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Fostering Trade through Private-Public Dialogue

Expert Meeting on Regional Integration in Asia

REPORT TO CONTRIBUTE
ITC EXPERT MEETING
28-29 March 2007 NEW DELHI

PREPARED BY CHAN BONNIVOIT


WTO OFFICE
ASEAN AND INTERNATIONAL ORGANIZATIONS DEPARTMENT
MINISTRY OF COMMERCE
CAMBODIA
A. Introduction
Since liberation day on January 7, 1979, the government of Cambodia has been
strenuously involved in rehabilitation efforts. In the early 1980s, Cambodia experimented with a
centrally planned economy. Realizing the vast potential provided by the world community and FDI,
Cambodia embraced a market-based economic system in the mid-1980s. Cambodia has never
been hesitant to join regional and global communities. As a result, it has become a member of
many regional and global organizations, such as ASEAN, the Greater Mekong Sub-region, and, at
the global level, the WTO. All these initiatives have meant considerable structural adjustment and
reform on Cambodia’s part.
The IMF studies conducted over the last few years have concluded that Cambodia’s
macro-economic performance has been relatively good since 1999. Private sector activities have
developed, in particular thanks to easier access for Cambodian textile products to American and
European markets and the development of tourism. From 1999 to 2003, the annual growth rate
was between 6 and 7%. The contributions to growth of the various sectors have however been
uneven: the agricultural sector has been much more erratic and in 2000 and in 2002 saw a fall in its
added value because of the reduction in the arable surface area. This spectacular growth was also
made possible by sharp increases in trade and investment. Economic growth continually rose to
9.5 percent in 2004 and accelerated to 13.4 percent in 2005 despite negative external
developments such as higher oil prices, terrorism, and the spread of epidemic diseases.
Political stability, accompanied by greater investor confidence, has provided the basis for
this robust growth performance, which has been driven mainly by the superb growth in the
agricultural sector, the expanding tourism sector, continued robust garment exports, and increased
construction activities. The growth rates in the agricultural sector, industrial sector, and services
sector have generally been quite robust, from 11.7 percent, 12.1 percent, and 2 percent,
respectively, in 2003 to 1.1 percent, 16.7 percent, and 10.1 percent in 2004 and 17.3 percent, 13.3
percent, and 9.4 percent in 2005, respectively.
The value of total trade has also risen significantly. The value of exports reached almost
US$3 billion in 2005, while the value of imports reached almost US$4 billion. The value of FDI rose
substantially, from US$74 million in 2003 to US$381 million in 2005. The increase in trade and
investment reflects the growing integration of Cambodia in the world trading system. Cambodia’s
trade with the world has also increased substantially in the last decade. Trade has been the main
source of economic growth in Cambodia. The normalization of relationships with EU countries and
the United States that culminated in trade agreements has been widely hailed as a success.
Cambodia has gained jobs and investments, along with better working conditions for labor. After
Cambodia gained access to the European and U.S. markets, its garment exports increased in
value from only around US$20 million in 1995 to almost US$2 billion in 2005. Growing employment

Chan Bonnivoit, MSc Agr., Ministry of Commerce of Cambodia 2


in the garment and textile sectors has been a major factor in stabilizing the economy. These
sectors currently employ 280,000 skilled and unskilled workers.

B. Cambodia Trade Facilitations


Customs Valuation
Cambodia is in the process of reforming its customs regime through a five year (2003-
2008) reform and modernization program to streamline and improve the effectiveness of customs
operations and to facilitate trade. With assistance from the International Monetary Fund (IMF), a
revised Law on Customs has been drafted and is awaiting National Assembly approval. As part of
its WTO accession commitments, Cambodia will implement the WTO Customs Valuation
Agreement by January 2009.
Although Cambodia has made some progress in reform efforts, customs procedures
remain complicated. Both local and foreign businesses have complained at the present that the
Customs and Excise Department generally engages in practices that are non-transparent and that
often appear arbitrary and irregular. Importers frequently cite problems with undue processing
delays, excessive paperwork and formalities driven by excessive discretionary practices.

