Imagine that you are a small company that makes artisanal soap products, using natural fragrances and colorings. You struggled during Covid lockdowns to find customers for your products, which you typically sell through a couple of local shops and at nearby fairs and festivals.
You get yourself online, as everyone has been urging you to do. You post out stunning photos of your products on a platform like Instagram and suddenly you are finding interested customers all around the world.
You are on the cusp of being a “micromultinational.” It’s an exhilarating feeling.
You prepare to ship your first few direct orders to a handful of markets. Suddenly, you find the first of several roadblocks or obstacles that make it very difficult for small sellers to realize the dream of exporting their goods.
First, the overall cost of shipping can be high. Your products are not exactly perishable, but soap getting shipped in hot climates can be exposed to temperatures that can cause problems. However, the cost of using express carriers to send your packages is often too high. Your total profit margin on one or three bars of soap to a customer can be quite modest.
So you head to the local post office to send your packages. Prices are still not cheap. Depending on the price of your soap, you might end up spending as much on the shipping as you are about to make from the sale. Thankfully, soap is not terribly bulky or heavy. And you remain excited about the possibilities of finding new customers overseas.
The good news continues: your soap is sold in bar form. This is important, as liquids are prohibited items. Bar soap is unlikely to be found on lists of goods not allowed to be sent to certain markets (although you should be cautious if sending to Australia, which has a long list of restrictions to maintain agricultural quarantines).
But then you face another serious and unexpected problem. There is a declaration form that needs to be filled out for the package. The requested information can include your sender IOSS number (for the EU) or the GST/VAT number of your recipient. The form asks for HS Codes and country of origin.
You make soap. You have no idea what these questions even mean to you and you quickly have to find someone who can help. You might get incredibly lucky and find a post office staff person who can unravel these questions. Or not.
In some markets, there are either written guides or help sheets built into the websites of the postal service. In some locations, there are government officials or business association staff who can provide some assistance. But in many instances, you are on your own to sort this out. If you get your information wrong, it can be a serious problem.
Once the details are filled in, the package is ready for shipment. The costs shown on the invoice reflects the shipping charges and may need immediate payment.
Flush with success, you prepare a second package. However, this time you are suddenly presented with a different set of bills. In addition to shipping charges, you are getting charged import duties and taxes. These import duties on soap could be as high as 25-40% and the taxes can easily be another 10%. Plus the customs forms are much more complicated.
What has happened? You have been caught by a quirk in global trade. For many markets, there is a set of rules that were designed to allow smaller businesses greater opportunities to trade across borders. These rules provide a threshold that can vary between markets. In some locations, the threshold is set very low or even at zero, meaning that every single package is required to have a full customs form, pay duties or tariffs if applicable, and pay taxes. In other locations, the threshold is higher—potentially exempting a bar or two of soap from these requirements.
The threshold varies and small businesses are often tripped up by unexpected charges at the border. For example, exports to Malaysia are exempt below MYR500 (current just above US$100). But if the CIF value (value of the good, plus shipping and insurance fees) exceeds this level, you might have to pay import duties and a sales and services tax of up to 10%. In Australia, this level has been dropped to zero—meaning you will have to manage customs even for one small bar of soap.
An inconsistent and unclear threshold leaves small businesses at great risk of losing significant sums of money on cross-border trade. Companies trying to send small value goods cannot afford shipping charges, duties and taxes, and remain competitive.
Hence, many small firms try to export and discover that the costs and hassle of doing so far exceed whatever profits they might make. They quickly get discouraged and stop trying to find new markets overseas.
However, if governments really wanted to help small businesses grow and thrive, they could try to better tackle this problem. They could set an MSME Threshold at a level that remains consistent. That would allow small companies, like a soap firm, to export directly to consumers without worrying about extra, unexpected, and variable charges depending on markets.
The MSME Threshold should be set a level that covers most MSME e-commerce shipments made to consumers, like a few bars of soap or a shirt or a box or two of teabags. This level would likely not create a competitive challenge to domestic producers of products, who can more easily find local customers and do not have to pay international shipping charges. It would not likely create incentives for larger companies to send packages in smaller shipments to avoid payments above the threshold.
It would, however, help support MSMEs that are using digital tools to find new customers. It should be a fairly simple solution that could be easily implemented by governments across the region to support the economic recovery of small firms and to enable consumers to better support small businesses. It would also be a significant help to small firms at a time of increasing economic pressures.
***This Talking Trade was written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore. If you want to help MSMEs in other ways, check out our MSME work, now managed through our ATC Foundation. Contact us today at info@atc-foundation.org. Stay tuned for more details of our expanding programming to support the growth of smaller companies in Asia.***