Digital trade boosts SMEs

New Zealand’s first digital trade deal will help small businesses bounce back from Covid-19, writes Kunal Sawhney.

Digital transformation is the silver lining to Covid-19, picking up steam amidst the disruption triggered by the pandemic.

With a sharp shift in consumer preferences and business requirements, the pandemic has unlocked the doors to a ‘‘Digital Fortress era’’, which should become the new normal.

The recently signed Digital Economy Partnership Agreement (DEPA) between New Zealand, Chile and Singapore is a crucial step in making this happen.

While New Zealand’s immediate goal has been to bring the spread of the virus under control and mitigate Covid-19’s economic impact, the nation continues to focus on a trade recovery potentially strengthening its position to emerge from the current crisis.

Recognising the importance of digital connectivity, the DEPA was signed to aid Kiwi exporters and help small and medium-sized enterprises (SMEs) reap the benefits of digital trade opportunities.

While the digital trade deal reflects New Zealand’s progress on the trade recovery front, the recent launch of free-trade negotiations with Britain is a breakthrough towards liberalising tariffs.

Besides securing the elimination of trade tariffs and addressing non-tariff barriers, New Zealand’s free-trade agreement with Britain is expected to focus on encouraging digital trade, offering a fresh set of opportunities for SMEs.

SMEs, no doubt, are the engine driving industrial trends and economy growth in terms of production, employment generation and innovation.

Accounting for over 95 per cent of all New Zealand businesses and employing over 28 per cent of employees, SMEs make a considerable contribution to the nation’s economy. Per Stats NZ, small businesses (1–19 employees) contributed approximately a quarter of total industry sales in the 2018 financial year, while medium-sized enterprises (20-99 employees) contributed a fifth.

While SMEs account for a significant proportion of Kiwi businesses, their participation in international trade and global value chains has been seen to be limited in contrary to their overall share of employment and economic activity. This is because entering international markets tends to be difficult, as well as costly, for SMEs, which lack economies of scale and face higher fixed costs than larger companies.

So, where do we see a few bright spots?

Global growth and expansion:

Digital trade agreements like DEPA can act as a trampoline to launch New Zealand’s SMEs at global markets previously accessible only to larger businesses.

Expense management: Digital trade can lower SME expenditure in a range of areas, including market research, general marketing, regulatory compliance, distribution and operational support. While reducing the cost of exports via internet-enabled technologies, digital trade can make it easier

for SMEs to integrate foreign suppliers and customers into their own value chains. The Organisation for Economic Cooperation and Development (OECD) rightly believes that digitisation bolsters the scope, scale and speed of trade, in addition to easing the cost of engaging in international trade. In a report published in March 2019, the OECD highlighted that a 10 per cent rise in ‘‘bilateral digital connectivity’’ improves trade in goods by about 2 per cent and trade in services by more than 3 per cent. Ease of finding customers and cracking business deals:

Digital trade can also unfurl a slew of opportunities for SMEs to play a more pivotal role in global value chains, enabling them to effortlessly find customers abroad. Fast-tracked entry and better

accessibility: Since burdensome customs procedures are particularly distressing to SMEs, their simplification via digital trade is expected to fast-track business entry in export markets. On top of these benefits, emerging technologies like blockchain, IoT and AI can help these small businesses access trade finance easily.

Here are some other aspects to bear in mind.

While digital trade promises fresh opportunities for SMEs, a few challenges pertaining to their participation in the digital era persist. It is all about staying ahead of the curve, beating the competitive environment on the back of capital positioning, tech adoption, and strategic business initiatives.

The primary challenge SMEs face is with the adoption of digital technologies, where they lag behind relative to large firms that have executed a range of innovative and advanced technologies catering to diversified consumers, markets and needs.

Another key area of concern is the visibility of their businesses, which requires them to market both online and offline to lure potential customers.

In addition to those difficulties, SMEs face the threat of being locked out of markets if a leading player seizes or dominates the market at a global level. Though challenges concerning access and use of digital technologies pose a threat, a comprehensive approach that blends human capital and technology investment with trade policy measures can make digital trade more inclusive for all at global level. Policymakers’ support to integrate SMEs into the digital economy will be instrumental in attaining this objective.