Rules of Origin
Cambodia had not yet established regulations on rules of origin and intended to introduce
preferential rules of origin as required by its membership in ASEAN. But Cambodia was requested
by the Members of WTO that the Cambodia’ s law and regulations on rules of origin would be in
conformity with the provision of WTO Agreement on Rule of Origin and would incorporate the
requirements of Article 2(h) and Annex II, paragraph 3(d), i.e., that for non-preferential and
preferential rule of origin, the customs authority would provide upon the request of an exporter,
importer or any person with a justifiable cause an assessment of the origin of the import and outline
the terms under which it would be provided, and that any request for such an assessment would be
accepted even before trade in the goods concerned began.
Until now, importers were required by the Government of Cambodia to indicate a product’s
origin in the import declaration for non-preferential trade. The requirement was applied for
statistical purposes only. However, Cambodia intended to comply fully with the provisions of the
WTO Agreement on Rules of Origin in the application of preferential and non-preferential rules of
origin and would be to do so after enactment of the new Customs Law and its implementing
regulations. In particular, the requirements of Article 2(h) and Annex II, paragraph 3(d) of the
Agreement would be established in Cambodia’s Law on Customs from the date of its promulgation,
or if necessary, by government degree.

Chan Bonnivoit, MSc Agr., Ministry of Commerce of Cambodia 3


Pre-shipment Inspection
Cambodia maintains a pre-shipment inspection system. Society General de Surveillance
(SGS) may inspect the quality of any goods shipped into the country. In practice, imports are
admitted into Cambodia with little reference to standards or rigorous inspection. The present pre-
shipment inspection contract applied to consignments valued at US$ 4,000 or more (FOB).
Goods worth less than US$ 4,000 were valued by the Cambodian Customs and Excise
Department (some remote customs checkpoint were authorized to make valuation decisions for
imports up to US$ 1,200). The fee for pre-shipment inspection amounted to 0.80 % of the FOB
value of the inspected goods, except for bulk petroleum products (US$ 0.30 per metric ton).
Importers failing to secure pre-shipment inspection, and thus necessitating goods to be inspected
by custom officials at the border checking point, incurred a penalty equal 7 % of the CIF value of
the imported goods.
Cambodia has also a Dispute Settlement Working Group that respond to resolve promptly
claims or disputes arising from the implementation of pre-shipment inspection. But from the date of
the Cambodia’s Accession into WTO the Government of Cambodia takes full responsibility to
ensure that the operations of the pre-shipment inspection companies meet the requirements of the
WTO Agreements, including the establishment of charges and fees consistent with Article VIII of
the GATT 1994, due process and transparency requirement of the WTO Agreement (Article X of
the GATT 1994), the provisions of the Agreement on the Implementation of Article VII of the GATT
1994 and the Agreement on Pre-shipment and Inspection.

Import Licensing Procedures


Cambodia imposed no licensing requirements nor quantitative restrictions or prohibitions on
imported agricultural products. Sanitary and Phytosanitary certificates were required for the
importation of agricultural products.

Implication of Cambodian trade facilitation for regional Integration


Cambodian harmonization of trade facilitation will be required a huge investment regarding
to ensuring some standards and making some commitments on faster custom clearance. But the
losses that business suffers through delays at borders, complicated and unnecessary
documentation requirements can be estimated very higher. Therefore, harmonizing and reforming
of Cambodian trade facilitation can gain relevance for reducing the cost of regional and
international trade.

