Rising Costs in Strait of Hormuz Endanger SME Global Participation

Aisha Mensah | AA

A UN report warns that disruptions in the Strait of Hormuz could prevent SMEs from participating in global value chains, as increased costs impact them more than larger firms.

Disruptions in the Strait of Hormuz pose a significant threat to small and medium-sized enterprises (SMEs) participating in global value chains, the United Nations Conference on Trade and Development (UNCTAD) warned on Tuesday. The rising costs for energy, transport, and financing are hitting smaller firms much harder than their larger counterparts, which have the resources to absorb the shocks.

According to a UNCTAD report, large companies can mitigate such risks by leveraging multiple suppliers and markets, as well as diversified financing sources. On the other hand, SMEs often lack these options, making them more susceptible to financial strain that could force them to cut production, delay investments, or even exit from the market entirely.

The agency emphasizes that once SMEs are forced out of value chains due to these disruptions, they may not return even when global trade volumes stabilize. This makes them vulnerable to exclusion from future recovery and growth.

Challenges Facing Smaller Firms

The report highlights the disparity between SMEs and large corporations, particularly in developing economies. Complying with import requirements alone costs small firms an average of 19.4% of their product value, compared to just 8.3% for firms in developed countries. Medium-sized enterprises face similarly steep costs of 17.5% against the 7.8% incurred by their developed-country counterparts.

Access to finance represents another significant hurdle. In developing nations, almost 48% of small firms see financial access as a major obstacle to operations. This figure is somewhat lower for medium-sized firms and large firms, standing at 42% and 38%, respectively.

UNCTAD's data, encompassing 90,120 firms across 157 countries, indicates that SMEs in developed economies encounter fewer financial obstacles. This disparity in access to finance exacerbates the difficulties facing SMEs in developing countries amid the Strait of Hormuz disruptions.

Policy Recommendations and Responses

To avert the sidelining of SMEs from global value chains, UNCTAD calls for robust interventions to support these enterprises. The organization emphasizes the importance of enhancing access to trade finance, liquidity, and working capital for SMEs. It also suggests implementing affordable logistics solutions to help smaller firms maintain and diversify their supplier and customer networks.

The report notes that with the right policy interventions, SMEs can continue to play a crucial role in job creation and economic growth. "Trade resilience requires SMEs to remain part of value chains," the report states, further adding, "Otherwise, recovery may simply mask greater concentration among larger firms."

Furthermore, the UN Secretary-General Antonio Guterres stresses the vital role that micro, small, and medium-sized enterprises play in ensuring economic stability across countries.

Impact on Middle Eastern Trade Routes

The geopolitical intricacies surrounding the Strait of Hormuz further complicate the economic landscape. Recently, an Islamabad memorandum facilitated by Pakistan and Qatar has aimed to quell hostilities and lay groundwork for discussions between Tehran and Washington.

Iran has accused the United States of not upholding key terms of this agreement, including those related to sanctions and the naval blockade. Amidst these tensions, discussions are ongoing between Iran and Oman regarding a temporary transit route through the Strait.

These geopolitical maneuvers have significant implications for global trade, with Middle Eastern trade routes being critical nodes in the supply chains affecting SMEs around the world.

Policy Implications for Urban Economies

The challenges outlined by the UNCTAD report highlight essential areas for municipal governments to address, particularly those in trade-reliant urban centers. Cities have a vested interest in ensuring that SMEs, which often form the backbone of local economies, remain integrated into global value chains.

This situation calls for innovative urban policy-making that focuses on enhancing local infrastructure to support SME participation in international trade. By emphasizing the importance of trade finance accessibility, cities can not only sustain but also enhance the economic resilience of these enterprises.

Finally, urban leaders must be proactive in advocating for policies at higher governmental and international levels that address the systemic vulnerabilities exposed by the current trade disruptions. Ensuring that SMEs continue to thrive is crucial for maintaining robust urban economies.

Questions That Matter

What impact do Strait of Hormuz disruptions have on SMEs?

Disruptions in the Strait of Hormuz risk pushing SMEs out of global value chains, as rising costs impact them more severely than large companies, according to a UNCTAD report.

What are the financial challenges for SMEs in developing countries?

In developing economies, 48% of small firms view access to finance as an obstacle, compared to 42% of medium-sized and 38% of large firms, according to UNCTAD data.