Cambodia has until 2015 to drop tariffs under the terms of a major regional free trade deal that takes effect today, but the alliance’s likely impact on the Kingdom is still far from certain.
Today marks the launch of two major free trade deals in Asia, paving the way for Cambodia to axe the majority of tariffs on imports from China and countries in the ASEAN region by 2015.
As the clock struck midnight today, Cambodia became part of the newly formed ASEAN-China Free Trade Area.
Encompassing an estimated 1.7 billion consumers, the new free trade area sees the removal of duties on 90 percent of goods traded between the founding six Asean members and the People’s Republic of China.
From today, Cambodia – which joined Asean in 1999 – will gradually reduce its levies with China until most goods become duty-free in 2015.
Midnight also marked the launch of freer trade between the ASEAN-6 nations. More than 7,000 trade tariffs were lowered to nil, enabling 99.11 percent of all goods to cross the borders of Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore and Thailand for free.
As part of the Common Effective Preferential Tariffs for Asean Free Trade Area, launched in 1993, Cambodia will reduce many of its tariffs to 5 percent this year, before lowering them to zero in 2015.
Businessmen and officials throughout the Kingdom are considering the impact of the moves, which some predict could revitalise the agricultural sector by providing increased export opportunities.
Commenting on the China deal, Chan Nora, a secretary of state for the Ministry of Commerce, said it was “a great achievement for us”.
However, some business leaders have questioned Cambodia’s ability to enter larger markets, given the limitations of domestic infrastructure and existing business models.
Aa the stroke of midnight last night, while the world was celebrating the dawn of a New Year, Cambodia’s business community ushered in an international trade deal eight years in the making.
The ASEAN-China Free Trade Area (FTA), signed in 2002, today removed trade barriers and tariffs between the six founding members of the Association of Southeast Asian Nations and China on around 90 percent of all products, though it gave Cambodia an additional five years to open its markets.
As a newer Asean member along with Laos, Vietnam and Myanmar, it will gradually reduce tariffs in coming years before scrapping the majority in 2015.
The FTA will unite an estimated 1.7 billion consumers in the world’s largest free trade area in terms of population. It is the third-biggest in terms of value behind the European Union and the North American Free Trade Area.
Uncertain times
But with the nation’s entry into one of the world’s largest free trade networks, a sense of uncertainty lies among the Kingdom’s business community as to what the FTA means for Cambodia. Questions are being asked about whether the Kingdom can compete on an international scale with the Chinese, and whether Cambodia will be able to make the most of new export opportunities.
Figures released by the International Monetary Fund, using data from the National Bank of Cambodia, show that Cambodia is already strengthening its economic ties with China. Its merchandise imports from China have risen every year for the last nine years, rocketing from just US$86.9 million in 2001 to $1.2 billion in 2008, accounting for 18.4 percent of total merchandise imports that year.
That figure was dwarfed, however, by the $4.74 billion in merchandise exports from other Asean countries, or 72 percent of all imports.
Merchandise exports to China have nearly doubled since 2001, from $16.7 million to $35.13 million in 2008, IMF statistics show, representing a significant trade deficit. Exports to other ASEAN nations grew from $76.1 million to $394.5 million over the same period, which is just a drop in the bucket compared with the $4.7 billion value of the Kingdom’s exports that year.
Leading government officials say that the new FTA can further cement economic links with China, widening the export market while giving consumers more choice as import duties come down, fuelling competition.
Chan Nora, secretary of state for the Ministry of Commerce, highlighted the potential for the agricultural sector – which, according to the WTO, accounted for just 2.8 percent of Cambodian exports in 2008 – to capitalise on the FTA by broadening Cambodia’s horizons away from trade with neighbouring Thailand and Vietnam. “When it comes into effect, we will have more direct access to export our products, especially agricultural products, to the Chinese,” he said.
