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Fixing FTAs for MSMEs: Action points for better utilisation of trade agreements – SME News

By Scott Wang

The MSMEs are the backbone of India’s economy. After all, they contribute to 30% of the country’s Gross Domestic Product (GDP). However, challenges like complex trade policies, restrictions on the flow of goods and services and higher compliance costs, prevent them from being active participants in international trade. 

That’s where Free Trade Agreements (FTAs) can help. They serve as an agreement between two or multiple countries to help bolster trade through the reduction of tariff and non-tariff trade barriers for better integration with global value chains. Some benefits include rationalisation of custom duties, lowering tariff disparities across countries and digitizing processes. 

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In the last five years, India has signed 15 FTAs, some of which include the India-UAE Comprehensive Partnership Agreement and the India-Australia Economic Cooperation and Trade Agreement. According to the Ministry of Commerce and Industry, the impact is substantial. The ASEAN-India FTA signed in 2014 witnessed Indian exports to the ASEAN nations growing at a Compound Annual Growth Rate (CAGR) of 12.4% between 2010 and 2022. 

Before we discuss how FTAs impact MSME exports, let’s understand the challenges better. 

A slew of challenges 

India has entered into over a dozen multilateral and bilateral FTAs with major trading partners in the past decade, which has reduced trade and non-trade barriers and enhanced the competitiveness of homegrown companies in the global markets. However, SMEs face several challenges in receiving benefits from this arrangement. 

For instance, many Indian SMEs lack adequate awareness of relevant FTAs, and if they do, they struggle with the necessary knowledge to navigate this space and fully benefit. That’s not all. FTAs typically require certain technical mandates including a certificate of origin and product classifications. But SMEs often struggle to find the right technical, professional and financial resources to address this challenge. 

At the same time, the tedious documentation procedures and compliance protocols not only prolong the time but also are heavy on the pocket. It is a huge deterrent for small businesses that lack these resources. Besides, due to the absence of skilled talent and expertise, the majority of SMEs are not export-ready at this stage. 

Leveraging benefits 

The challenges for SMEs to benefit from FTAs should be addressed through concerted efforts from both public and private sectors. Relevant government agencies are well positioned to leverage public funding to create trade education and corporate training programs targeting export-oriented SMEs. Private sectors such as chambers and industry associations are well positioned to follow suit and develop industry-specific programs to assist SMEs.

Export-focused digital platforms should be developed to provide SMEs with FTA-related information, market intelligence, and streamlined processes. These platforms should be effectively promoted to the SME community to facilitate their adoption.

That’s not all. Due to the integration of the Rules of Origin provision in FTAs, MSMEs can be a part of global value chains more easily. For instance, if these Indian enterprises get their inputs from the FTA partner nations, they can also position themselves as strong and key players in international markets.

Through FTAs, small and medium-sized businesses can also look at diversifying their export markets outside the traditional ones. This is also because the tariffs are either reduced or eliminated, making way for more opportunities to access new markets. 

Additionally, the opportunity for MSMEs to access cluster programmes provides them with access to various sectors globally. Some of the industries in the spotlight include aerospace and defence, semiconductor healthcare, artificial intelligence, and cybersecurity.

The last word 

While there’s a potential for MSMEs to utilise FTAs for growth, the utilisation in India is quite low at 25% in comparison to developed countries that are between 70-80%. This points towards the need to reflect and take further action to leverage benefits available through bilateral and multilateral trade agreements. 

Different stakeholders and the government must come together to resolve this issue. 

Scott Wang is WTCA (World Trade Centers Association) Vice President, Asia Pacific. Views expressed are personal. Reproducing this content without permission is prohibited.

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