C. Investments in Cambodia
Investment Climates

Chan Bonnivoit, MSc Agr., Ministry of Commerce of Cambodia 4


In addition to the political stability and the sound macro economy, Cambodia's membership
in the WTO and ASEAN economic integration allow Cambodia to have favorable access to the
international market. Overall investment environment is positive. With a view to reflecting opinions
from the private sector including foreign investors on the government policies of Cambodia, the
Government-Private Sector Forum is carried out once every 6 months, with participation of H.E.
Samdech Hun Sen, Prime Minister of the Kingdom of Cambodia. This forum consists of eight
working groups, and decisions made by the forum are regarded as decisions made by the Council
of Ministers meetings.
The Cambodian government gives priorities to the following seven areas: (1) agricultural
and food processing industry (especially raw materials for rubber, organic crops, and bio fuel), (2)
development of infrastructure (development of such infrastructure as seaports and airports by
private capital), (3) electricity, (4) labor-intensive, export-oriented industries (shoe and garments
industries), (5) tourism, (6) human resources, as well as (7) minerals including oil.
The legal system related to investment has been consolidated in Cambodia in recent
years, and most of the conditions under such laws and regulations are liberalized to the investors.
Except for land ownerships (however, land lease is permitted up to 70 years for foreigners as well),
the conditions are non-discriminatory for both domestic and foreign investors. Neither
nationalization nor regulations permitting sales price and other requirement without the consent of
investors are in practice. There are various preferential treatments to investors, such as import-
export tax exemptions.

Investment Policy to attract the FDI


In order to attract FDI, the government has strengthened the country's legal framework,
bolstered its institutions and liberalized the relevant regulations, in ways that are conducive to
private sector investment and business activities in Cambodia. The 1994 Law on Investment
provides similar treatment to foreign and domestic investors alike, with the exception of the issue of
land ownership, as set forth in Cambodia's constitution. Even in this area, the regulations are
generous, with foreign investors able to lease land for a period of up to 70 years, with the possibility
of renewal thereafter.
The government provides investors with a guarantee neither to nationalize foreign-owned
assets, nor to establish price controls on goods produced and services rendered by investors, and
to grant them the right to freely repatriate capital, interest and other financial obligations. Investors
can set up 100% foreign-owned investment projects and employ skilled workers from overseas, in
cases where these workers cannot be found in the domestic labor force.
In addition, the Law on Investment and its related Sub-Decree grant generous incentives to
investors, especially those concerned in investment projects geared towards exports. Attention is
also accorded to private investment in Build-Operate-Transfer (BOT) projects, and private

Chan Bonnivoit, MSc Agr., Ministry of Commerce of Cambodia 5


investment in infrastructure, including public utilities such as electricity, water supply and
telecommunications.
In order to facilitate investors in their applications for investment approval, the government
has established an institution to oversee investment policy and strategy called the Council for the
Development of Cambodia (CDC). The CDC, being the highest decision-making level of the
government on private (CIB) and public (CRDB) investments, is chaired by the prime minister and
composed of senior ministers from related government ministries. The Cambodian Investment
Board (CIB), the operational arm of the CDC, has been designated as the etat major and one-stop
service of the government, responsible for the evaluation of investment proposals and projects
from all investors, both individual and corporate.
Cambodia has obtained "Generalized System of Preferences (GSP)" and "Most Favored
Nation (MFN)" status from its major trading partners, including the European Union, the USA,
Japan, Canada and Australia.
Apart from facilitation and support at the national level, attention is also being given by the
government to opening up access to international sources of finance for private sector investment.
Cambodia is already a member of the IFC and MIGA, and is currently applying for membership to
the ICSID (International Center for Settlement of Investment Disputes). It has also signed
agreements with the ADB, providing private sector investors with the opportunity to obtain funding
for their investment projects from this international financing institution.
Cambodian-South Korea Investment Relations Cambodia signed an agreement with South
Korea to helping create a Cambodian stock exchange by the end of the decade. Other agreements
between the two leaders also included a slew of signings boosting trade ties, especially in the
areas of construction, industry, investment and infrastructure development as well as an agreement
for South Korea to build the IT network in Cambodia. Actually, the both Governments had also
discussed ways to offset a serious trade imbalance between the two nations by increasing
Cambodian exports to South Korea. But between aid and trade, South Korea is a major contributor
to the Cambodian economy.
Cambodia is a friendly adjacent nation of China. China established diplomatic relations
with Cambodia on July 19th 1958. The 2nd Prime Minister of Cambodian visited China from July
18th to 23rd in 1996, and in the July 19th, the two sides signed Trade Agreement and Investment
Protection Agreement. Since 1992, bilateral trade volume has seen a continuously rapid
increasing. In the year 1997, Sino-Cambodian trade volume hit 120 million USD, increasing by
71.8% comparing to the year before. In 1998, the number reached 162 million USD, another
increase of 34.1%. The bilateral trade volume of 1999 is 160 million USD, dropping 1.1%
comparing to the year before, of which China's exportation accounts for 104 million USD, dropping
by 8.2%, importation 55.79 million USD, increasing by 15.8%, comparing to the year before.