According to a 2005 report from the ASEAN Bureau for Economic Integration, when Thailand signed a bilateral FTA with China it saw durian exports rise by 21,850 percent, mangosteen demand rise by 1,911 percent and mango shipments rise by 150 percent.
Chan Nora says that NGOs and development partners can help improve the quality of the country’s products to comply with international standards.
But while leading interest groups also welcome the FTA, they have asked whether Cambodia’s poorly developed trade infrastructure will make it difficult for exporters to use the opportunity to muscle in to new markets.
President of the Cambodian Centre for Study and Development in Agriculture, Yang Saing Koma, said: “The FTA can only be a good thing.
Products which have a market for export include rice, soya beans and cassava. But our capacity to export is questionable.
“Cambodia is very limited. Our capacity to process goods is just one factor which could affect exports. There are others, such as our roads and our ability to supply produce of a high quality and standard.”
Chan Sophal, president of the Cambodian Economic Association, said Cambodia needed to boost production of the type of goods that will be most required by China, singling out the agricultural industry as a key sector. However, he acknowledged it would not be a simple matter.
“I think we still don’t have enough ability to do this, due to the high costs of transportation, electricity and land conflict,” he said. “I think that businesses within the industrial sector will find it hard to compete with China, because they can produce products cheaper than us.”
These concerns echo those in the World Bank’s latest economic outlook report for East Asia and the Pacific, released in early October. The report’s lead author, Ivailo Izvorski, warned at the time that Cambodia was not well placed to benefit from trade with China. The Asian giant was mainly hungry for imports of commodities, parts and components for processing into finished products, as well as whiteware such as washing machines and fridges, none of which were sourced from Cambodia.
He said the only benefit to Cambodia would come as regional countries, like Korea and Japan, rose on the back of China’s continue growth. “As the rising tide lifts all ships, I think you can expect to see Cambodia benefiting from a return of tourism, a return of demand for garments, but I don’t think there will necessarily be any direct relationship between China and Cambodia.”
New opportunities
Despite these worries, many, even in the beleaguered garment industry – which has seen an annualised export drop of more than 20 percent this year – remain positive about a new relationship between Cambodia and the PRC.
Garment factories make up about 70 to 80 percent of the Kingdom’s 530 large industrial units, with the other 32,000 small and medium-sized enterprises mostly producing foodstuffs and textiles.
Ken Loo, secretary general of the Garment Manufacturing Association of Cambodia, said that most brands catering to the Chinese garment market choose to produce in China, but said that might well change.
“If the cost of production rises further in China, then maybe it will be a viable option down the road to produce in Cambodia for export,” he said. “We can no longer rely on just one market – the USA – which accounted for 55 percent of garment exports in 2009 and 70 percent in 2008.”
He added that an existing Early Harvest agreement with China, which has already made some goods duty-free, has paved the way for a positive relationship between the Kingdom and the superpower.
The FTA’s impact on the domestic market is also being considered. With China’s reputation for mass production of goods at cheap prices, some officials think a certain amount of protection will be needed as domestic markets adjust to a possible explosion of consumer imports.
Meng Saktheara, the director general in charge of the Ministry of Industry, Mines and Energy’s small and medium-sized enterprise department believes that a law setting a quality standard for imported products should be introduced. He warned that local producers must make high-quality, cheap products to compete with goods from China.
“The negative and positive impacts of the FTA will not occur in one day. There will be time for both local producers and consumers to adapt.
“Nevertheless, it is very good for our economy. We all should be happy with this because we can make our economic voice heard on the international stage,” he said.
And some Cambodian entrepreneurs may not see a difference at all.
Scott Lewis, chief investment officer at Leopard Capital, a private equity fund focusing on Asia frontier markets, acknowledged the FTA could make it harder for domestic industries to develop in future, but questioned that it would really change much in the way of trade across the border.
“Given how porous Cambodia’s borders are, enforcing duties, tariffs and trade restrictions are very hard,” he said.
“The only people who pay are typically foreigners using legal channels. For most, it is already a semi-free trade zone.”