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Kingdom of Cambodia

Nation Religion King

Country Report:
Cambodias Trade Development
For the Course Implementation of the WTO Agreements (A) 13 May to 26 May 2012, Japan

Prepared by Mr. Chan Bonnivoit Chief for WTO Office Department of Notification and Legal Compliance Ministry of Commerce Tel: (855-12) 836 515 Fax: (855-23) 866 469 E-mail: bonnivoit@yahoo.com

Table of Contents

I. Introduction II. The Outline of Cambodias development

1. Main issues of Cambodias sustainable development 2. Cambodias Cooperation with WTO, WB and UNCTAD

WTO and Cambodia The Donors/international Organizations in promoting trade

V. Conclusion

I. Introduction Cambodia is a country in Southeast Asia of incredible beauty, with famous breathtaking temples, fertile plains dotted with rice fields, and a history unlike any other. The dominant religion is Buddhism, which places value on hospitality and kindness. Each year, Cambodia draws millions of tourists who come to enjoy the country's breathtaking sights and enter the walls of Cambodia's Angkor Wat - one of the Seven Wonders of the World. The Economy of Cambodia has seen rapid economic progress in the last decade. Per capita income, although rapidly increasing, is low compared with most neighboring countries. The main domestic activity on which most rural households depend is agriculture and its related sub-sectors. Manufacturing output is varied but is not very extensive and is mostly conducted on a smallscale and informal basis. The service sector is heavily concentrated in trading activities and catering-related services. Cambodia has reported that oil and natural gas reserves have been found off-shore. Cambodia has been classified by the United Nations as a Least Developed Country. It is a small country of about 181,035 square kilometers and a population of roughly 14 million. Cambodia's economy is continuing to recover from the 2008-09 downturns but annual growth is not expected to return to the highs of around 10% recorded in the years preceding the crisis. However, real GDP growth is expected to remain strong in 2011, at around 6%, as are Cambodia's garment and footwear exports, due partly to the EU's relaxed rule of origin on preferential tariffs for LDC exports to EU markets, effective 1 January 2011. There are also official plans to boost exports of milled rice as the government seeks to develop other sources of economic growth. With GDP per capita at around US$790 in 2010, Cambodia remains a very poor country. The poverty rate was estimated to have decreased moderately from 47% in 1993 to 35% in 2004 and to an estimated 30% in 2007, with rural poor comprising 90% of the total. Further reductions in the poverty level have been problematic since then due to the unexpectedly sharp rise in consumer prices, notably for foodstuffs, in 2008 and the effects of the global economic crisis. Cambodia is an open economy. Imports and exports combined are equivalent to about 65 per cent of its GDP. Exports account for a high proportion of formal employment, and a very high proportion of the growth of

employment. Cambodians working in export sectors are typically recruited from among the rural poor. Trade, employment and poverty reduction are thus tightly linked in Cambodia, and trade policy is an integral and central element in the Royal Governments efforts to promote development and improve living standards. Reflecting this, the Royal Government has identified trade as a priority area. Cambodias recent memberships to the Association of South-east Asian Nations (ASEAN) and the World Trade Organisation (WTO) also require economic strategies, which are more adaptable to the changing environment. All these changes also demand a policy framework that will provide flexibility for market players and, at the same time, require the least regulatory intervention, stable institutions to enforce contracts and property rights, and enhance the predictability, transparency, and accountability of state actions.

II. The Outline of Cambodias development II. 1 Main issues of Cambodias sustainable development With the assistance from the ADB, UNEP and the Norwegian Ministry of Foreign Affairs the final draft of the National Sustainable Development Strategy (NSDS) was presented for submission to the government for approval in 2008. The three overall goals of the strategy give direction for the future development of Cambodia. They are:

People's wellbeing and social development Sustainability of the national resources and environment Sustainable economic sector and infrastructure

The vision and overall goals for sustainable development have to be integrated into all policies, plans and projects of the various sectors, and in the daily life of all Cambodians. Sustainable development is a mission for every person in the country.

For people's wellbeing and social development the following goals are proposed:

- Poverty alleviation and food security - Good health - Well educated people - Gender equality - Zero victims of landmines and UXOs

In order to ensure environmental sustainability into the future, the following environmental quality objectives (goals) are proposed for Cambodia to be achieved within one generation (2030): - Productive land resources - Rich forest resources - High quality ground and surface water resources - Rich fish resources - Functional wetlands - Sustainable marine and coastal environment - Rich biodiversity - Limited influence on the climate - Protected ozone layer - Clean air - Nontoxic environment - Good living environment - Efficient use of nonrenewable resources - Efficient use of natural resources and limited waste generation - Efficient energy production

- Limited impact from natural disasters

In order to ensure the development of sustainable economic activities and infrastructure following goals have been proposed: - Sustainable land use and agriculture - Sustainable forestry - Sustainable water resources management - Sustainable fishery - Sustainable mining - Private sector and sustainable business development - Sustainable tourism - Sustainable transportation - Sustainable energy - Sustainable water supply and sanitation - Solid waste management

The national poverty headcount fell from 39 percent in 1994 to 30.1 percent in 2007. Urban and rural poverty rates likewise decreased, although poverty levels remain higher in rural areas. Income disparities between the rich and the poor increased during the same period, with the Gini coefficient derived from national consumption data rising from 0.35 to 0.43.