Chan Bonnivoit, MSc Agr., Ministry of Commerce of Cambodia 6


The possibility of Japan-Cambodia Investment Agreement was discussed. The importance
of legal stability and predictability provided by such agreement was stated. It was pointed out that a
possible investment agreement should include the provisions on investment liberalization as well
as the provisions on investment, which are included in the Investment Chapter of Economic
Partnership Agreement (EPA) that Japan had signed with other countries in recent years.

Impacts on the regional level


Why invest it in Cambodia? It is the question concerning the impacts of the investments in
Cambodia on the regional level. The short answer is the large market, low wages, a liberal
economy and one of the world’s great assets for tourism. The large markets are a function of
location, not the domestic market of Cambodia but the markets of the Association of South-East
Asian Nation (ASEAN). ASEAN have a total population of around 550 million and participate in a
free trade area (AFTA) that will become full-fledged by 2010, with tariff rates of 0-5%. ASEAN is
also negotiating a free trade area with China, which might also be in place by 2010 which will
create the trading block of 1.7 billion people, and may be doing so with India soon. Also deserving
mention are the rich markets of Europe and North America, to which Cambodia, as a least
developed Country, has preferential access. As for the liberal economy, Cambodia has one of the
most open economies in Asia, ranking on a par with Japan, and the most open economy among
the world’s 49 LDCs. Its low-wage, trainable labor force is of course an asset in an increasingly
competitive world economy and, when it comes to tourism, the extraordinary monuments of Angkor
Wat near Siem Riep already ensure the Cambodia is attracting tourists with an annual growth rate
of 30% plus.
So when all is said and done, the FDI can be profitable not only in Cambodia, but from the
Countries establishing the free trade area mentioned above. Although the reverse benefit gained
from FDI among Cambodia and other Countries in the region is not full reciprocally, but it can
minimize Cambodia social and economical difference with these Countries and can accelerate the
integration’s process in the region.

D. Cambodia Production Synergies and the regional Integration


Perceived benefits of integration
Integration will also provide exporters with access to raw materials and intermediate inputs
at world market prices. Cambodia has always recognized this, and, under the Law on Investment,
has provided export industries with duty-free access to imported capital and intermediate goods
and raw materials. For example, membership in ASEAN allows Cambodia to import fabrics from
ASEAN countries to produce garments for the EU market. When Cambodia was not a member of
ASEAN, it had to ask for derogation from the EU every year in order to import fabrics to produce

Chan Bonnivoit, MSc Agr., Ministry of Commerce of Cambodia 7


garments for the EU market so that it might satisfy the requirements of the Rules of Origin under
the EU generalized system of preferences scheme.
Cambodia’s textile and garment industry well illustrates the role of exports and investment
in generating employment and helping to reduce poverty. More than half the current 280,000 skilled
and unskilled jobs in the industry have been created during the past five years, making the industry
by far the largest source of job growth during this period. The workers are generally from low-
income families in the countryside, and their earnings usually flow back to these families in the
countryside, where they support rural development. Garment exports have also helped manage the
balance of payments; they rose sharply from around US$20 million in 1995 to almost US$2 billion
in 2005.
The agricultural sector also stands to benefit greatly from integration. The productivity of
the agricultural sector in Cambodia is considered low. Relative to neighboring countries,
agricultural yields are much smaller. However, through economic integration, the small yields might
also be turned into a good opportunity to enhance productivity in the sector. Because of the vast
area of cultivation and the huge untapped potential in all agricultural crops, economic integration
would open up foreign markets to Cambodian agricultural products, while also obliging Cambodian
farmers to become more competitive so as to succeed in local and foreign markets.
To be able to export and generate employment, Cambodia needs foreign investment
because adequate savings, skills, and technology are not available within the country. Cambodian
firms must therefore cooperate with foreign firms to get the benefits of what they are missing at
home. Foreign investment has an important role in upgrading technology levels and transferring
commercial and industrial knowledge. Cambodia has much to learn from the foreign firms that
know foreign markets the best and possess the technology, managerial experience, and marketing
channels needed to export successfully.

