Thank you for the opportunity to provide my views on this important matter of how small businesses in
Small businesses, as members of this committee well know, are crucial to the health of the
The COVID-19 pandemic has ravaged nearly every part of the
Financing conditions for small businesses also tend to tighten at times of heightened economic uncertainty and amidst signs of a sharp and protracted economic downturn, as is the case now.
Small businesses and associated jobs in retail, arts and entertainment, food services, personal services, and hospitality have proven to be especially vulnerable during the pandemic. But this vulnerability cuts across sectors and has affected small businesses across the board. It is difficult to envision the
In addition to the difficult domestic economic circumstances, the global nature of the pandemic has created additional complications for small businesses by disrupting their supply chains. I commend this committee for convening this hearing to focus attention on the nature of these disruptions, potential strategies for small businesses to reduce their vulnerability, and how
The Benefits of Global Supply Chains
There are two factors that have played a key role in the proliferation of global supply chains.
The first is the reduction in both tariff and nontariff barriers to international trade, with
Thus, it is not just large multinationals, but also small and medium-sized businesses, that have benefited from global supply chains./4
These supply chains have enabled firms to source raw materials, intermediate inputs, and even final goods in more efficient and cost-effective ways than in the past. It has also allowed firms to benefit from access to different technologies and innovative production processes, some of which are then incorporated into their domestic operations. In some cases, these supply chains also give small businesses more familiarity with foreign markets and gives them a competitive edge in expanding their market shares abroad.
In discussing supply chains, it is worth keeping in mind that there is a distinction between Global Production Chains (GPC) and Global Value Chains (GVC). GPCs allow small firms to take advantage of natural resources, labor, technology, and capital at a lower cost than if they were restricted to domestic sources and suppliers. GPCs are clearly important for manufacturing firms. GVCs go beyond the production process to include distribution, aftersales service and support, and even recycling. This illustrates why global supply chains are relevant even for firms in the services sector.
How Can Small Businesses Enhance the Resiliency of Their Supply Chains?
This section of my testimony puts into broader context the factors underlying supply chain disruptions and their implications, and how small businesses can prepare for and adapt to such disruptions.
There are a number of reasons why supply chains might be subject to disruption. First, trade frictions with
Uncertainties related to the North American Free Trade agreement while it was being renegotiated two years ago affected many
Second, geopolitical tensions can have similar disruptive effects as they foment uncertainty in the free flow of goods and services across national borders. For instance, rising tensions on the Korean peninsula have had a dampening effect on Asian supply chains related to electronics manufacturing, for which
Third, natural disasters and public health emergencies, either at the national or cross-national levels, can disrupt supply chains. The COVID-19 pandemic is of course a good illustration of this, as it has affected both the demand for and worldwide commerce in inputs as well as final goods./8
Another example is the extensive flooding in
Fourth, economic distress of other countries can hurt supply chains. As in
How can small businesses deal with different types of uncertainty that could expose them to supply chain disruptions?
One strategy is diversification, both in terms of sources of inputs as well as markets for final products. Relying heavily on suppliers in a specific country might make good business sense from a pure cost minimization perspective, but increases the exposure to disruptions caused by the factors discussed above. There is a clear trade-off between efficient, linear supply chains that minimize costs versus more diversified supply chains that could drive up costs and reduce margins but provide some insurance against disruptions. Diversifying their export markets can also provide some protection for small businesses as it leaves them less subject to the risk of disruptions in specific markets.
Another strategy is onshoring, although this means giving up the benefits of globally integrated supply chains and implies less diversification of suppliers./11
One argument in favor of onshoring is that it brings jobs back to
While the benefits from globalization have not been evenly distributed throughout the economy and across different segments of the
But for small businesses, the negative implications of a broad retreat from globalization are immediately apparent.
There are substantial cost implications and even concerns about the viability of their business models, in addition to the potential loss of export markets, if there were to be a general retreat around the world from freer trade flows./13
Improved logistics management can help small businesses better manage their supply chains./14
By adopting technology that facilitates real-time tracking of intermediate goods and products at different stages of the manufacturing process, small businesses can better protect themselves against volatility and make suitable adjustments in the production process when faced with imminent disruptions. Logistics management becomes even more important in the international context, where the uncertainties are multiplied and such tracking becomes essential.
