Report To Contribute Itc Expert Meeting On 28-29 March 2007 New Delhi

Fostering Trade through Private-Public Dialogue Expert Meeting on Regional Integration in Asia

REPORT TO CONTRIBUTE ITC EXPERT MEETING 28-29 March 2007 NEW DELHI

PREPARED BY CHAN BONNIVOIT WTO OFFICE ASEAN AND INTERNATIONAL ORGANIZATIONS DEPARTMENT MINISTRY OF COMMERCE CAMBODIA

A. Introduction Since liberation day on January 7, 1979, the government of Cambodia has been strenuously involved in rehabilitation efforts. In the early 1980s, Cambodia experimented with a centrally planned economy. Realizing the vast potential provided by the world community and FDI, Cambodia embraced a market-based economic system in the mid-1980s. Cambodia has never been hesitant to join regional and global communities. As a result, it has become a member of many regional and global organizations, such as ASEAN, the Greater Mekong Sub-region, and, at the global level, the WTO. All these initiatives have meant considerable structural adjustment and reform on Cambodia’s part. The IMF studies conducted over the last few years have concluded that Cambodia’s macro-economic performance has been relatively good since 1999. Private sector activities have developed, in particular thanks to easier access for Cambodian textile products to American and European markets and the development of tourism. From 1999 to 2003, the annual growth rate was between 6 and 7%. The contributions to growth of the various sectors have however been uneven: the agricultural sector has been much more erratic and in 2000 and in 2002 saw a fall in its added value because of the reduction in the arable surface area. This spectacular growth was also made possible by sharp increases in trade and investment. Economic growth continually rose to 9.5 percent in 2004 and accelerated to 13.4 percent in 2005 despite negative external developments such as higher oil prices, terrorism, and the spread of epidemic diseases. Political stability, accompanied by greater investor confidence, has provided the basis for this robust growth performance, which has been driven mainly by the superb growth in the agricultural sector, the expanding tourism sector, continued robust garment exports, and increased construction activities. The growth rates in the agricultural sector, industrial sector, and services sector have generally been quite robust, from 11.7 percent, 12.1 percent, and 2 percent, respectively, in 2003 to 1.1 percent, 16.7 percent, and 10.1 percent in 2004 and 17.3 percent, 13.3 percent, and 9.4 percent in 2005, respectively. The value of total trade has also risen significantly. The value of exports reached almost US$3 billion in 2005, while the value of imports reached almost US$4 billion. The value of FDI rose substantially, from US$74 million in 2003 to US$381 million in 2005. The increase in trade and investment reflects the growing integration of Cambodia in the world trading system. Cambodia’s trade with the world has also increased substantially in the last decade. Trade has been the main source of economic growth in Cambodia. The normalization of relationships with EU countries and the United States that culminated in trade agreements has been widely hailed as a success. Cambodia has gained jobs and investments, along with better working conditions for labor. After Cambodia gained access to the European and U.S. markets, its garment exports increased in value from only around US$20 million in 1995 to almost US$2 billion in 2005. Growing employment

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in the garment and textile sectors has been a major factor in stabilizing the economy. These sectors currently employ 280,000 skilled and unskilled workers.

B. Cambodia Trade Facilitations Customs Valuation Cambodia is in the process of reforming its customs regime through a five year (20032008) reform and modernization program to streamline and improve the effectiveness of customs operations and to facilitate trade. With assistance from the International Monetary Fund (IMF), a revised Law on Customs has been drafted and is awaiting National Assembly approval. As part of its WTO accession commitments, Cambodia will implement the WTO Customs Valuation Agreement by January 2009. Although Cambodia has made some progress in reform efforts, customs procedures remain complicated. Both local and foreign businesses have complained at the present that the Customs and Excise Department generally engages in practices that are non-transparent and that often appear arbitrary and irregular. Importers frequently cite problems with undue processing delays, excessive paperwork and formalities driven by excessive discretionary practices.

