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Cambodia-China FTA: Will Cambodia benefit from its first bilateral trade deal?
A deeper cultural understanding of the Chinese market is necessary to help the Southeast Asian nation leverage the trade agreement to stimulate its Covid-hit economy.
Cambodia and China may have wrapped up a trade deal in less than one year, but to fully benefit from the agreement, Cambodia still needs to be equipped with the knowledge and understanding of the Chinese market, including its customs and regulations.
Signed in October 2020 but yet to be ratified, the free trade agreement (FTA) between Cambodia and China is the latest milestone in the flourishing bilateral relationship, which has seen China overtake Japan as Cambodia’s biggest aid donor and foreign investor.
The Southeast Asian nation has long been one of China’s closest allies in Asia and is a key supporter of the Chinese government’s Belt and Road Initiative, which Cambodia seeks to benefit from.
“Cambodia has inadequate infrastructure capacity and fares lower in logistics performance and cost-competitiveness compared with its neighboring countries. However, with the infrastructure and connectivity development projects with China, we can anticipate more logistical efficiency,” said Prayag Chitrakar, Country Manager, DHL Express Cambodia.
One such project is the upcoming 190-kilometer long Phnom Penh-Sihanoukville expressway, which is expected to reduce the time and costs of transportation of goods between the two key economic poles in the country.
Despite the countries’ close ties, trade talks started only in early 2020, with Cambodia hoping a deal would lift exports to China by 25 percent and even out its huge trade deficit. While imports from China totaled US$7.03 billion (€5.94 billion) in 2020, exports were only worth US$1.09 billion (€0.92 billion).
The new agreement would provide a much-needed fillip for Cambodia’s Covid-hit economy which is expected to grow only 2.5 percent this year, down from an earlier projection of 4.1 percent.
Before the agreement comes into force, understanding the full extent of what it entails, and learning the regulatory hurdles of entering China’s market, will allow Cambodia’s exporters to maximize the potential benefits of the deal.
Understanding the agreement
While the Cambodian Government has yet to publicly disclose the full details of the deal, local reports suggest it is heavily focused on agriculture.
“This agreement will play a large role in stimulating domestic production, especially in some agricultural segments such as bananas, mangoes, cassava, longan, cashew nuts, and so on,” Cambodian Ministry of Commerce spokesperson Seang Thay said in July.
Notably absent from the agreement is the garment industry. Garments account for Cambodia’s largest export and brought in US$7.4 billion (€6.25 billion) in export value in 2020.
Chitrakar believes the exclusion was partly because China also competes in low-end manufacturing products such as garments. He expects the duty-free access to China’s huge market, as part of the FTA, to deliver considerable benefits in other areas.
“Besides enhanced access for Cambodian agricultural exports, we anticipate gains in overall trade, tourism, construction, transportation, and investment climate,” he said.
According to a recent Eurocham event, Cambodia could export more than 10,000 items to China. And China could ship more than 8,000 products to Cambodia. Tariffs would be cut or removed on most of these items. Currently, both countries already enjoy reduced tariffs through the FTA between China and the Association of Southeast Asian Nations (ASEAN), of which Cambodia is part of.
Aiding economic recovery
Despite excluding the garment industry, the deal is expected to revitalise Cambodia’s economy.
In its latest report on the country, the World Bank highlighted the agriculture sector’s role in Cambodia’s economic recovery, noting its resilience during the 2020 Covid-19 crisis. The sector was supported by increased investment, in view of the good prospects of the newly signed Cambodia–China FTA and Regional Comprehensive Economic Partnership.
According to the World Bank, the new agreement will help reduce the constraints the sector is facing due to Cambodia’s small domestic market.
The outlook appears promising. The Asian Development Bank predicts that Cambodia’s agriculture sector will grow 1.3 percent in 2021 and 1.2 percent the following year due to higher crop production, growth in aquaculture and rising exports to China.
The deal will particularly benefit Cambodia’s rice industry, with China already the biggest importer of its rice, accounting for more than 50 percent of the country’s rice exports.
“With the addition of further reduced tariffs and greater access to China’s huge market, Cambodian trade in other sectors will also stand to benefit,” said Chitrakar on the agreement’s impact.
China already accounts for approximately 10 percent of DHL Express’ outbound shipments from Cambodia — a share that the company expects to grow once the deal comes into force.
However, to take advantage of the new deal, Cambodian exporters must first familiarise themselves with the ins and outs of the Chinese market and its customs and regulations, according to Chitrakar.
“This requires exporters to have cultural understanding and adaptability, on top of equipping themselves with market knowledge. We help them by providing up-to-date market research and analyses of the destination country so that they’re fully aware of the customs regulations and requirements prior to shipping,” he said.
Ensuring inclusive growth
For the agreement to succeed, it must increase Cambodia’s economic competitiveness and help generate local jobs, according to Heimkhemra Suy, advisor for German development agency Deutsche Gesellschaft für Internationale Zusammenarbeit.
“Much of the case for FTAs rests on improving economic efficiency, allowing each signatory nation to carry out the economic activity in which they specialise, participate in international trade and become better off than they would be by operating a more independent economy,” said Suy in a policy journal back in September last year.
“In the context of this agreement, Cambodia is poised to leverage and further develop its rice industry in return for China’s economic efficiency in manufacturing,” he added. “This way, each party can benefit by investing further in areas where they have a comparative advantage.”
While the impact of the agreement can only be assessed after it comes into effect, inking the new deal is, on its own, a notable sign of broader bilateral economic and trade cooperation to come between both nations.
Source: https://www.businesstimes.com.sg/asean-business/cambodia-china-fta-will-cambodia-benefit-from-its-first-bilateral-trade-deal