Cambodia set to boost trade links via FTAs

Cambodia through its progressive market-based reforms has reaped high dividends courtesy the FTA with ASEAN countries, but that was just the stepping stone.

The recent agreements with Korea, China, Japan and many others to follow will further put the Kingdom on a solid footing.

Khmer Times examines how the FTA will boost trade activities in Cambodia not only within the circumference of ASEAN, but beyond.

Cambodia has identified free trade agreements (FTAs) as a way forward to enhance its trade competitiveness and market potential for its various products across the world. The country has been actively engaged in forging bilateral and multilateral FTAs with a view to accessing wider markets across the world. Cambodia’s entry into the Regional Comprehensive Economic Partnership (RCEP) and its free trade agreements with China and South Korea are expected to further enhance its trade potential in the international arena.

Several international agencies have already predicted good economic growth for the country in the coming years, thanks also to its encouraging approach to FTAs. According to the estimates of the International Monetary Fund (IMF), Cambodia’s economic growth is expected to be robust this year and the next couple of years, due to free trade agreements and the high vaccination rate.

Boosting trade

In its Regional Economic Outlook Report for Asia and Pacific: Sailing into Headwinds, the IMF said Cambodia’s growth is projected at 5.1 percent in 2022, 6.2 percent in 2023 and 6.6 percent in 2024.

Davide Furceri, deputy division chief of the IMF’s Regional Studies, Asia and Pacific Department, said the RCEP and the Cambodia-China Free Trade Agreement have also given a boost to these growth rates.

“Regarding the trade agreements, I think this is a good step for many countries to the extent it signals international cooperation more broadly,” he said in a press conference.

“So, I think the participation in the RCEP is a good step not only for the short term but also for the medium term,” Furceri added.

After the success of its bilateral FTA with China, Cambodia has also entered into an FTA with South Korea.

Earlier this month, Prime Minister Hun Sen announced that the Cambodia-Korea free trade agreement would come into force in December this year.

FTA significance

The Kingdom has already signed a bilateral FTA with China.

Talking about the significance of FTAs, Penn Sovicheat, under-secretary of state at the Ministry of Commerce, told Khmer Times recently: “When we have bilateral free trade agreements with many countries including China, Korea, and Japan, it is a positive sign to our economy and products.”

The new bilateral agreement is expected to accelerate the economic recovery following the adverse effect of the Covid-19 pandemic.

According to experts, the agreement will help provide market access to Cambodia for its different products.

Some of Cambodia’s main exports to South Korea include footwear, apparel, travel, beverages, electrical and electronic components, rubber, pharmaceuticals and agricultural products.

On the other hand, the major imported items for Kingdom are vehicles, electronics, kitchen appliances, beverages, pharmaceuticals, finished plastics and products.

The two countries have already ratified the free-trade agreement.

The bilateral trade between Cambodia and South Korea rose 13.8 percent year-on-year to $818 million in the first nine months of this year, according to a report from the Korea International Trade Association (KITA).

Cambodia’s export surged 19.6 percent to $301 million as compared to the same period last year.

Prime Minister Hun Sen (right) holding discussions with Japanese Prime Minister Fumio Kishida in Phnom Penh on March 20, 2022. Xinhua

Eyeing more FTAs

Senior Commerce Ministry officials said the country has plans to make negotiations on bilateral FTA establishment with several countries, including Japan, India and Mongolia.

Recently it held the initial round of talks with the United Arab Emirates for a Comprehensive Economic Partnership Agreement.

The first round of negotiation was held recently in Abu Dhabi.

On November 14, a consultation meeting was held at the Commerce Ministry, featuring officials and top businesspeople regarding the likely contents of the Cambodia-United Arab Emirates Comprehensive Economic Partnership Agreement (CAM-UAE CEPA).

The bilateral trade between both countries rose 52.66 per cent to  $151.547 million in 2021 compared with the previous year’s trade figures.

While Cambodia’s exports rose more than 18 percent to $52.116 million, its imports surged 79 percent to $99.431 million.

Both the Cambodia-China Free Trade Agreement (CCFTA) and
the RCEP came into force on January 1, 2021.

Broad range of motivations

Talking about Cambodia’s growth prospects related to FTAs, Jayant Menon, Senior Fellow with ISEAS-Yusof Ishak Institute in Singapore, told Khmer Times in an exclusive interview recently: “Cambodia is keen to negotiate a lot of FTAs, and it is not a bad thing. FTA is not just about trade or economics. It’s about strengthening relationships, political ties, and so on. So, there’s a very broad range of motivations for these FTAs.”

He also termed RCEP as a very important agreement for Cambodia. “The agreement extends Cambodia’s engagement beyond ASEAN to include the big players in East Asia, especially China, Japan, and Korea,” Menon explained.

Terming the pull out of India from the partnership “unfortunate”, he said Cambodia can still engage bilaterally with India.

Menon said FTA is a stepping stone, not an end, especially for developing countries like Cambodia.