Rules of Origin Cambodia had not yet established regulations on rules of origin and intended to introduce preferential rules of origin as required by its membership in ASEAN. But Cambodia was requested by the Members of WTO that the Cambodia’ s law and regulations on rules of origin would be in conformity with the provision of WTO Agreement on Rule of Origin and would incorporate the requirements of Article 2(h) and Annex II, paragraph 3(d), i.e., that for non-preferential and preferential rule of origin, the customs authority would provide upon the request of an exporter, importer or any person with a justifiable cause an assessment of the origin of the import and outline the terms under which it would be provided, and that any request for such an assessment would be accepted even before trade in the goods concerned began. Until now, importers were required by the Government of Cambodia to indicate a product’s origin in the import declaration for non-preferential trade. The requirement was applied for statistical purposes only. However, Cambodia intended to comply fully with the provisions of the WTO Agreement on Rules of Origin in the application of preferential and non-preferential rules of origin and would be to do so after enactment of the new Customs Law and its implementing regulations. In particular, the requirements of Article 2(h) and Annex II, paragraph 3(d) of the Agreement would be established in Cambodia’s Law on Customs from the date of its promulgation, or if necessary, by government degree.

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Pre-shipment Inspection Cambodia maintains a pre-shipment inspection system. Society General de Surveillance (SGS) may inspect the quality of any goods shipped into the country. In practice, imports are admitted into Cambodia with little reference to standards or rigorous inspection. The present preshipment inspection contract applied to consignments valued at US$ 4,000 or more (FOB). Goods worth less than US$ 4,000 were valued by the Cambodian Customs and Excise Department (some remote customs checkpoint were authorized to make valuation decisions for imports up to US$ 1,200). The fee for pre-shipment inspection amounted to 0.80 % of the FOB value of the inspected goods, except for bulk petroleum products (US$ 0.30 per metric ton). Importers failing to secure pre-shipment inspection, and thus necessitating goods to be inspected by custom officials at the border checking point, incurred a penalty equal 7 % of the CIF value of the imported goods. Cambodia has also a Dispute Settlement Working Group that respond to resolve promptly claims or disputes arising from the implementation of pre-shipment inspection. But from the date of the Cambodia’s Accession into WTO the Government of Cambodia takes full responsibility to ensure that the operations of the pre-shipment inspection companies meet the requirements of the WTO Agreements, including the establishment of charges and fees consistent with Article VIII of the GATT 1994, due process and transparency requirement of the WTO Agreement (Article X of the GATT 1994), the provisions of the Agreement on the Implementation of Article VII of the GATT 1994 and the Agreement on Pre-shipment and Inspection.

Import Licensing Procedures Cambodia imposed no licensing requirements nor quantitative restrictions or prohibitions on imported agricultural products. Sanitary and Phytosanitary certificates were required for the importation of agricultural products.

Implication of Cambodian trade facilitation for regional Integration Cambodian harmonization of trade facilitation will be required a huge investment regarding to ensuring some standards and making some commitments on faster custom clearance. But the losses that business suffers through delays at borders, complicated and unnecessary documentation requirements can be estimated very higher. Therefore, harmonizing and reforming of Cambodian trade facilitation can gain relevance for reducing the cost of regional and international trade.

C. Investments in Cambodia Investment Climates

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In addition to the political stability and the sound macro economy, Cambodia's membership in the WTO and ASEAN economic integration allow Cambodia to have favorable access to the international market. Overall investment environment is positive. With a view to reflecting opinions from the private sector including foreign investors on the government policies of Cambodia, the Government-Private Sector Forum is carried out once every 6 months, with participation of H.E. Samdech Hun Sen, Prime Minister of the Kingdom of Cambodia. This forum consists of eight working groups, and decisions made by the forum are regarded as decisions made by the Council of Ministers meetings. The Cambodian government gives priorities to the following seven areas: (1) agricultural and food processing industry (especially raw materials for rubber, organic crops, and bio fuel), (2) development of infrastructure (development of such infrastructure as seaports and airports by private capital), (3) electricity, (4) labor-intensive, export-oriented industries (shoe and garments industries), (5) tourism, (6) human resources, as well as (7) minerals including oil. The legal system related to investment has been consolidated in Cambodia in recent years, and most of the conditions under such laws and regulations are liberalized to the investors. Except for land ownerships (however, land lease is permitted up to 70 years for foreigners as well), the conditions are non-discriminatory for both domestic and foreign investors. Neither nationalization nor regulations permitting sales price and other requirement without the consent of investors are in practice. There are various preferential treatments to investors, such as importexport tax exemptions.

