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Business Times - 30 Mar 2010

SME INC

The FTA fear factor


SMEs have various worries concerning free trade agreements, reports JASLENE PANG

THE door may look wide open, but many small and medium enterprises (SMEs) are not taking
advantage of free trade agreements (FTAs) as they look to expand overseas.

A recent study by the Economist Intelligence Unit (EIU) showed that less than a fifth of SME
respondents in Singapore now make use of FTAs, while less than a third plan to do so. Fear could
explain this reluctance, according to Frank Debets, a trade consultant and a partner of
PricewaterhouseCoopers WMS Pte Ltd.

'The main concerns of SMEs appear to be lack of adequate resources to benefit from a FTA, both in
terms of quantity and quality, with a related fear of getting it wrong and incurring retrospective duties and
penalties,' he told BT.

Penalties for the first conviction are about $100,000 and imprisonment for two years. The second is a
heavier fine of $200,000 and sentence of three years. Moreover, when retrospective duties are incurred,
businesses cannot recoup their losses from customers because the goods are already sold.

'Additionally, they often see no real or at least, immediate, benefit from using FTAs. Increased market
access is a longer-term measure, and in relation to duty benefits it is often exclusively the importer on
the other side of the transaction that benefits in practice. That is, sales prices are not or cannot be
increased,' Mr Debets added.

SMEs also worry about the opportunity cost of sending workers to attend seminars to find out about
FTAs or applying for FTAs. This cost is exponentially higher for the smaller SMEs.

Loke Yuen Kong, director of TruMarine explained: 'We have not tried using any FTAs because the
paperwork looks tedious.'

TruMarine is an SME specialising in turbocharger servicing. To date, TruMarine has not used a single
FTA, but is considering using it in the future.

'We are paying too much custom duties in China,' laughed Mr Loke when quizzed on the reason for the
possible change.

The time spent on FTAs is a real problem. First, there is a need for businesses to check if their product
line is covered for tariff concessions under the FTA, and if they satisfy the rules of origin. Applicants
have to also fill in a manufacturer application form -about three pages long- and also a cost statement,
which involves a long time as more details are required.

However, SMEs who have used FTAs before, assured the BT that it gets easier with time.

Dominic Yeo, export executive of Singa Plastics Ltd, said his company used to take one to two weeks
for the whole process. It now takes at most three days as it is now more familiar with the procedure.
Moreover, cost statements can be renewed without having to fill out the whole form again.

More importantly, FTAs present their users with lots of benefits. 'We get a competitive edge over other
countries' product, simply because our products in turn will incur lower tax when they buy and import
our items,' Mr Yeo explained.

Erman Tan, chief executive officer of Asia Polyurethane Mfg Pte Ltd (APU) shared the same sentiments.
He said: 'APU has so far saved around an estimated 3-6.5 per cent in import taxes. With these savings,
we obviously reduce our cost and our goods achieve price competitiveness which enables us to
compete with the local manufacturers in overseas countries through better market penetration.'

APU started using FTAs in 2005 to meet its export needs, which drives 97 per cent of its business. Mr
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Tan also told BT that between 2008 and 2009, his company's revenue increased 28.6 per cent. He
explained that the quantity of goods produced increased despite the drop in prices due to FTAs.

FTAs are not only beneficial to the companies dealing with exports and imports of goods. They also
benefit the service industry, which saw S$7.2 billion worth of exports of services from Singapore to China
in 2008.

Modes of services supply covered in FTAs include cross-border supply of service like e-ticketing,
consumption abroad like booking a room in a hotel in which the regulations become less stringent,
commercial presence abroad and presence of labour abroad.

However, regardless of the type of industries, SMEs must understand the differences between the
various FTAs in order to make full use of them. Although enjoyment of the lowest possible preferential
duty rates is important, rules of origin and other compliance requirements are also important aspects to
consider.

For example, SMEs interested in business in the rapidly growing China economy have a choice of using
Asean-China FTA (ACFTA) or China-Singapore FTA (CSFTA), given the overlap between the two. But
when calculating the value content for the rule of origin, ACFTA's cumulative content can come from 11
countries as compared to CSFTA's two.

On the other hand, a company exporting aviation kerosene to China will save more using CSFTA as
compared to using ACFTA.

Researching on the different FTAs unfortunately requires manpower and time, but SMEs should
seriously consider if the long term benefits outweigh the cost, or they might get left behind in the future
in a 'borderless world'. If they encounter problems, they can always try to seek for help from
organisations such as IE Singapore.

'Although FTA compliance may appear daunting at first, the continued expansion of FTA networks and
benefits increase the size of the prize all the time, and allocating or hiring some resource to capture
these benefits, or setting some money aside for external advisors -if possible on a success fee basis-
could bring many potential benefits,' said Mr Debets.

Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.

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