Small business trade is disproportionately restrained by trade costs, but it could be unlocked with policies that are more attentive to the unique needs of small business.
In this latest commentary in the IRPP trade volume, Ted Mallett (Vice President and Chief Economist at the Canadian Federation of Independent Business) provides a small business perspective on Canadian trade. (It’s a nice complement to the views from larger firms in our volume, here and here).
Although international trade by large firms and multinationals attracts much attention, trade is also a small business phenomenon. Roughly one in ten small and medium-sized enterprises (SMEs) in Canada are direct exporters of goods or services, and they accounted for over a quarter of the value of our goods exports in 2014.
When this direct trade is considered along with indirect trade — where SMEs act as intermediate suppliers to the large firms that trade internationally — the SME contribution to trade is further magnified.
International trade involves fixed costs. This might be related to the time required to learn about new markets or the effort needed to apply for government trade support programs. Because these costs are often similar for both large and small firms, average trade costs tend to fall as firm size increases.
The upshot is that trade costs disproportionately restrain trade by SMEs, particularly for small lower-value shipments (whereas large firms tend to have the scale and resources needed to cover these costs).
It’s hard to get a good handle on trade costs because they vary depending on the products/services and destinations involved, but a recent CFIB survey of over 8,600 Canadian firms has some interesting results. It found that 59 per cent of SME respondents who imported from, or exported to, the United States said that border costs were higher than they had expected. One-third said that if they had known about these costs, they wouldn’t have traded. Many SMEs owners also cited the cost and complexity of do-it-yourself trade, as reflected in the common use of broker-facilitated trade performed by companies like UPS and FedEx.
Mallett offers several concrete policy recommendations to encourage more Canadian SMEs to trade. Here are seven examples.
1. Review red tape at the border and reduce it
Undertake an economic impact assessment of all border fees imposed by the Canadian government. Ideally, this would include a thorough review and consolidation of our overly complicated tariff classifications, which would make life easier for all firms operating here, but particularly for small business and first-time traders.
2. Waive duties on small-valued shipments
For instance, those below the $2,500 threshold under the Courier Low Value Shipment program, where reduced duties already might apply. In some cases, these fees exceed the value of the underlying product or service, rendering such trade uneconomical and causing undue administrative burden on the federal government in exchange for little revenue.
3. Fill information gaps
Even if border fees were unchanged, firms would benefit from having more clarity and consistency on customs procedures and costs before they trade. Unfortunately, over one-third of SME respondents to that survey rated the user-friendliness of the CBSA website as poor. To improve information accessibility, the Canadian Border Services Agency (CBSA) could develop a dedicated section of its website for SME and first-time traders. Upgraded computer systems at border crossings could also make it faster and easier to fill out trade documentation.
The CBSA could report publicly on whether its service targets are being met on cross-border trade. This would increase the transparency and accountability of our trading system and ultimately improve the border services received by Canadian firms.
4. Design trade programs with SMEs’ needs in mind and promote them better
Most SMEs have relatively limited awareness and take-up of existing government programs that encourage trade. This might be because many are geared to the needs of large, frequent commercial traders — often involving considerable paperwork and lengthy approval processes. (Indeed, such processes might discourage SMEs from using these programs even if they were aware of them.) The answer, therefore, lies not only in promoting better the programs that already exist, but also in designing programs to better meet the needs of Canada’s small businesses in the first place.
5. Continue making progress on existing programs that show promise
Some examples include: the Regulatory Cooperation Council, which is working with the US to harmonize regulations; Beyond the Border initiatives, which aim to streamline and simplify cross-border movement of goods and people; and the one-for-one rule on regulation, whereby new regulation must be offset by eliminating or modifying an existing regulation.
6. Focus on imports as well as exports
For many businesses imports matter as much as exports, since they are an intrinsic part of the production process. Companies do not export because they want to improve Canada’s trade balance; they do so because it is profitable. Likewise, a key motivation for imports is that it often makes business sense to source from other countries. This allows Canadian companies to access cheaper or higher-quality inputs for their production, or inputs that simply are unavailable domestically.
With the rise of global value chains, businesses are increasingly importing in order to export. Programs are in place to help firms import — one example is the duty deferral program that allows businesses to avoid being double-charged when they import products that eventually are exported — but once again, few SMEs know about them, and they could be designed to be easier to use.
7. Don’t overlook internal trade issues
Signing international trade deals is important, but for many small business in Canada internal trade issues are more important than international trade. Mallett says that governments in Canada need to work together to reduce trade barriers within the federation by updating and modernizing the Agreement on Internal Trade.
Please read the full chapter here.
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