Investment Policy to attract the FDI In order to attract FDI, the government has strengthened the country's legal framework, bolstered its institutions and liberalized the relevant regulations, in ways that are conducive to private sector investment and business activities in Cambodia. The 1994 Law on Investment provides similar treatment to foreign and domestic investors alike, with the exception of the issue of land ownership, as set forth in Cambodia's constitution. Even in this area, the regulations are generous, with foreign investors able to lease land for a period of up to 70 years, with the possibility of renewal thereafter. The government provides investors with a guarantee neither to nationalize foreign-owned assets, nor to establish price controls on goods produced and services rendered by investors, and to grant them the right to freely repatriate capital, interest and other financial obligations. Investors can set up 100% foreign-owned investment projects and employ skilled workers from overseas, in cases where these workers cannot be found in the domestic labor force. In addition, the Law on Investment and its related Sub-Decree grant generous incentives to investors, especially those concerned in investment projects geared towards exports. Attention is also accorded to private investment in Build-Operate-Transfer (BOT) projects, and private

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investment in infrastructure, including public utilities such as electricity, water supply and telecommunications. In order to facilitate investors in their applications for investment approval, the government has established an institution to oversee investment policy and strategy called the Council for the Development of Cambodia (CDC). The CDC, being the highest decision-making level of the government on private (CIB) and public (CRDB) investments, is chaired by the prime minister and composed of senior ministers from related government ministries. The Cambodian Investment Board (CIB), the operational arm of the CDC, has been designated as the etat major and one-stop service of the government, responsible for the evaluation of investment proposals and projects from all investors, both individual and corporate. Cambodia has obtained "Generalized System of Preferences (GSP)" and "Most Favored Nation (MFN)" status from its major trading partners, including the European Union, the USA, Japan, Canada and Australia. Apart from facilitation and support at the national level, attention is also being given by the government to opening up access to international sources of finance for private sector investment. Cambodia is already a member of the IFC and MIGA, and is currently applying for membership to the ICSID (International Center for Settlement of Investment Disputes). It has also signed agreements with the ADB, providing private sector investors with the opportunity to obtain funding for their investment projects from this international financing institution. Cambodian-South Korea Investment Relations Cambodia signed an agreement with South Korea to helping create a Cambodian stock exchange by the end of the decade. Other agreements between the two leaders also included a slew of signings boosting trade ties, especially in the areas of construction, industry, investment and infrastructure development as well as an agreement for South Korea to build the IT network in Cambodia. Actually, the both Governments had also discussed ways to offset a serious trade imbalance between the two nations by increasing Cambodian exports to South Korea. But between aid and trade, South Korea is a major contributor to the Cambodian economy. Cambodia is a friendly adjacent nation of China. China established diplomatic relations with Cambodia on July 19th 1958. The 2nd Prime Minister of Cambodian visited China from July 18th to 23rd in 1996, and in the July 19th, the two sides signed Trade Agreement and Investment Protection Agreement. Since 1992, bilateral trade volume has seen a continuously rapid increasing. In the year 1997, Sino-Cambodian trade volume hit 120 million USD, increasing by 71.8% comparing to the year before. In 1998, the number reached 162 million USD, another increase of 34.1%. The bilateral trade volume of 1999 is 160 million USD, dropping 1.1% comparing to the year before, of which China's exportation accounts for 104 million USD, dropping by 8.2%, importation 55.79 million USD, increasing by 15.8%, comparing to the year before.

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The possibility of Japan-Cambodia Investment Agreement was discussed. The importance of legal stability and predictability provided by such agreement was stated. It was pointed out that a possible investment agreement should include the provisions on investment liberalization as well as the provisions on investment, which are included in the Investment Chapter of Economic Partnership Agreement (EPA) that Japan had signed with other countries in recent years.

Impacts on the regional level Why invest it in Cambodia? It is the question concerning the impacts of the investments in Cambodia on the regional level. The short answer is the large market, low wages, a liberal economy and one of the world’s great assets for tourism. The large markets are a function of location, not the domestic market of Cambodia but the markets of the Association of South-East Asian Nation (ASEAN). ASEAN have a total population of around 550 million and participate in a free trade area (AFTA) that will become full-fledged by 2010, with tariff rates of 0-5%. ASEAN is also negotiating a free trade area with China, which might also be in place by 2010 which will create the trading block of 1.7 billion people, and may be doing so with India soon. Also deserving mention are the rich markets of Europe and North America, to which Cambodia, as a least developed Country, has preferential access. As for the liberal economy, Cambodia has one of the most open economies in Asia, ranking on a par with Japan, and the most open economy among the world’s 49 LDCs. Its low-wage, trainable labor force is of course an asset in an increasingly competitive world economy and, when it comes to tourism, the extraordinary monuments of Angkor Wat near Siem Riep already ensure the Cambodia is attracting tourists with an annual growth rate of 30% plus. So when all is said and done, the FDI can be profitable not only in Cambodia, but from the Countries establishing the free trade area mentioned above. Although the reverse benefit gained from FDI among Cambodia and other Countries in the region is not full reciprocally, but it can minimize Cambodia social and economical difference with these Countries and can accelerate the integration’s process in the region.