Rice is mostly grown to meet domestic consumption and market demand. Annual growth in production is a result of the expansion in the cultivated area rather than improvement in productivity. Largely delineated by access to irrigation, dry season rice farming constitutes only about 14 percent of total rice cultivated area even though dry season yields are higher. After

rice, fish is the second staple food with fish captures providing 75 percent of national dietary protein. However, the current degradation of wetlands and associated habitats compounded by effects of climate change, as well as hydrological changes due to developments such as hydropower dams, will likely challenge the sustainable management of fisheries resources and result in declining fish stocks. Forests are critical for regulating the environment, while forest resources are important for sustaining livelihoods though they no longer provide as many benefits as they used to due to deforestation. Unpredictable changes in climatic conditions are detrimental to agricultural production, especially rice farming. Deforestation, drought, flood and cyclone damage human lives, assets and production.

FDI stock between 1993 and 2010 reached USD5.58 billion, accounting for 34 percent of total private investment, or an annual average of 5.4 percent of GDP. FDI in Cambodia, however, remains low compared to its ASEAN neighbours. The World Banks Doing Business Survey has identified governance and corruption as the biggest obstacles to the growth of private business (World Bank 2010). The other major constraints were crime, theft and disorder, barriers to entry and competition, regulatory policy uncertainty, and weaknesses in the judiciary, custom and trade regulations, and tax administration. Insufficient infrastructure is also a major issue in enhancing the countrys competitiveness and growth (WEF 2011). Road transport remains embryonic and inefficient. Despite a significant upgrading programme, the railway system is still in poor shape with little traffic demand. While the effectiveness of ports has improved, the cost of shipping remains high. Power supply is costly, inadequate, and to some extent unreliable. Telecommunications coverage remains limited.

II. 2 Cambodias Cooperation with WTO, WB and UNCTAD Cambodia became a member of WTO on 13 October 2004, 30 days after it notified WTO that its Parliament has ratified the protocol. Cambodia, along with Nepal, were the first (and only two) least-developed countries (LDCs) to have succeeded in gaining accession to WTO since its transformation from the General Agreement on Tariffs and Trade (GATT) in 1995. Like their trading partners, Cambodia views their participation in the multilateral trading system as a means of integrating into the global economy and maximizing their

benefits from international trade. However, achieving this depends on supportive terms of accession. As part of its economic strategy to increase export revenues, Cambodia, like other countries knocking at the door of WTO, wants to secure the benefits derived from membership. But skeptics have questioned whether Cambodia will really benefit from entering WTO. They have cited the situation of the 30 LDC members of WTO. Despite their membership, they have been unable to secure trade opportunities commensurate with their development needs. Given the length and difficulty of the accession process it is surprising that so many members want to enter WTO. However, in the case of a poor country like Cambodia, accession is seen as a necessary means to achieve economic growth. In the words of the Cambodian chief negotiator: In a time of harsh and fierce global competition, the survival of our country depends on our ability to capture the right opportunities and at the right time. We believe the entry to the WTO is such a case. According to UNCTADs three pillars of work, namely research and analysis, technical cooperation and consensus building, there is no doubt to say that UNCTADs delivery of services was effective in the past and UNCTAD was rich of expertise in the areas of trade, investment, competition policy, etc. which could be used to advise member states. Cambodia has extensively enjoyed these services during the WTO Accession negotiation and seen their effectiveness. A number of projects which includes Train-for-trade and competition policy are still being implemented in Cambodia. The reform agenda ranging from investment, trade facilitation, custom valuation, competition policy and WTO notifications are still under discussions in various established working groups of the Royal Government of Cambodia. Cambodia needs assistance and advice from UNCTAD in these areas. As of December 31, 2011, World Bank loans and grants to Cambodia was over $369.9 million for 13 active projects. The portfolio is concentrated in governance, transportation, electricity, water supply, rural development, human development, trade facilitation, and public expenditure management. The World Banks estimates suggested that Cambodia has achieved the Millennium Development Goal (MDG) of halving poverty by 2009. However, despite this remarkable progress, rural poverty remains a challenge, with 92 percent of the poor residing in the country side. III. WTO in Cambodia The RGC applied for accession to the World Trade Organization (WTO) in October 1994. At its meeting on 21 December 1994, the Preparatory Committee for the WTO established a working party to examine the application of the Government of Cambodia to accede to WTO under Article XII of the Marrakesh Agreement establishing WTO.

