June 7, 2023
PhnomPenh – The Asian Development Bank (ADB) and UN Conference on Trade and Development (UNCTAD) have recommended Cambodia pursue new free trade agreements (FTA) and act promptly to enact the necessary reforms to deal with the challenges that may arise when it exits the Least Developed Country (LDC) group.
The Kingdom fulfilled the three LDC graduation requirements for the first time in 2021, two decades after being added to the category, and intends to make its exit “as early as 2027”, the institutions said in a statement.
In 2021, Cambodia’s gross national income (GNI) per capita and human assets index (HAI) respectively came in at $1,382 and 74.2, above the minimum requirements of $1,222 and 66, while the Kingdom’s economic and environmental vulnerability index (EVI) was 30.2, below the maximum allowed 32, the statement noted.
“This is a major achievement, as graduation from least developed country status means that a country has achieved significant economic and social development goals,” it said, underscoring that an LDC exit could also pose challenges.
“In the case of Cambodia, graduation means the loss of trade benefits enjoyed by least developed countries, including duty-free status and favourable ‘rules of origin’.
“Cambodia is one of the few least developed countries that has dramatically increased its exports to the European Union through preferential treatment and lenient rules of origin, allowing its products to enter Europe duty-free.
“[However,] if not carefully managed, the loss of these preferences may hurt Cambodia’s export performance,” it warned.
The institutions suggested the Kingdom negotiate more FTAs and ensure continued market access to gain a competitive edge on the global stage post-LDC.
“Cambodia has benefited from increasing export flows and a trend towards diversification over the years. However, these gains are under threat as more trade agreements continue to unfold in the region. Cambodia may consider strengthening its trade policy by negotiating trade agreements to maintain and enhance its market access.
“Movement in this direction is Cambodia’s entry into separate bilateral agreements with the People’s Republic of China and the Republic of Korea in 2022, in addition to its participation in the Regional Comprehensive Economic Partnership (RCEP) Agreement,” they added.
“Building on this momentum, Cambodia should consider forging new agreements with its major partners while improving the implementation and utilisation of existing ones.
“A free trade agreement with the European Union would avoid falling back on the generalised system of preferences by 2031 while expanding ‘extended cumulation’ would facilitate compliance with rules of origin.
“Maintaining market access in Japan is also critical. Consultations for a free trade agreement with business-friendly rules of origin should start as soon as possible,” the statement said.
Meanwhile, Prime Minister Hun Sen on June 4 made similar remarks about how Cambodia could lose many of its trade benefits once it leaves the LDC category, which he speculated could be in 2026-2027. He was addressing factory workers in Kong Pisei district, Kampong Speu province.
In either case, “Cambodia will shortly leave the LDC group and [international] taxes on commercial activity will need to be paid in both directions”, he said.
“We must therefore increase our resilience going forward.”
Royal Academy of Cambodia economist Ky Sereyvath commented that increasing exports to key markets like Europe and the US, which offer trade privileges, have been a major driver of economic growth.
“We need to improve our trade policies, produce more skilled workers and fully exploit existing FTAs … to maintain our economic growth after graduation,” he said.
The ADB-UNCTAD statement also suggested that “discussions within the RCEP Secretariat, RCEP Joint Committee, ASEAN, and ASEAN+1 dialogue partners should focus on deepening RCEP tariff cuts, clarifying the functioning of RCEP tariff differentials, and achieving convergence on product-specific rules of origin in” the Asia-Pacific region.
“Cambodia should also use the WTO ‘specific trade concerns’ mechanism to raise critical sanitary and phytosanitary measures imposed by its trading partners on agricultural exports,” it said.