D. Cambodia Production Synergies and the regional Integration Perceived benefits of integration Integration will also provide exporters with access to raw materials and intermediate inputs at world market prices. Cambodia has always recognized this, and, under the Law on Investment, has provided export industries with duty-free access to imported capital and intermediate goods and raw materials. For example, membership in ASEAN allows Cambodia to import fabrics from ASEAN countries to produce garments for the EU market. When Cambodia was not a member of ASEAN, it had to ask for derogation from the EU every year in order to import fabrics to produce

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garments for the EU market so that it might satisfy the requirements of the Rules of Origin under the EU generalized system of preferences scheme. Cambodia’s textile and garment industry well illustrates the role of exports and investment in generating employment and helping to reduce poverty. More than half the current 280,000 skilled and unskilled jobs in the industry have been created during the past five years, making the industry by far the largest source of job growth during this period. The workers are generally from lowincome families in the countryside, and their earnings usually flow back to these families in the countryside, where they support rural development. Garment exports have also helped manage the balance of payments; they rose sharply from around US$20 million in 1995 to almost US$2 billion in 2005. The agricultural sector also stands to benefit greatly from integration. The productivity of the agricultural sector in Cambodia is considered low. Relative to neighboring countries, agricultural yields are much smaller. However, through economic integration, the small yields might also be turned into a good opportunity to enhance productivity in the sector. Because of the vast area of cultivation and the huge untapped potential in all agricultural crops, economic integration would open up foreign markets to Cambodian agricultural products, while also obliging Cambodian farmers to become more competitive so as to succeed in local and foreign markets. To be able to export and generate employment, Cambodia needs foreign investment because adequate savings, skills, and technology are not available within the country. Cambodian firms must therefore cooperate with foreign firms to get the benefits of what they are missing at home. Foreign investment has an important role in upgrading technology levels and transferring commercial and industrial knowledge. Cambodia has much to learn from the foreign firms that know foreign markets the best and possess the technology, managerial experience, and marketing channels needed to export successfully.

Negative impacts of integration Similar to other countries undergoing integration, Cambodia is also facing several problems. Rapid economic change is altering social relationships, with some positive and some negative effects. Even though the opportunities provided by integration are substantial, Cambodia does not possess a sufficiently robust social framework to seize on those opportunities fully. It continues to experience the many social ills, such as drug use and crime that are often attributed to globalization. Integration will likewise mean that, in future, Cambodia will not be spared from the shocks emanating from the international financial and commercial systems. For example, the Asian financial crisis resulted in a sharp drop in FDI in Cambodia. The ratification of trade agreements between other countries will also have an impact on Cambodia, for example, the United States’s and Vietnam Trade Agreement. The end of safeguard measures by the EU and the United States

