Cambodia Braces Itself for Asean Free Trade

When Asean’s top leaders gather in Phnom Penh next week, they will surely be congratulating them selves on one landmark initiative: The Asean Free Trade Agreement.

The Asean leadership is counting on AFTA—now nearly 10 years old and with many of its main goals achieved—to forge South­east Asia into a unified trade bloc and market that will attract foreign investment in droves. Nearly everyone agrees that the pact, which provides for a gradual lowering of tariffs to zero percent between all 10 Asean countries, will facilitate economic growth of the region as a whole.

But that doesn’t necessarily mean growth for every Southeast Asian economy. And many fear that AFTA’s success will come at the expense of the re­gion’s poorest countries—such as Cambodia.

“Asean as a whole will benefit from the agreement, but I’m not sure about Cambodia,” said Sok Hach, an economist who is wri­ting a book on the Cambodian economy. Instead, he believes, “The other countries will probably use Cambodia as a provider of a cheap, low-skilled labor force.”

Cambodia is so much less developed than its neighbors that its few, mostly undeveloped in­dustries will be driven out of business without the protection of tariffs, Sok Hach and others say.

“[Cambodia] could benefit from the Asean Free Trade Agree­ment if it was more competitive, but how?” Sok Hach said. “This is the big question.”

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Many analysts see AFTA as an unfortunate side effect of Cam­bo­­dia’s Asean membership. “Cam­bo­dia joined Asean for political reasons, not economic reasons,” Sok Hach said.

Fearing drastic political isolation, Cambodia joined Asean in 1999—the last country in the region to do so. “Economics was secondary—Cambodia just wanted to be part of the club,” Sok Hach said.

Government officials acknowledge this. “Cambodia joining Asean was first of all a political decision. It was a good decision—we cannot be isolated from the region,” a Ministry of Commerce official said. “When we join, we have to cooperate economically also and join AFTA.”

But having joined Asean out of political necessity, Cambodia never put in place the economic preparations it would—and will—need to integrate itself into a regional trade bloc.

“In Vietnam, they started preparing for this several years before they joined Asean,” Sok Hach points out. “

Under AFTA’s provisions, countries in the region have 10 years to bring their tariffs under 5 percent, and five more years to bring them all the way down to zero.

Since the six original members of Asean—Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand—began implementing AFTA in 1993, their deadline for tariffs under 5 percent is Jan 1, 2003. Already more than 96 percent of trade between the “Asean 6” carries tariffs below 5 percent.

Vietnam must bring its tariffs on regional goods below 5 percent by 2006, Burma and Laos by 2008 and Cambodia by 2010.

Cambodia currently relies relatively heavily on tariffs. While Cambodian goods face import tariffs averaging just 3.1 percent when they enter other Asean countries, products from elsewhere in the region are greeted with average duty fees of 8.9 percent when they cross into Cambodia.

These tariffs are necessary, especially for agricultural products. Given the current primitive state of Cambodia’s small-scale rural agriculture—the vocation of some 80 percent of the population—local rice and other crops could not compete with Thai and Vietnamese imports without tariffs. Even with the tariffs, Cambodian crops make scant profit.

“The [tariff] situation favors Cambodian products, but we are facing many problems,” the Commerce Ministry official said. “Many small farmers cannot produce up to the amounts requested by buyers; there is a lack of infrastructure; the cost of transport is high. Foreign investment will take some time to invest in agricultural production.”

Because of these difficulties, Cambodia will exploit AFTA’s flexibility provisions to their fullest extent—extending tariff protections to agriculture until 2017, the official said.

By that time, the government believes, Cambodia will have caught up to its neighbors in terms of agricultural production. The process has already begun, but not without snags, the official said.

“There are some missions from other countries that are interested in investing in the agricultural sector,” the official said. “For example, Japan wants to invest in the agricultural sector, but not in products that compete with Japanese farmers”—such as rice, Cambodia’s staple crop.

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Currently, the overwhelming percentage of Cambodia’s exports are garments, and the majority of those go to the US, Europe, Japan and Canada.

A Western diplomat sees this industry as the future of the economy. “Cambodia has great potential. It’s centrally located within the region, a fast-growing economy with low labor costs.”

The diplomat noted that in just five years Cambodia has achieved a $1.2 billion-per-year garment sector. While Cambodia’s labor costs won’t stay competitive, its strong labor standards make it attractive to conscientious Western consumers who don’t want to buy sweatshop-made goods, he said.

Eventually, with the help of AFTA, Cambodia should move on to producing goods for the regional and domestic markets. Critics say Cambodia is too dependent on these markets, but dependence is an inevitable part of foreign trade, he maintained.

