RCEP Commitments REF#6259

The Royal Government of Cambodia (RGC) has demonstrated a willingness to engage in foreign trade, as evidenced by the formulation of a long-term national trade strategy and its participation in various trade agreements. Cambodia’s Trade Integration Strategy Update (CTISU) 2019-2023 aims to ensure that the benefits of international trade continue to drive Cambodia’s rise away from Least Developed Country status and into middle income status, in the process upgrading its positions in the global and regional supply chains. In 2022, Cambodia exported products for a total value of USD 20.5 billion, and its imports were worth USD 29.9 billion.

A key component of the RGC’s trade strategy has been its adhesion to new trade agreements. The multilateral Regional Comprehensive Economic Partnership (RCEP) was signed in 2020. RCEP now constitutes the world’s largest trading bloc, comprising 10 ASEAN members (including Cambodia) and five other regional partners: Australia, China, Japan, India, Korea. It encompasses a population of 2.2 billion people (30% of the world) and USD 38.8 trillion (30% of the world’s GDP). The purpose of RCEP is to establish a modern, comprehensive, high-quality, and mutually beneficial economic partnership that will facilitate the expansion of regional trade and investment and contribute to global economic growth and development. By signing it, countries commit to open regionalism and global trade.

The benefits of RCEP are not so much on tariff reduction but on non-tariff measures to improve market access, such as commitments to simplify and harmonise Rules of Origin and its thresholds, simplify import-export procedures, remove barriers to trade and review phytosanitary standards. RCEP will indeed reduce or eliminate import tariffs on most industrial products, encompassing about 92% of all products across multiple key tariff classification codes. Still, since as many as 86 to 90% of categories of goods covered by RCEP already qualify for tariff elimination under existing ASEAN Free Trade Agreements (FTAs) with Dialogue Partners, RCEP will improve market access but not necessarily imply large tariff reductions for all parties.

For its part, Cambodia has received good trade preferences for its products under RCEP, which cover:

• Agricultural products, such as cashew nuts, maize, coconut, fresh mango, and banana;
• Processed agricultural goods including noodles, cakes, fish processing goods, cassava flour, package noodles, etc;
• Industrial goods including bicycles, garments, footwear, electronic components, electrical cables, etc.

Despite its active trade agenda, challenges for Cambodia lie ahead, which put into question the future sustainability of the country’s position in the world economy.

Cambodia’s export-oriented economy suffers from low diversification, both in terms of export sectors and destination markets. Sector-wise, most of the export revenue comes from garments and footwear. There has been in recent years a small shift towards higher value-added products in components and transport, but not enough yet to upset the main trend. In terms of geography, Cambodia still heavily relies on exports to the European Union and the USA, destinations which allow preferential trading conditions to the country under preferential trading schemes.

As much as these schemes allowed Cambodia’s export sector to grow and thrive in the last 10-15 years, helping develop the economy, in a few years Cambodia will graduate from LDC status to become a middle-income country, meaning it will suddenly lose most of the preferential trading conditions to key export markets. This is because existing trading schemes for the most part do not plan a transition period for Cambodian exports.

In practical terms, this means that in only a few years, unless conditions change, a substantial share of products exported from Cambodia to key export markets will see price hikes in accordance with higher costs due to new import tariffs that will kick in. Such added costs (assuming these will be absorbed by producers rather than end consumers) seriously jeopardise the competitiveness of Cambodia’s export industries, and require urgent action in the trade negotiation sphere from the RGC.

The RGC needs to implement an alternative trade agenda that can absorb the expected loss of trade preferences in key export markets.

Focusing on the most immediate opportunities, Cambodia has signed the RCEP but has still to implement most of its commitments under the agreement. These commitments make up several hundred pages of documents, including those relating to:

• Chapter 2 (Trade in Goods);
• Chapter 3 (Rules of Origin);
• Chapter 4 (Customs procedures and trade facilitation);
• Chapter 5 (Sanitary and Phytosanitary measures);
• Chapter 8 (Trade in Services);
• Chapter 12 (E-commerce).

Additionally, the RGC has to ensure in future bilateral and multilateral discussions with RCEP members that they also commit to implementing their share of agreements, as these commitments by foreign governments in key prospective markets – eg. Korea, China – will determine the outcome of enhanced market access for Cambodian exports.

The absence of an alternative trade negotiation agenda to one relying on preferential trading schemes to carry the export economy seriously risks undermining Cambodia’s current high levels of economic growth and development. Having no comprehensive trading alternative once Cambodia becomes a middle-income country, risks suddenly making a significant share of the country’s export industries uncompetitive as suppliers of products such as garment and footwear.

Producers in these sectors will consider leaving the country and transporting their factories over to other countries, either those still enjoying LDC status (eg. Myanmar) or to other more mature economies (eg. Vietnam). The loss of these industries would be a significant blow to Cambodia’s ambitions of scaling up the global value chains and risks setting the country back for years to come.