What Can the
While much of the onus of managing and optimizing their supply chains is the responsibility of small businesses, federal and local governments do have a role to play in facilitating this process. They can provide some forms of direct support, especially in challenging economic circumstances, but also ensure a more stable business environment that would be conducive to the success of small businesses.
One obvious and immediate priority is the provision of short-term financial assistance to help small businesses cope with the impact of COVID-related business disruptions.
Further assistance of this sort might be required if the recession proves to be protracted, which carries the risk of pushing many small businesses over the edge. Congressional oversight would be useful to ensure that the benefits of such government initiatives flow mainly to small and medium-sized businesses that are in most dire need of such aid./16
This is particularly important given that a disproportionate share of jobs in more vulnerable small businesses is accounted for by workers with lower wages and weaker skill levels, who are also among the most economically vulnerable./17
For exporting firms, availability of trade credit and export guarantees through the
The EXIM bank dollar value of authorizations and 89 percent of the total has attempted in recent years to strike a better balance, but Congressional oversight could certainly help push for even more of the institution's support being directed towards smaller businesses.
The government should also continue to develop and consistently enforce domestic regulatory policies, including enforcement of anti-trust provisions already in the law that try to level the playing field between large incumbent firms and smaller firms as well as new entrants (which typically tend to be small).
More policy certainty in terms of
Rather than taking a bilateral approach, it would be more productive to fashion multilateral agreements that ensure a consistent set of standards across a number of trading partners. This would be advantageous to small businesses, in particular, as it would imply lower compliance costs than in a scenario with fragmented trading arrangements. A multilateral approach would also be helpful in extracting better terms on trade deals with major trading partners such as
Support for international organizations, such as the
Effective management of supply chains has significant potential benefits for small enterprises but also leaves them vulnerable to disruptions. This period of economic turmoil should lead to a re-evaluation of the resiliency of such supply chains and suitable restructuring of supply chains to reduce vulnerabilities. Small businesses can take a number of steps to promote such resiliency, but should receive the right kind of support from the government to facilitate this process. It is my hope that this committee's work will help steer government policy in the right direction and help fortify small businesses, which are a bulwark of the
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2 The typical definition of small businesses is that they are firms with fewer than 500 employees. Basic statistics on small businesses, including their employment and output, as well as their shares of overall macroeconomic aggregates in the
3 The two-month window from February to
4 For some general perspectives on how small and medium enterprises benefit from cross-border supply chains, see https://www.apec.org/Publications/2013/03/SMEs-Participation-in-GlobalProduction-Chains and https://researchportal.port.ac.uk/portal/files/1813970/TROTT_2014_cright_IJPR_How_SMEs_can_be nefit_from_supply_chain_partnerships.pdf
5 Some survey-based evidence of the supply chain disruptions faced by
6 For a discussion of how
7 A short piece pointing to how tensions on the
8 For a discussion of how global supply chains have been affected by the pandemic and also how these supply chains have acted as a transmission mechanism for the global economic shock, see
9 See, for instance, https://www.reuters.com/article/thailand-floods-supply-chainidUSSGE79R00E20111028.
11 This point is made in the following article, which also analyzes the pandemic's effects on regional and global supply chains: https://www.weforum.org/agenda/2020/04/covid-19-pandemic-disruptsglobalvalue-chains/
12 While economists' general consensus is that free trade improves consumer choice and welfare, the distributional effects of globalization are less clear. See, for instance,
13 For instance, see Simchi-Levi, David, and
14 The following article makes the case that businesses need to better map their supply chains in order to identify potential vulnerabilities: Choi, Thomas Y.,
15 Other initiatives include: Economic Injury Disaster Loans (EIDL), which provide up to
16 One study based on an extensive survey of small businesses suggests that many small businesses "may have missed out on initial Paycheck Protection Program funds because of low baseline awareness and differential access to information relative to larger firms." See Humphries, John;
17 During the two-month period from February to
18 In its annual report for FY 2019, the
number of transactions. The annual reports are available at https://www.exim.gov/news/reports/annual-reports