Negative impacts of integration


Similar to other countries undergoing integration, Cambodia is also facing several
problems. Rapid economic change is altering social relationships, with some positive and some
negative effects. Even though the opportunities provided by integration are substantial, Cambodia
does not possess a sufficiently robust social framework to seize on those opportunities fully. It
continues to experience the many social ills, such as drug use and crime that are often attributed to
globalization.
Integration will likewise mean that, in future, Cambodia will not be spared from the shocks
emanating from the international financial and commercial systems. For example, the Asian
financial crisis resulted in a sharp drop in FDI in Cambodia. The ratification of trade agreements
between other countries will also have an impact on Cambodia, for example, the United States’s
and Vietnam Trade Agreement. The end of safeguard measures by the EU and the United States

Chan Bonnivoit, MSc Agr., Ministry of Commerce of Cambodia 8


on textile products from China in the future will also pose a threat to the Cambodian garment
sector.
One of the biggest challenges relates to the rising inequality resulting from the differential
impact of integration on segments within society. Those people who are not able to seize the
opportunities provided by integration are being left out of the process. With its sustained high
growth over the last decade, Cambodia has reduced poverty incidence from 47 percent in 1993-94
to 35 percent in 2004. The peace dividend in the aftermath of the end of civil strife and the low
initial conditions prevailing in the economy have enabled Cambodia to sustain high growth during
the early stages of development without severely straining capacity. This growth has generally
been unbalanced, centered in Phnom Penh and other urban areas, and narrowly based, driven as
it is by such activities as garment making, construction, and tourism.
Cambodia is experiencing considerable inequality in income distribution: the Gini
coefficient was 0.42 in 2004. If the situation worsens because of integration, the social
consequences will be heavy. This is the most pressing issue in Cambodia today. We have enjoyed
economic success because of a high growth rate, but we have not been able to reduce inequality,
and this may threaten stability and future growth. Cambodia is considered to suffer from the
greatest inequality in income distribution in the region. Much of this has been due to growing
differences within the rural population, with considerable variation in the rate and distribution of
growth in different localities, in the security of land tenure, in remoteness from markets and
services, and in the lack of productive assets.
Economic integration is one of the major causes of landlessness in Cambodia. As the price
of land has risen because of the increase in foreign investments and the growing demand for land
for hotel and factory construction, farmers have sold their lands cheaply. Moreover, because they
lack knowledge about how to manage this sudden financial gain, the money has vanished quickly,
and many farmers have become landless and poor. The proportion of landless rural households
increased from 13 percent in 1997 to 16 percent in 1999 and 20 percent in 2004. The rise in
landlessness has been relatively rapid given that land distribution was more or less equal when
land was formally allocated to households in 1989. The problem has been exacerbated by the
related problem of unclear property rights (as many as 80 percent of rural households that owned
land were without titles to the land in 2004) and the ambiguous legal status of land ownership. The
rising value of land in many parts of the country has complicated the issue. The result is an
emerging phenomenon of increasing landlessness juxtaposed with the existence of uncultivated
land. Realizing that this is not an easy problem to solve, the government has set up the Ministry of
Land Management, Urbanization, and Construction for the sole purpose of managing land,
clarifying land titling, and reviewing land concessions.
Finally, it is widely known that economic integration is accompanied by corruption. No
country has been spared this unfortunate activity. Integration exposes countries to corruption,

