MSMEs in cross border E Commerce – Challenges, Opportunities and Trade Facilitation Measures

MSME's and E Commerce

MSMEs currently contribute to around 40% of exports of India. E-Commerce is an area that has shown tremendous potential for growth, especially for MSMEs. It is so because MSMEs suffer from certain handicaps in traditional trade models, with regard to access and scale, that are ameliorated in an E-Commerce model. This post shall elaborate some of the challenges and opportunities that pertain specifically to MSMEs when it comes to E-Commerce trade across border before deliberating on the facilitation measures specific to MSMEs.

Data from Statista show that retail E commerce trade will grow to around 4.8 Trillion USD by 2021 – around two years from now. Around 30% of this is expected to be cross border trade through E-Commerce route. Data also shows that 82% of enterprises involved in such cross border trade are micro and small scale in size (definition of SMEs vary across countries/organisations). 

Opportunities for MSMEs in Ecommerce

E commerce creates opportunities for MSMEs through 

a)     Easier Outreach potential 

b)    Easier Market Research

c)     Easier Reputation building

d)    Easier Marketing expenditures

e)    Development of ecosystems creating synergy

E Commerce brings a paradigm shift in terms of dealing in delivery time, warehousing concepts, customized production and social marketing. The traditional model of value chains are being broken up – for example, the evolution of shipping from bulk cargo to containers of last four decades is giving way to, what one may call, "parcelization" (there’s no such word as of now in the dictionary) where individual parcels - recall the amazon box parcel you got last time around – play the role of a unit of measure in transport cargo.   

Challenges for MSMEs in E-Commerce

The efficiency of logistics and cross border procedures are yet to catch up with the blazing speed with which E Commerce has grown. The volumes of E Commerce shipments are straining the existing logistics industry and associated business costs. 

E Commerce is also challenging border regulatory agencies and they have not evolved sufficiently fast to cater to the emergence of E Commerce. The customs operates with laws made decades ago with a priority on border controls and emphasis on duty collection over trade facilitation. 

Five types of trade costs associated for MSMEs in particular that challenge the faster growth of cross border E Commerce trade are: 

a)     Tariffs and duties

b)    Technical barrier to trade – standards that are rigged against SMEs

c)     Documentation requirements

d)    Border costs – fee/charges associated with border crossing

e)    Logistics costs – transport, insurance and warehousing costs 

The cost of delay at border clearances add up to the detriment of MSMEs, squeezing their competitiveness. 

Vulnerability of MSMEs in international trade

The vulnerabilities arise due to the fact that MSME's 

a)     Need more human resource to export per unit of revenue due to scale of operations 

b)  They Have limited access to financing and costlier financing when compared to bigger corporations with better access to credit. 

c)     MSMEs trades are usually categorized under high risk items under Risk Management Systems and are subject to greater border controls 

d)    MSMEs usually cannot afford high quality logistics operators to handle their shipment leading to sub-par performance on logistics front. 

e)    MSMEs usually export small volumes of low value added products leading to longer breakeven times for the firms. 

Trade Facilitation Measures for MSMEs in Ecommerce

Trade facilitation Measures should focus on MSME's needs if India wishes to grow in this area. The bigger multinational organisations have their in-house teams to manage supply chains and optimise the operations. Giant firms operate efficiently, optimise logistics, and involve themselves with policymakers to ensure that the border policies don't harass them. The bulk of these organisations ensure that Governments heed to their demands in the interest of earnings and employments that these firms bring to the country. That's not so when it comes to MSMEs. That's where forming associations for protecting interest of MSMEs become important. Without an association or representative body, it is difficult to hear the voices of MSMEs. 

Many countries approach the trade facilitation to SMEs through a system of de-minimis where customs duties are not levied for products with value less than a certain threshold. This encourages trade while sparing disproportionate efforts by customs in collecting what in the end adds up to a relatively small percentage of revenue. India has granted certain easier tax processing and compliances for small scale industries through the composition scheme. However, for inter state and export transactions, SMEs still don't enjoy sufficient freedom. While tax evasion is certainly an issue from revenue loss point of view, but if the revenue arm enjoys overbearing say in the area of taxation of SMEs, we may end up stifling growth. While the SMEs grow, it is better to let a small bit of revenue slip in the interest of higher employment and prosperity. This, alas, is an approach that appears lost in the din for maximisation of revenue in India. 

Also, schemes that are designed for greater ease of transaction at border, such as the Authorized Economic Operator (AEO) program - a program flowing from the Trade Facilitation Agreement of WTO -  are heavily skewed to help multinationals and bigger corporations. A rethink is required to make such programs suitable to MSMEs. 

Finally, the barriers to trade for MSMEs arising out of technical and non-technical barriers erected by various governments needs a look into. As world have negotiated away the tariffs, a common way to protect local industries is through erection of the so called Non Tariff Barriers (NTBs). The rise of NTBs in recent years has affected MSMEs badly. This has carried over to the E-commerce trade. 

To sum up, trade facilitation for MSMEs needs a paradigm shift in the way the border compliances and regulatory functions are designed. Unless addressed adequately, we may end up in a situation where the bigger organisations end up gaming the cross border E Commerce and leading to an unequal, non level playing field for SMEs.