AFTA will have no direct effect on Cambodia’s garment trade with Western countries. But it could have an indirect effect on the garment industry.

“In theory, the free trade agreement could benefit Cambodia,” Sok Hach said. “France or Germany or the US can come to Cambodia, produce goods and sell them to Thailand or Singapore.”

In addition, “[Cambodia is] eligible to import textiles from the Asean countries, make garments out of them, and export them,” the Commerce official said. By importing textiles tariff-free, Cambodian factories could gain a competitive edge.

But these would be only incremental gains. To really benefit from AFTA, Cambodia would have to improve its regional balance of trade, which is currently dismal. In 2001, 4.2 percent of Cambodia’s total exports went to Asean countries, while 44.4 percent of its imports came from within Asean.

Cambodian exports to Asean took a huge dive between 1999 and 2000, falling from 23.4 percent to 5.6 percent of the country’s total exports. Economists say this was due to new restrictions on the timber industry, which the government began clamping down on in 1999 and halted altogether at the beginning of this year.

To get a share of the free-trade prize, then, Cambodia has to find more products Asean countries want and start manufacturing domestically more of the products it currently gets within the region. That’s much easier said than done.

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As one of Asean’s four newest, poorest members—along with Burma, Laos and Vietnam—Cambodia is a victim of Asean’s yawning “development gap.” For AFTA to integrate Southeast Asia into a true economic bloc, this gap will have to narrow—a fact Asean recognizes.

Asean is counting on its Initiative for Asean Integration, a six-year work plan, to bring the new members up to speed. “If we reduce the gap, we will prosper together,” the Commerce official said.

But Femy Pinto of the advocacy group Oxfam America, who attended a workshop on the initiative in Jakarta in August, is skeptical. The initiative’s programs aren’t what countries like Cambodia really need, she said.

“If you look at the sections of the IAI—trade facilitation, building economic infrastructure—it doesn’t give a picture of how, exactly, countries like Cambodia are going to be able to address the negative consequences of trade liberalization,” she said.

Building infrastructure such as transportation links, for example, might simply help trade flow through Cambodia without benefiting the country.

The initiative also promotes the privatization of services, leading Oxfam’s Kelly Brooks to envision a future in which health care, education, electricity and water will be controlled by for-profit companies not responsible to the government—or the people.

“Where are the regulations and standards for the private sector?” Brooks said.

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Real economic integration, Brooks said, means helping the poor. The integration initiative—and AFTA at large—has failed to recognize that economic growth often only benefits an elite few, she said.

The Ministry of Commerce official disagreed with this notion. “Trade makes the economy grow, so there are more jobs for people. That means more income, and that helps poverty. It’s a chain reaction,” he said.

“If garment workers have income, they will spend it—they will buy food, clothes, motorcycles and so on. If other people make a good business they will also spend,” creating a ripple effect, he maintained.

He pointed especially to the Export Processing Zones Cambodia plans to create—special manufacturing areas where industries can import raw materials, process them and export them duty-free.

The zones would help diversify the economy away from its current reliance on garments and tourism, and toward processed agricultural products; Cambodia would benefit from the arrangement by providing water, electricity, labor and some raw materials to the production process, the official said.

But Brooks sees this plan as unsustainable and even harmful. “This kind of development only helps a select few and has damaging social implications,” without necessarily improving the domestic economy, she said.

If it weren’t for the disparity between the countries in Asean, she noted, AFTA would be “an encouraging sign” in that it might shelter the region from the unfairness activists is built into the global trade system.

“With regard to the [World Trade Organization], we’ve always said developing countries should hold out and negotiate for a better deal. That’s the kind of role Asean could play for the less developed countries in the region.” No such advocacy is included in Asean’s integration initiative.

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The Commerce official acknowledged that losing its tariffs will be difficult for Cambodia at first, but in the long run, he said, the country will benefit and become competitive.

“Foreign investment is difficult when investors…have to pay more [to import to Cambodia] because of higher tariffs,” he said.

Tariffs, however, are a minor concern compared to the rampant smuggling—encouraged by tariffs—that is a serious obstacle to industries such as steel and gasoline in Cambodia.

“Industries complain to the government, ‘Why can’t you battle against smuggling?’ They don’t complain about the tariffs,” he said.

The smuggling issue points out that the real problems with the Cambodian economy aren’t linked to trade liberalization at all, Sok Hach said.

It is corruption and ineptitude within the Cambodian system that weakens the economy, he said. “The problem of Cambodia is not a problem of tariffs—it’s a problem of structure, governance.”

Strengthening institutions, enforcement and services—all domestic reforms—are what Cambodia really needs, he said.

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