Cambodia submitted, on 21 May 1999, its Memorandum on the Foreign Trade Regime to the Accessions Division of WTO, based on which four main trading partner countries submitted a set of 179 questions. Cambodia completed answering the questions and submitted them to the WTO secretariat on 8 November 2000, opening the way for convening the first working party, which took place on 22 May 2001 and started at the same time the first round of bilateral negotiations with some interested members. Motivated by these early successes Cambodia committed itself to an aggressive accession agenda with the second and third working party meetings held in 14 February and 14 November 2002 respectively. At the third working party the focus was on the review of the Factual Summary. Cambodia returned to Geneva for the fourth working party in 16 April 2003 to review the accession report. An informal working party was held on 26 June 2003 to review the state of play of bilateral negotiations and focus on substantive discussions on a second version of the working partys draft accession report. The conclusion of the informal working party opened the way for the working party chairman to set the timetable for the formal final working party for 22 July 2003. Cambodia submitted, on 22 July 2003, its acceptance of the terms and conditions of membership set out in the accession protocol, which was approved by the Fifth Ministerial Conference on 11 September 2003 and signed by Cambodia subject to ratification. Ratification of this protocol was made by the National Assembly and the Senate on September 2004 following the formation of the new Royal Government of Cambodiaafter political negotiations lasting 1 year. For coordinating the process of this accession into WTO, Ministry of Commerce of Cambodia established the WTO Office in 1997 to handle this international economic integration of Cambodia. Since his establishing the WTO Office maintains its Offices name and the basic function dealing with the WTO affairs, although some structures of the Ministry, in particular some Departments and Offices, were reconstructed and changed their name in 2006. After removing from ASEAN and International organization Department, the WTO Office is now one of the 4 Offices working under the Notification and Legal Compliance Department and has the responsibility to promote the smooth implementation of Cambodia's commitments and obligations under WTO, including the effective exchange of information between Permanent mission of Cambodia in Geneva on Market Access, NAMA, Agriculture, and other WTO agreements, including Dispute settlement and other related issues. Through developing strong network with other line ministries and collect updated information on trade negotiation under WTO and other forum, the WTO Office is also responsible for ensuring the effective negotiation relating to WTO issues and following up all developments of negotiations in Geneva including position of other members on all WTO related issues. In addition, the WTO Office has a significant role in building up the trade capacity for the concerned officials and stakeholders.

Base on my experiences and my daily fulfilled jobs and duty I believe that after the accession into WTO Cambodia continually requires policy action in two areas: The first area should be taken to bring Cambodias legal and institutional framework into conformity with WTO rules. Second, Cambodia can be called upon to make commitments on market access in the areas of trade in goods and trade in services. In each of these areas, Cambodias economic integration into the world trading system will provide both opportunities and challenges as following: 1. The Legal and Institutional Framework At the time Cambodia becomes a member of the World Trade Organization, Cambodia has to undertake firm commitments to bring her legal framework and administrative procedures into conformity with WTO Agreements. Cambodia expects to make considerable concrete progress in this direction, and to commit to specific work-programs and time frames for completing the process. Cambodia has for some time been seeking to reform its legal system to bring it into line with the requirements of a modern market economy. WTO accession can be seen as a way of organizing and accelerating this process, and of ensuring that international norms are fully reflected in Cambodias own legal framework governing business and trade. It will thus be of great help to Cambodia in accelerating economic reform, and ensuring that through reform, in the near future, the legal framework and administrative procedures of Cambodia will be consistent with international rules both in theory and in implementation. 2. Market Access into the World Market Currently, the market size of Cambodia is relatively small with nearly 14 million consumers, 32 percent of which are living below the poverty line. Of course, we have access to the markets of our ASEAN neighbors, which consist of 500 million consumers, but economic conditions and products are alike and these create some difficulties for Cambodia to export as much as possible to this market. Therefore, it is necessary for Cambodia to look at the world market as a whole to find better comparative advantages for its products, especially in the US, EU, Japanese, Korean and Africa markets. The Most Favored Nation Principle among members created an important factor for Cambodia to attract foreign direct investment. 3. Positive Effects from the Agreement on Agriculture Since Cambodia is an agricultural economy, 80 percent of its labor force is employed in the agricultural sector. The agreement on agriculture provided many benefits to least developed countries such as Cambodia. The agreement required member countries to eliminate non-tariff barriers, transfer them into tariff barriers and gradually reduce them. As a Least Developed Country, Cambodia may maintain import tariffs on agricultural products at higher levels through accession negotiations. This factor provides a better possibility for Cambodia to expand its export agricultural products and attract investment in this area as well. 4. Export Quota on Textile Products is eliminated

