How RCEP Benefits Cambodia in the Long Term

By Heimkhemra Suy

Though the Regional Comprehensive Economic Partnership （RCEP） may bring only modest short-run economic benefits to Cambodia， the long-run outlook looks positive. Through ASEAN free trade agreements （FTAs） with non-ASEAN partners， Cambodia has already benefited from extensive tariff reductions and preferential trade treatment.

The European Union and the United States are not direct participants to RCEP， yet they are Cambodias first and second largest importers respectively， jointly accounting for 70% of Cambodias exports. This includes 76% of Cambodias garment and footwear exports. By contrast， RCEP countries are modest consumers of Cambodias products. Japan consumes 8% of Cambodias exports， China and India 6%， Australia， New Zealand and South Korea 3% and ASEAN countries make up 9%. Cambodias existing preferential trade arrangements and narrow production and export base indicate that RECP might not substantially boost Cambodias market access， at least directly and immediately. Instead， RCEP could become a net competitor to Cambodia.

Still， RCEPs long-term trade opportunities and benefits will enable Cambodia to modernise and diversify its economic structure. The countrys current engines of growth depend heavily on agriculture， tourism， garment manufacturing and construction. Yet， due to domestic structural and demographic change， as well as rising competition and vulnerability to external shocks， these industries cannot secure high growth for Cambodia indefinitely.

With tariff barriers already low from existing FTAs， non-tariff barriers are of particular concern for Cambodias exports. RCEP gives enhanced guidance among members to mitigate non-tariff trade barriers. These are a direct response to concerns raised by Cambodias agricultural exporters， who stand to benefit from a reduction in non-tariff barriers.

Another RCEP benefit is around rules of origin （ROOs）. ROOs determine which goods originate under RCEP and are eligible for preferential tariff treatment. Firms operating in RCEP countries where the cost of labour is high will be incentivised to direct outward foreign direct investment （FDI） to countries with low production costs in labour-intensive industries， including Cambodia.

RCEP also offers special treatment in terms of technical cooperation， capacity building and implementation flexibility for developing countries. Cambodia， along with Laos and Myanmar， is required to eliminate tariffs on 30% of trade compared to tariff elimination requirements of up to 65% for other members. While other members have 10 years to eliminate 80% of their tariffs， Cambodia has 15 years to prepare itself.

RCEP also includes provisions for economic and technical cooperation aimed at narrowing the development gap among members.

Compared to existing preferential trade deals Cambodia is involved in — including the Everything but Arms （EBA） and Generalized System of Preferences （GSP） agreements — RCEP is more extensive and rule-based. As Cambodia develops， the EBA and GSP will， at some point， be phased out.

As Cambodia is expected to reap RCEPs benefits， so are other ASEAN countries， especially developing countries. Vietnam and Thailand， both efficient large-scale producers and exporters， will increase competition around agricultural exports to RCEP markets. Cambodia should identify market niches for its high-value products to compete. Myanmar， with its low-wage economy， will also be attractive to investors in the garment industry.

Cambodias past FDI success has largely depended on relatively inexpensive labour， fiscal incentives and preferential trade deals. Yet， the prospective conclusion of preferential treatment and rising minimum wages have eroded Cambodias competitiveness. When targeting cost-sensitive investors， Cambodia should explore ways to reduce operation costs， do more to reduce corruption and improve the investment climate through stronger rules and regulations. Special investment incentives should be granted to firms committed to upskilling employees and enabling technical and knowledge diffusion that enables domestic firms and young people to become the driver of economic revitalisation.

Inefficient and absent regulatory conformity across institutions has also continued to prevent Cambodia from expanding and diversifying its agricultural exports. For example， exports of semi-milled or wholly milled rice， which accounts for 12% of Cambodias exports to China， face around 106 non-tariff measures. Similarly， the establishment of quality infrastructure in Cambodia will also help to address non-tariff challenges facing the countrys agricultural exporters.

With imports outpacing exports， Cambodia should keep a close eye on dumping which would be harmful to the countrys domestic industries.

Concerns that RCEP will bring additional harm to Cambodias domestic industries are overblown given that most RCEP members have already established free trade deals with Cambodia. The net benefits more than outweigh any costs.

· Source： East Asia Forum