How HK SMEs can thrive in changing face of intra-Asia trade

Lauren Zhao May 05, 2023 09:11

After the Covid-19 pandemic, many experts and policy makers believe that returning trade will help revitalise economies as restrictions have eased. While the current global economic headwinds of growing inflation and interest rates create new uncertainty, there is still reason to be optimistic as opportunities abound.

Our study, “Clearing the Runway for Intra-Asia Trade”, shows that trade amongst the 12 major Asian markets (also known as the Asia-12, of which Hong Kong is a key component) will more than double from USD6.4 trillion in 2020 to USD13.5 trillion in 2030. Hong Kong alone accounted for 11% of total intra-Asia trade in 2020, highlighting its increasingly prominent role in overall trade with other Asian economies, which is set to grow by 19% by 2030.

Intra-Asia trade already accounts for two-thirds of the region’s trade with the world. So, how can SMEs in Hong Kong capitalise on the growing high potential value of future intra-Asia trade?

Hong Kong has all the components to take advantage of regional trade ties
Firstly, Hong Kong occupies an advantageous niche within the Asia-12 group. It is recognized as a super connector that leverages its status as an open trade and financial hub to foster further trade ties in the region and beyond.

Secondly, Hong Kong’s trade growth with the rest of the Asia-12 is expected to be driven by four key product segments including high-tech, retail, industrial manufacturing and automotive (IM&A) and healthcare – which together constitute 92% of Hong Kong’s intra-Asia trade. Among these four segments, trade in high-tech is a key driver for Hong Kong’s trade growth and accounts for 65% of its trade with other Asian markets.

It is expected that almost 700 million people in the Asia Pacific will have access to the Internet by 2025, creating a new generation of e-commerce consumers. Against this market backdrop, Hong Kong’s key tech products, for instance broadcasting equipment, circuits and mobile phones, will continue to be in great demand. Data has shown that ASEAN markets have already proven critical to high-tech trade for Hong Kong – growing by 6.3% between 2011 and 2020, outpacing the 4.5% overall growth posted for all four segments between Hong Kong and ASEAN in the same period.

Thirdly, deeper trade integration in the region will be instrumental in maintaining future resilience. The Hong Kong Government has been actively seeking to join the Regional Comprehensive Economic Partnership (RCEP), which is at present the world’s largest free trade agreement (FTA), covering more than 30% of the global population and total gross domestic product. With the RCEP, global trade revenue can amount to US$263 billion and global export value to US$496 billion by 2030.

Addressing trade barriers to remain competitive and unlock trade opportunities
However, businesses, especially SMBs in Hong Kong, face multiple trade barriers including the lack of harmonisation of standards, a shortage of labour and skills in the logistics industry, wide-ranging tariffs and other complex customs administration. The potential of intra-Asia trade can be unlocked only if these issues are addressed. For example, businesses of all sizes need to collaborate to promote measures to facilitate increased trade, for instance harmonising standards to align with international benchmarks.

Additionally, putting all the proverbial supply chain eggs into one basket is never a good idea - one of the biggest lessons from the pandemic. Therefore, SMBs must diversify their supply chains into resilient trade routes while also targeting high value and high growth areas.

For example, ASEAN markets present Hong Kong businesses with an opportunity for rapid growth, providing a wider range of manufacturing bases to outsource production across parts of their value chains. We’ve seen Hong Kong-based companies increasingly shifting towards ASEAN markets, such as Vietnam, as an alternative location for manufacturing bases and regional expansion. Another good example is how the trade routes in the healthcare segment have proven to be extremely resilient, with 91% of trade value today potentially growing even in a “deglobalization” scenario. Hong Kong has seen much investment within this segment which could provide a base for future trade.

What’s more is for SMEs to increase investment in supply chain innovation. Businesses in Hong Kong in the past have tended to invest more in front-end technologies such as digital marketing and customer relationship management but underestimate the importance of investing in advanced core technological applications such as data analytics tools and Artificial Intelligence (AI) enabled tools. Going forward, it is important for SMEs to partner with tech-driven service providers to enhance efficiency and improve supply chain productivity – ranging from robotics and automation in warehouses, to blockchain-based inventory management, or smart tracking of cargo to make trade simpler and more efficient.

Finally, it is also crucial to promote deeper Micro, Small and Medium Enterprises (MSMEs) involvement in trade, given that they have demonstrated strong potential to leverage export opportunities, which on average generated 88% of their revenue from exports before the pandemic. Since every cross-border move involves vastly different trade regulations, when dealing with trade barriers, professional expertise is needed to make compliance and documentation processes easier.

Only when we have these counter measures in place, can we hope to boost Hong Kong’s trade with the 11 other major Asian markets from USD861 billion in 2020 to over USD1 trillion by 2030.

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Lauren Zhao

Managing Director of UPS Hong Kong and Macau