEs trade transactions may actually hinder trade facilitation, and that SMES cannot comply, or only at too high costs, with many conditions required for trade facilitation simplification measures.

What are the main challenges for SMEs in trade facilitation?

Government strategies to facilitate trade commonly focus on three aspects

• Strengthening partnerships with traders;
• Simplifying procedures and formalities through digitalization, standardization and harmonization;
• Fostering public awareness and information on legal requirements.

To be successful these measures require that companies engage in a continuous process of ongoing involvement and feedback, invest in knowledge, infrastructure and equipment, and strengthen compliance. Trade facilitation measures are often designed as a reward for past compliance and deliver benefits for companies that trade regularly and have a good record of compliance history over time. SMEs however, are not in the same position compared to large companies and therefore risk not being able to benefit from trade facilitation.

SMEs transactions are commonly low volumes, infrequent and irregular and SMEs are often unknown stakeholders for public authorities.

Three examples can illustrate the challenges for SMEs to benefit from trade facilitation equally vis a vis larger companies.

1. Risk management
   
   Risk management entails that shipments are risk assessed and selected for controls based on the level of risks it represents. The compliance history of the operator(s) involved in the transaction impacts the risk score of a shipment and therewith the likelihood of complete physical inspection. Infrequent and non-regular traders will score differently than frequent traders with a long compliance history.
   SME are also more likely to commit errors when complying with regulatory requirements, in particular with regard to accurately complying with documentation and information requirements. For the WCO many SMEs fall into the category of Customs clients (*2) that “try to be compliant but do not necessarily always succeed [because they] lack professional manpower and experiences, in relation to border regulation of international trade.” This may result in unintentional errors, inaccurate information that leads to additional controls and inspections and possibly penalties. Government authorities may therefore apply a targeted compliance management approach for operators that are SMEs, that favors efforts to assist them to comply rather than to penalize them for non-compliance.
   
2. Authorized trader programmes
   
   Authorized trader programs are an example of a trade facilitation concept with high implementation burden for SMEs. The certification or authorization are generally made conditional on the respect of detailed record-keeping, accounting rules, information, minimum levels of financial solvency, and safety and security requirements for infrastructure, equipment and staff. Expenses for Authorized Economic Operator (AEO) certification include investments into physical security infrastructure, training of personnel, IT systems, and establishment of internal security. See below a table for implementation cost for an AEO certification from a study by the Manufacturing Institute.
   
   
3. SMEs however can only invest a smaller amount of capital into IT infrastructure, physical security and training of staff Many governments experienced that few SMEs join their authorized trader programs because of the related costs and administrative burdens of the certification process. Although these costs may be offset in midterm by benefits such as faster clearance, increased supply chain visibility, better inventory management and product safety, SMEs are found to be reluctant to undertake these investments because “ they are more focused on keeping direct expenses rather than collateral benefits”. (*3) SMEs need to see direct and tangible benefits to join AEO programs, such as deferred duty and tax payment or guarantee waivers, which are of particular interests to them.
   
4. Aware of this situation the ICC recommends that “AEO programmes should not have the effect to diminish trade facilitation benefits for non-AEO traders and SMEs ” and the WCO highlights that for AEO programmes to be successful for SMEs, they need to have tangible and direct benefits for SMEs. Another example is deferred duty and tax payment which is a facilitation option whereby companies can defer until a fixed number of days the payment and still benefit from fast release of their goods. Conditions for benefiting from such a treatment vary, but commonly comprise the deposit of a financial guarantee or an account with Customs and is also frequently limited to regular traders.
   
5. Deferred duty and tax payment
   
   Deferred duty and tax payment is a facilitation option whereby companies can delay until a fixed number of days the payment of the Customs duties and taxes and still benefit from fast release of their goods. Conditions for benefiting from such a treatment vary but commonly include prior authorization linked with the deposit of a comprehensive guarantee or an account with Customs, and is also frequently limited to regular traders.
   
6. Government – Traders consultation
   
   The final example is trader-Government consultation mechanisms. Experiences have shown that SMEs struggle to participate in stakeholder meetings The WCO recognize that a challenge of the Customs-Business consultations is to ensure diverse and effective representation, especially of SMEs (*5); and that SME needs and interest may be represented by associations or that Customs may offer separate consultation fora only for SME. The UNECE Recommendation no 40 stresses the importance for a transparent and inclusives consultation process.

(*1) See the following publications specifically dedicated to this topic, i.e. UNESCAP (2016), Making the WTO TFA work for SMEs, United Nations Publications, Bangkok, Thailand and ITC (2015), SMEs and the WTO Trade Facilitation Agreement, XX, Geneva
(*2) The WCO Risk Management Compendium and Voluntary Compliance Management guidelines list four types of Customs clients:

• those who are voluntarily compliant;
• those who try to be compliant but do not necessarily always succeed;
• those who will avoid complying if possible; and
• those who deliberately do not comply

(*3) Findings from a study by Stanford University on behalf of the Manufacturing Institute on AEO programs cited in: http://www.wcoomd.org/en/topics/facilitation/instrument-and-tools/tools/~/media/93162547322F462A97F8767D0987A901.ashx

(*4) https://iccwbo.org/media-wall/news-speeches/icc-sets-out-recommendations-for-successful-authorized-economic-operators-programmes/(*5) WCO (2015) Custom Business Partnership Guidance, page 6