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Why form a free-trade deal between Cambodia, China?

Lim Menghour / No Comments Share:

Cambodia and China have recently started studying a possibility to establish a bilateral free-trade agreement (FTA). According to the Chinese embassy in Phnom Penh, the first round of the official negotiation was launched in December 2019, during which the officials from the two countries started the discussion and consultation that could lead to the final conclusion of the Cambodia-China FTA in the near future. If successfully concluded, this FTA would be a new mechanism that boosts and diversifies the economic potential and visions of the two nations.

The FTA with China will give Cambodia benefits in two ways. First, the agreement will encourage greater trade and investment flows between Cambodia and China through the reduction and/or removal of tariff and non-tariff barriers. By concluding the deal with China, Cambodia may enjoy more diverse and cheap products into the market, as trade and investment will give consumers and businesses an access to a wider range of competitively priced goods and services. Also, the trade and investment will fuel continued economic growth, which helps the country to achieve its target of becoming an upper-middle-income country by 2030.

Second, the FTA also serves as a new source for Cambodia’s exports. Cambodia’s economy is rapidly growing to a point, where it will need more exporting markets besides the EU and the US. These two traditional markets have been providing preferential treatments to Cambodia through the Everything but Arms (EBA) and Generalised System of Preferences (GSP), respectively.

China has been reportedly interested in importing Cambodia’s agricultural products such as rice, mangos, soya beans, corn, coconut oil and cassava. In this sense, China could provide Cambodia a preferential tariff treatment of the mentioned agricultural products in order to meet the former’s local demands. By the same token, Cambodia will increase its export volume that could eventually modernise the exporting industries of the nation.

Through this FTA, Cambodia may reach similar trade deals with the other trading partners of China, such as Singapore, South Korea, Australia, New Zealand, Switzerland and Pakistan, which have already signed an FTA with this giant economy. Therefore, it could be strongly suggested that the FTA with China is crucial for Cambodia because the Kingdom is trying to look for more opportunities to diversify its export destinations, finally reducing its heavy dependence on the West.

For China, it could be said that the FTA with Cambodia fulfils the strategic and economic interest of the nation. It is crucial for China to strengthen its ties with other developing economies including those of Southeast Asia. Cambodia has enjoyed an economic growth rate of 7 percent annually, partly owing to the solid bilateral relation between the two countries.

Hence, this suggests that the other Southeast Asian countries may reap a similar benefit should they be on good terms with China. Ultimately, it will promote a more comprehensive economic integration in the region.

This would allow Chinese companies to play a more active role in Cambodia and in the region, that has strong political and economic ties with China. Also, it would allow China to promote its standards and rules in the whole region.

This FTA offers a new opportunity for growth for both China and Cambodia. The two countries would likely gain the reciprocal benefits considering positive trading trends in recent years. Specifically, the trade volume between the two countries has steadily increased from $5.16 billion in 2016 to $6.04 billion in 2017 and to $7.4 billion in 2018, respectively. The two countries aim to reach $10 billion in trade a year by 2023.

Therefore, it could be argued that the FTA is an important initiative for Cambodia to engage more deeply with China in terms of boosting the bilateral trade and foreign direct investment (FDI). This could maintain and enhance the economic growth of the Kingdom, that may suffer from the EBA withdrawal. This FTA with China has been identified as a unique mechanism to promote Cambodia’s economic growth, which, in turn, underpins the Kingdom’s long-term peace and stability.

However, as a developing country, Cambodia needs to prepare itself significantly to maximise the opportunities arising from this FTA so as to minimise to the lowest the potential risks and problems that Cambodia may face as a result of concluding this FTA with the economic giant of China. To put it another way, trade and economic deficits, reduced tariff revenue, the excessive influx of Chinese products to the Cambodian market, loss of jobs and degradation of natural resources may put Cambodia in a disadvantageous position.

It is recommended that Cambodian businesses, particularly small and medium-sized enterprises should be more proactive in accessing resources, make comprehensive preparations, do careful research into opportunities and challenges and improve their products’ quality, competitiveness and productivity. At the same time, the Cambodian government should endeavour to facilitate the favourable business environment in the country by improving its physical infrastructure, promoting the digital economy and developing its banking and financial sectors.

 

Lim Menghour is deputy director of the Mekong Centre for Strategic Studies, Asian Vision Institute

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