The agreement on textile and clothing requires all members to eliminate quotas imposed on export textile products by 01 January 2005. At that time Cambodia will no longer be concerned about export quotas to the U.S. and E.U., and we should pay attention to the competition capacity of the private sector in this area. From the above observations we can say that the membership of Cambodia in the World Trade Organization is very important for Cambodia to accelerate the economic development process and to raise the living standards of people through market access to the world market. 5. Good Dispute Settlement Mechanisms With suitable dispute settlement mechanisms, it will ensure and support small and vulnerable economies such as Cambodia from any violation made by big countries due to the fact that dispute settlement mechanisms in the WTO are very crucial in providing security, safety and predication to the economic issues of member countries. This mechanism is also considered an important factor in upgrading the rights and obligations of members under the agreements. This factor is also very important for Cambodia to ensure current investment and attract more foreign direct investment into the country. 6. Special and Differential Treatment WTO Agreements provide a Special Treatment to least developed countries with longer time to prepare to implement WTO Agreements and technical assistance to upgrade the commercial legal framework. Developed countries commit to provide opportunities for goods from least developed countries to flow into their markets with better terms and 0% tariff rates. The European Union at the LDCIII Conference in Brussels declared the principal of everything but arms, which will provide more opportunity for least developed countries on market access. This is a very important factor for Cambodia to attract foreign direct investment. 7. Impact on the National Budget Some challenges may arise from globalization. One immediate impact could be seen on the national budget. Binding tariff rates are one obligation that Cambodia has to fulfill in the negotiation process of accession. Within this context, main trading partners will request that Cambodia bind all tariff rates, some of which will have to be bound at levels below those currently applied. A key concern is how this can be managed without endangering the growth of budget revenues, taking into account the ongoing need for fiscal reform and for a broadening of the tax base. Ministrys Organization Figure


Notification and Legal Compliance Departments Organization Figure

IV. The Cooperation by other Donors/international Organizations Cambodia became one of the first countries to pilot the Integrated Framework for Trade-Related Technical Assistance to Least-Developed Countries, which had been established by the WTO, World Bank, IMF, ITC, UNCTAD and UNDP. In 2001, under the guidance of the Government, a World

Bank-led team conducted a Diagnostic Trade Integration Study for Cambodia. In 2005, the OECDs Paris Declaration on Aid Effectiveness endorsed the concept of the sector wide approach, or SWAp, to harmonize donors practices and increase the effectiveness of their aid. In 2006, Cambodia and its development partners agreed to adopt a SWAp for the trade sector and the TRADE Project took on the task of updating the 2001 study. This produced Cambodias 2007 Diagnostic Trade Integration Strategy (DTIS 2007), which now forms the heart of the Trade SWAp. The strategy identifies 19 products and services with export potential, including garments, footwear, rice, cassava, rubber, fish, cashew nuts, silk, soybeans, corn, wood products, light manufacturing, and tourism. The strategy also pinpoints promising markets in Asia, the Middle East, the former Soviet Union countries and Africa. The Trade SWAp consists of three sub-programmes, or pillars, supported by mixed teams of government officials, private sector representatives and development partners. Pillar 1 is cross-cutting reform of laws and institutions to promote trade development. Pillar 2 is development of export supply capacity. Pillar 3 is development of human and institutional capacity for managing the Trade SWAp. Other Donors and international organizations supporting SWAp are UNDP, ADB, IFC, ITC, EC, DANIDA, GIZ, AFD etc. V. Conclusion During the period since accession, Cambodia has made considerable progress in meeting its WTO obligations and in using the WTO trading system to foster growth, development and poverty alleviation. Efforts in both areas will be intensified in the period ahead. Recent and prospective increases in aid for trade will allow Cambodia to advance more rapidly to meet fully its WTO obligations, and, more generally, to accelerate legal reform. The Royal Government is fully committed to putting in place a modern, transparent and predictable legal framework for business that fully reflects international norms and best practice. The inadequacy of physical infrastructure, in particular transportation infrastructure, is at the heart of the difficulties faced by Cambodian producers in competing in world markets. With the support of development partners, Cambodia has been making rapid progress in improving its roads, bridges, ports and railroad. These efforts will continue and intensify in the period ahead. A lowering of transport and electricity costs is central to any effort to improve the competitiveness of the Cambodian economy. These, and other specific policies of the Royal Government, are designed to foster and support a vigorous and competitive private sector, and to ensure that Cambodia becomes a highly attractive destination for international investment.

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