The Advantages and Disadvantages of Cambodia-China Free Trade Agreement for Cambodia

The Advantages and Disadvantages of Cambodia-China Free Trade Agreement for Cambodia

Chinese President Xi Jinping (R) meets with Cambodian Prime Minister Samdech Techo Hun Sen, in Beijing, capital of China, Dec. 1, 2017. Xinhua/Rao Aimin/Khmer Times

I. Introduction

    On 5th October 2020, The Free Trade Agreement between Cambodia and China was signed by the two sides. Cambodia’s Commerce Minister Pan Sorasak and Chinese Commerce Minister Zhong Shan virtually linked the pact. During the key event on 12th October 2020, Prime Minister Hun Sen and visiting Chinese State Councilor and Foreign Minister Wang Yi were witnesses to the signing. Actually, the appearance of the trade deal lifted the two parties up to extra levels; comprehensive strategic cooperation partnership, jointly building the China-Cambodia community with a shared future, and cooperation in the joint construction of the Silk Road Economic Belt and the 21st Century Maritime Silk Road; trade between the two sides was valued at over US$7.4 billion in 2018, with China enjoying a trade surplus of over US$6 billion. Through the FTA, the two countries aim to boost bilateral trade to US$10 billion by 2023 (Devonshire-Ellis, 2020). This finding will point out the pros and cons of the Free Trade Agreement between Cambodia and China for Cambodia through main four points for each.

The Signing Ceremony of The Cambodia-China Free Trade Agreement (CCFTA) was held at the Peace Palace and was presided over by Prime Minister Hun Sen and Chinese State Councillor and Minister of Foreign Affairs Wang Yi as witnesses. SPM

II. Significances of the Free Trade Agreement for Cambodia

1. The Free Trade Agreement (FTA) with China will spur leading trade and investment flows between both sides through the contraction and/or removal of tariff and non-tariff barriers. By doing so, the Kingdom may happily see that the market is full of more diverse and inexpensive products. In addition, trade and investment will allow consumers and businesses to get greater access to extensive competition on pricing goods and services. On the same page, trade and investment will boost economic growth, which may be able to enable the Kingdom to achieve the ideal scenario to become an upper-middle-income status in 2030.
   
   
2. The FTA will also play an important role in Cambodia’s exports. Tangibly, Cambodia needs more export destinations to increase its economic growth rate into the Chinese market and others besides the EU and the US. These two Western countries have been providing preferential treatments to the Kingdom through the Everything but Arms (EBA) and Generalised System of Preferences (GSP), respectively (Menghour, 2020). Consequently, on 12 August 2020, the EU’s decision on partial withdrawal on the preferential treatments from Cambodia under “Everything But Arms” (EBA) - the EU’s trade arrangement for Developing Countries has now been effective because of serious concerns over violations of human rights and fundamental freedom; Cambodia’s typical export products, such as garments, footwear, and travel goods, have been subject to the EU’ custom duties; manipulating the withdrawal of preference access to the market concerns approximately 20% of Cambodia’s exports to the EU. In that case, Cambodia is still allowed to export its products to the EU’s market, but they will be subject to general tariffs applicable to any other members of the WTO (European Commission, 2020).
   
   
3.  The FTA will help Cambodia rebuild its economic growth after suffering from the global crisis in 2020 due to the post-pandemic effect. In addition, according to Wang Yi speech on CCTV, he said the agreement would not only promote bilateral trade but also contribute to addressing the Kingdom’s challenges once the economic impact of the COVID-19 pandemic had subsided (Chhengpor, Socheata, & Narin, 2020).
   
   
4.  According to Lim Heng’s claim on his post on 27 December 2020, Cambodia Chamber of Commerce vice-president, goods exported from Cambodia to the Asian economic powerhouse are expected to increase in volume considerably, particularly agricultural products whenever the Cambodia-China FTA enters force. Thus, he highly recommended Cambodian investors and producers to make sure that their products meet the standard consideration of high quality. In the pipeline, “I believe our exports will continue to show strong overall growth as implementing the bilateral free trade agreement between Cambodia and China next year contributes to further national economic development,” he also added (Pisei, 2020).

III. Insignificances of the Free Trade Agreement for Cambodia

1.  The FTA will make the Kingdom lose its tax revenue without taxes on Chinese goods. However, the Kingdom’s increased exports to China will make a balance to this loss. The government will look for another alternative source of tax revenue to fulfill and balance its tax gap. By doing so, the Royal Government of Cambodia might be pushed towards implementing domestic consumption taxes - leading to dissatisfaction for consumers in Cambodia to pay for more increased taxes to the government.
   
