The European-American Business Organization, Inc. (EABO) is a consulting firm specializing in transatlantic business development and international tax services. It is a one-stop-shop for companies that are planning an expansion abroad. The customer base of our consultancy consists mostly of SMEs. This paper is a reflection of our experience with SMEs. Furthermore, I have taken part in a number of stakeholder meetings running parallel to the negotiation rounds for TTIP and have also made brief presentations there. I am also a board member of the Transatlantic Business Council/Transatlantic Business Dialogue.
The relevance of SMEs in today’s economy
For some years now we have been talking about the importance of Small and Medium-sized Enterprises. According to the OECD they account for over 95% of firms, represent 60 to 70% of employment, and generate a large share of new jobs. For this paper the focus is on the U.S. and the EU economies. The definition of SMEs differs in Europe from the one used in the U.S.
In Europe, the category of small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euros, and/or an annual balance sheet total not exceeding 43 million euros.
In the U.S., the Small Business Administration sets small business criteria based on industry, ownership structure, revenue and number of employees (which in some circumstances may be as high as 1,500, although the cap is typically 500).
In 2015, enterprises employing fewer than 250 persons represented 99% of all enterprises in the EU. They account for around two-thirds of total employment in the EU. Enterprises with fewer than 250 persons employed contribute about 56% of the total turnover in the EU (Eurostat). The total number of SMEs is estimated at about 23 million.
In the U.S. there are about 28 million SMEs. Firms with fewer than 500 workers account for 99.7% of those businesses. American SMEs generate about 50 percent of the U.S. GDP.
Important is a look at employment. Small businesses in the U.S. accounted for 61.8% of net new jobs from the first quarter of 1993 until the third quarter of 2016. Small businesses created 1.9 million net jobs in 2015. Firms employing fewer than 20 employees experienced the largest gains, adding 1.1 million net jobs.
Why is the ‘SME vs large enterprise discussion’ relevant?
The discussion about free trade was dominated for many years by large multinational companies. Research showed, however, that SMEs play an important role in today’s trade environment. The growth-generating potential of SMEs has been the subject of many academic studies. Some recent studies suggest that large enterprises are more pro-cyclical, which means international business cycles affect them more than SMEs.
The role of SMEs is now recognized in trade agreements. The text of the Trans-Pacific Partnership agreement (TPP) and the draft of the Transatlantic Trade and Investment Partnership (TTIP) included a chapter on SMEs. Furthermore, the new United States- Mexico-Canada Agreement (USMCA) also includes a chapter on SMEs.
As SMEs are entities that don’t have the resources at their disposal that a large multinational firm has, they are disadvantaged. In many cases the founder, owner, CEO is the decision maker and has to take all aspects necessary into account. Many times these companies are exporters and thus are confronted with all the challenges that all exporters are facing such as barriers at the border, barriers behind the border, financing of exports, etc. These are all issues that make it much tougher for an SME to send its products across the national borders. There is a lot of paperwork involved in the process. While much is digital today, it still means that forms need to be filled, signed, and presented. There may be provisions in countries that require testing of certain products that are going to be introduced to the market. There are requirements in Europe presenting challenges to U.S. SMEs like the CE marking (certification mark on conformity with EU legislation), REACH (Registration, Evaluation, Authorization and Restriction of Chemicals is an EU regulation) also, understanding Value Added Tax.
A new free trade agreement between the U.S. and Europe may not resolve all the issues from the very beginning. But it can certainly start a process that leads to freer and fairer trade. Such an agreement can aim at cooperation of the partner countries to increase the trade and investment opportunities for SMEs. Unfortunately, the process seems to be stalled quite a bit in Europe.
In article 25.4 of the USMCA agreement a committee on SME issues is referred to. As far as an agreement with the EU and the U.S. is concerned a predecessor to such a committee already exists: the EU – US Small and Medium-Enterprise (SME) best practices workshop in the framework of the Transatlantic Economic Council (TEC). In mid-November the American and European delegations met in the Vienna to talk about issues such as:
- Skills needed for SMEs in the transatlantic marketplace
- SME access to finance
- Intellectual property (IP) protection and SMEs
- Support policies to SMEs, startups and scale ups: update on EU and U.S. actions
This was the 9th meeting of the group. While the discussions and deliberations don’t necessarily lead to any immediate changes, they certainly are a part of the discussion between the officials of both sides and the ideas reviewed can at a later point become part of an agreement.
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