“You should look at trying to use FTA to globalise and not just regionalize. So, it should try and eventually find a way for multilateral FTAs. So, instead of managing each and every FTA, which has its own special tariff rates, special rules of origin and other legal requirements at some point in the future, they should try and consolidate all these FTAs and harmonize them to have a standard set of rules of origin, a standard set of preferential tariffs, and has multilateralism,” he said.

Menon also pointed out that signing FTAs doesn’t automatically guarantee open regionalism.

Jayant Menon, Senior Fellow with ISEAS-Yusof Ishak Institute in Singapore. ISEAS – Yusof Ishak Institute

“An open regionalism is in the interests of Cambodia because it maximizes the benefits and also it minimizes the cost of administering multiple FTAs. In a country with limited human resources and capacity, it is particularly important,” he said.

Apart from FTAs, Menon felt Cambodia has chances to progress in the future, considering several geopolitical developments.

“There’s a lot of restructuring going on, especially with the US-China trade war, but also as a result of China’s prolonged zero COVID policy. There are a lot of firms that are looking for alternatives to the China+1 strategy. China itself is looking to invest in the region and move out of China. Some Chinese firms are moving out of the country. So far, the main beneficiary has been Vietnam. Cambodia can also try and tap into some of that.”

He said some of the sectors that have growth potential for the country would be the global supply chain of electronics and automotive parts.

Cambodia exports surge

The favourable trade agreements and RCEP has helped Cambodia’s exports as well. According to the latest figures, Cambodia exported $18.74 billion worth of goods in the January-October period of 2022. It marked an increase of almost 20 percent when compared with the same period in 2021, according to the General Department of Customs and Excise report.

The US continues to be the biggest market for Cambodia’s products as it imported $7.6 billion worth of products from Cambodia during the period.

RCEP impact

A recent report indicated that the large export potential for Cambodia is in implementing the RCEP commitments and undertaking deeper structural reforms to align the domestic economy with regional integration.

The RCEP comprises 15 Asia-Pacific countries including 10 ASEAN member states, namely Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam, and their five trading partners, namely China, Japan, South Korea, Australia and New Zealand.

According to the Jakarta-based Economic Research Institute for Asean and East Asia’s (ERIA) study, RCEP’s impact of a 9.4 percent increase in exports could have an annual growth impact of two percent on GDP and 3.2 percent increase in employment. The higher impact of an 18 percent increase in exports on the domestic economy can translate into a 3.8 percent increase in GDP and a 6.2 percent increase in employment.

The study said the progressive market-based reforms in Cambodia in both manufacturing and services have been successful in lifting the country closer to the next stage of growth. Cambodia has to maintain progressive market-based reforms in the post-pandemic recovery for deeper regional integration with the framework provided by RCEP, it pointed out.

One of the authors of the paper, Shandre M Thangavelu of the Jeffrey Cheah Institute on Southeast Asia, Sunway University, Malaysia, told Khmer Times that the structural transformation of the Cambodian economy is critical to shift and position its manufacturing activities to higher value-added activities in the global production value-chain.

“Currently, the manufacturing sector is not diversified and concentrated in garment and textiles, but the overall manufacturing activities are showing signs of shifting to higher value-added activities such as parts and components and transport,” he said.

Workers in a garment factory in Phnom Penh. The manufacturing activities are showing signs of shifting to higher value-added activities. KT/Chor Sokunthea

Important achievement

Prime Minister Hun Sen recently said that the RCEP trade pact would be a booster for regional trade and greater economic integration in the post-COVID-19 pandemic era.

The Premier said that the mega-regional trade deal marked an important achievement for ASEAN as the bloc has been keeping up with its efforts to open up the economy and diversify its regional markets.

“I firmly believe that this huge free trade agreement will boost trade activities both inside and outside of ASEAN, as well as promote broader regional economic integration,” he said.

“As a member of the RCEP, Cambodia reaffirms its commitment to the rule-based trading system and welcomes all businesses and investments from the ASEAN countries and other partners,” he added.

Proposed FTAs

As per a report from the Asia Regional Integration Center, some of the proposed/under consultation FTAs involving Cambodia include the East Asia Free Trade Area (ASEAN+3), ASEAN-EU Free Trade Agreement, Comprehensive Economic Partnership for East Asia (CEPEA/ASEAN+6), ASEAN-Pakistan Free Trade Agreement, ASEAN-Eurasian Economic Union Free Trade Agreement, and Cambodia-Eurasian Economic Union FTA. Meanwhile, negotiations have been launched for the ASEAN-Canada FTA.

The FTAs that have been signed and in effect include the RCEP, ASEAN Free Trade Area, ASEAN-Republic of Korea Comprehensive Economic Cooperation Agreement, ASEAN-Japan Comprehensive Economic Partnership, ASEAN-India Comprehensive Economic Cooperation Agreement, ASEAN-Hong Kong, China Free Trade Agreement, ASEAN-People’s Republic of China Comprehensive Economic Cooperation Agreement, ASEAN-Australia and New Zealand Free Trade Agreement and Cambodia-People’s Republic of China Free Trade Agreement, it added.