   
2. The FTA would not make up for part of losing EBA from the EU and GSP from the U.S., by just depending on the garment sectors alone. According to the International Monetary Fund has warned that the Kingdom will face tens of thousands of jobs lost in the garment sectors (Heimkhemra, 2020).
   
   
3. The FTA will allow China to export over 9,500 items in terms of tax-free to Cambodia in the upcoming years. In that case, Cambodia will face a challenge due to Chinese cheaper products will beat local goods and lead to a trade imbalance for the Kingdom (Amarthalingam, 2020).
   
   
4.  According to analysts there is no clear sign the FTA will have the desired effect, doesn’t use the partial withdrawal of EBA for Cambodia to make an excuse to join trade pact with China, and as seen that the vast majority of Cambodia’s exported products to China are already allowed without paying taxes since it is one of ASEAN member that benefits from ASEAN-Sino Free Trade Area. For instance, the free trade pact increases tariff-free trade to an additional 340 products, including pepper, dried chili, cashew nuts, garlic, honey, and seafood products. In addition, the narrative advanced by the Royal Government of Cambodia and its supporters is that the FTA will propel Cambodia to diversify its export-driven economy yet at all the attention of the trade pact and its only clear benefits lie in expanding Cambodia’s agricultural exports (David, 2020).

IV. Conclusion and Recommendation

        It is the right time for Cambodia to seek the Free Trade Agreement with China while two Western countries have considered a partial withdrawal of preferential treatments to the Kingdom through the Everything but Arms (EBA) and Generalised System of Preferences (GSP) over violations of human rights and democracy basics, respectively. Even though this trade deal will not make up for that undesirable effect, it’s the right choice for Cambodia to protect its neutrality and find another way to reboot the economic growth after suffering from the trade preferential loss and being hard hit by the post-pandemic. Thus, the Royal Government of Cambodia has negotiated with other big economic countries for Free Trade Agreements such as South Korea and India, to name a few. By doing so, Cambodia will enjoy its economic growth when all these agreements enter force.

        From my own account, I would suggest that the Royal Government of Cambodia should enhance and improve existing law investments to be more convenient and attractive for a variety of Foreign Direct Investments (FDIs) to invest in Cambodia to create more jobs and provide income for local individuals. Cambodia gets on the right track to solve its economic downturn by looking for more export destinations to rebuild back better.

Reference

Amarthalingam, S. (2020, August 06). What’s the deal with Cambodia and China’s FTA? From The Phnom Penh Post: https://www.phnompenhpost.com/special-reports/whats-deal-cambodia-and-chinas-fta

Chhengpor, A., Socheata, H., & Narin, S. (2020, October 12). Cambodia Signs Free Trade Agreement with China. From VOA CAMBODIA: https://www.voacambodia.com/a/cambodia-signs-trade-agreement-with-china/5618112.html

David, H. (2020, August 4). China, Cambodia trade pact more form than substance. From ASIA TIMES: https://asiatimes.com/2020/08/china-cambodia-trade-pact-more-form-than-substance/

Devonshire-Ellis, C. (2020, October 15). The China-Cambodia FTA to Become Cambodia’s First Bilateral Free Trade Agreement. From ASEAN Briefing : https://www.aseanbriefing.com/news/the-china-cambodia-fta-to-become-cambodias-first-bilateral-free-trade-agreement/#:~:text=The%20China%2DCambodia%20FTA%20to%20Become%20Cambodia's%20First%20Bilateral%20Free%20Trade%20Agreement,-October%2015%2C%202020&text

European Commission. (2020, Auguest 2020 12). From Cambodia loses duty-free access to the EU market over human rights concerns: https://ec.europa.eu/commission/presscorner/detail/en/IP_20_1469

Heimkhemra, S. (2020, September 16). Cambodia’s free trade agreement with China. From POLICY FORUM: https://www.policyforum.net/cambodias-free-trade-agreement-with-china/

Menghour, L. (2020, January 28). Why form a free-trade deal between Cambodia, China? From Khmer Times: https://www.khmertimeskh.com/684249/why-form-a-free-trade-deal-between-cambodia-china/

Pisei, H. (2020, December 27). Ministry works on plan to win in trade. From The Phnom Penh Post: https://www.phnompenhpost.com/business/ministry-works-plan-win-trade