Chan Bonnivoit, MSc Agr., Ministry of Commerce of Cambodia 9


which contributes to deterioration in the business environment. Since Cambodia began integrating
with the world economy, we have experienced this phenomenon. Corruption definitely slows the
integration process because investors are afraid to pour money into a corrupt environment, which,
in turn, leads to slower growth in trade and other forms of integration. In the Cambodian case,
corruption has not had a strong impact on integration into regional and global communities. One of
the reasons for this is the fact that the government has been quite aware of the problem.
The integration of Cambodia into regional and world communities means that the country
must make commitments to reform so as to improve governance, the rule of law, and the
establishment of an appropriate regulatory environment. To achieve this, the government has set
up numerous mechanisms to tackle corruption, such as the Rectangular Strategy, which aims at
good governance, and various reforms, including public financial management reform, judicial
reform, and civil administration reform, along with the relevant joint working groups. Moreover, the
government has also set up the Government’s Private Sector Forum, in which the private sector
may meet with the government to express complaints and grievances that the government then
seeks to address.

E. Cambodia Service Sectors: Tourism Sector


Cambodia Tourism Sector
The tourism sector is also booming as improving security and political stability is attracting
a large number of tourists. The tourism industry is the country’s second-greatest source of hard
currency after the textile industry. More than 60 percent of visitor arrivals are to Angkor Wat and
Angkor Thom in Siem Reap, and most of the remainder to Phnom Penh. Other tourist hotspots
include Sihanouk Ville, Cambodia’s only port and developed coastal beach area. Cambodia’s
tourist market increased at 35 percent in 2005, in line with the country’s aim to triple tourism in the
next five years. Over 1.4 million tourists visited Cambodia according to the Ministry of Tourism,
from slightly over 1 million in 2005. The number of tourist arrivals is targeted to reach about three
million arrivals a year by 2010.
Tourism comes mainly from Korea, Japan, USA, France, UK, Thailand, China, etc.
Increased stability and security is credited for the jump, as well as government efforts to encourage
eco-tourism and visits to Cambodia’s historical sites, such as the World Heritage-listed Angkor
temples. Cambodia is aggressively promoting tourism and both in Phnom Penh and in Siem Reap
new hotels are going up. Cambodian, Thai, and to a lesser extent Western investments in travel
infrastructure are particularly large near Angkor Wat and the Khmer temple complexes. In general,
although service is still not up to most tourism-oriented country’s standards of friendliness and
efficiency, the hotel and tourism sector is definitely growing and improving daily. Hotels,
restaurants, and other food outlets are going up by the day in Siem Reap as the tourism industry
around Angkor Wat races to meet growing demand.

Chan Bonnivoit, MSc Agr., Ministry of Commerce of Cambodia 10


Regional Integration of Cambodia Tourism Service Sector
It is estimated that nearly 200 restaurants currently operate and cater to foreign tourists.
About 80 percent of food and beverage used in these hotels and restaurants are imported products
mainly from Thailand, Vietnam and Singapore. Almost 35 percent of hotel revenue is mainly
generated from food and beverage sale and an average meal cost per customer per visit is US$30.
The distribution of these imported food and beverage products supplied to hotels and restaurants
are supplied from Phnom Penh, where major importers/retailers are located. These importers are
bringing the products into Phnom Penh mainly from three sources: Thailand via road from
Aranyaprathet (Poipet), Vietnam via road/air to Phnom Penh, Singapore and Malaysia via sea
freight through Sihanoukville deep seaport.

F. Conclusion
Economic integration has been increasing, and the process is irreversible. It is difficult to
conclude a priori that integration is either good or bad for Cambodia. Much will depend on how
adroitly the process is managed. In any case, economic integration will definitely have both positive
and negative impacts. The positive impacts will have to be maximized, and the negative impacts
will have to be well managed if Cambodia is to benefit unequivocally from integration. The
government needs to maintain macroeconomic stability so as to create the proper conditions for
investment and savings, to push for outward-oriented policies to promote efficiency through
increased trade and investment, to promote structural reform to encourage domestic competition,
and to create strong institutions to foster good governance.

Chan Bonnivoit, MSc Agr., Ministry of Commerce of Cambodia 11

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