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on textile products from China in the future will also pose a threat to the Cambodian garment sector. One of the biggest challenges relates to the rising inequality resulting from the differential impact of integration on segments within society. Those people who are not able to seize the opportunities provided by integration are being left out of the process. With its sustained high growth over the last decade, Cambodia has reduced poverty incidence from 47 percent in 1993-94 to 35 percent in 2004. The peace dividend in the aftermath of the end of civil strife and the low initial conditions prevailing in the economy have enabled Cambodia to sustain high growth during the early stages of development without severely straining capacity. This growth has generally been unbalanced, centered in Phnom Penh and other urban areas, and narrowly based, driven as it is by such activities as garment making, construction, and tourism. Cambodia is experiencing considerable inequality in income distribution: the Gini coefficient was 0.42 in 2004. If the situation worsens because of integration, the social consequences will be heavy. This is the most pressing issue in Cambodia today. We have enjoyed economic success because of a high growth rate, but we have not been able to reduce inequality, and this may threaten stability and future growth. Cambodia is considered to suffer from the greatest inequality in income distribution in the region. Much of this has been due to growing differences within the rural population, with considerable variation in the rate and distribution of growth in different localities, in the security of land tenure, in remoteness from markets and services, and in the lack of productive assets. Economic integration is one of the major causes of landlessness in Cambodia. As the price of land has risen because of the increase in foreign investments and the growing demand for land for hotel and factory construction, farmers have sold their lands cheaply. Moreover, because they lack knowledge about how to manage this sudden financial gain, the money has vanished quickly, and many farmers have become landless and poor. The proportion of landless rural households increased from 13 percent in 1997 to 16 percent in 1999 and 20 percent in 2004. The rise in landlessness has been relatively rapid given that land distribution was more or less equal when land was formally allocated to households in 1989. The problem has been exacerbated by the related problem of unclear property rights (as many as 80 percent of rural households that owned land were without titles to the land in 2004) and the ambiguous legal status of land ownership. The rising value of land in many parts of the country has complicated the issue. The result is an emerging phenomenon of increasing landlessness juxtaposed with the existence of uncultivated land. Realizing that this is not an easy problem to solve, the government has set up the Ministry of Land Management, Urbanization, and Construction for the sole purpose of managing land, clarifying land titling, and reviewing land concessions. Finally, it is widely known that economic integration is accompanied by corruption. No country has been spared this unfortunate activity. Integration exposes countries to corruption,

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which contributes to deterioration in the business environment. Since Cambodia began integrating with the world economy, we have experienced this phenomenon. Corruption definitely slows the integration process because investors are afraid to pour money into a corrupt environment, which, in turn, leads to slower growth in trade and other forms of integration. In the Cambodian case, corruption has not had a strong impact on integration into regional and global communities. One of the reasons for this is the fact that the government has been quite aware of the problem. The integration of Cambodia into regional and world communities means that the country must make commitments to reform so as to improve governance, the rule of law, and the establishment of an appropriate regulatory environment. To achieve this, the government has set up numerous mechanisms to tackle corruption, such as the Rectangular Strategy, which aims at good governance, and various reforms, including public financial management reform, judicial reform, and civil administration reform, along with the relevant joint working groups. Moreover, the government has also set up the Government’s Private Sector Forum, in which the private sector may meet with the government to express complaints and grievances that the government then seeks to address.

E. Cambodia Service Sectors: Tourism Sector Cambodia Tourism Sector The tourism sector is also booming as improving security and political stability is attracting a large number of tourists. The tourism industry is the country’s second-greatest source of hard currency after the textile industry. More than 60 percent of visitor arrivals are to Angkor Wat and Angkor Thom in Siem Reap, and most of the remainder to Phnom Penh. Other tourist hotspots include Sihanouk Ville, Cambodia’s only port and developed coastal beach area. Cambodia’s tourist market increased at 35 percent in 2005, in line with the country’s aim to triple tourism in the next five years. Over 1.4 million tourists visited Cambodia according to the Ministry of Tourism, from slightly over 1 million in 2005. The number of tourist arrivals is targeted to reach about three million arrivals a year by 2010. Tourism comes mainly from Korea, Japan, USA, France, UK, Thailand, China, etc. Increased stability and security is credited for the jump, as well as government efforts to encourage eco-tourism and visits to Cambodia’s historical sites, such as the World Heritage-listed Angkor temples. Cambodia is aggressively promoting tourism and both in Phnom Penh and in Siem Reap new hotels are going up. Cambodian, Thai, and to a lesser extent Western investments in travel infrastructure are particularly large near Angkor Wat and the Khmer temple complexes. In general, although service is still not up to most tourism-oriented country’s standards of friendliness and efficiency, the hotel and tourism sector is definitely growing and improving daily. Hotels, restaurants, and other food outlets are going up by the day in Siem Reap as the tourism industry around Angkor Wat races to meet growing demand.

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Regional Integration of Cambodia Tourism Service Sector It is estimated that nearly 200 restaurants currently operate and cater to foreign tourists. About 80 percent of food and beverage used in these hotels and restaurants are imported products mainly from Thailand, Vietnam and Singapore. Almost 35 percent of hotel revenue is mainly generated from food and beverage sale and an average meal cost per customer per visit is US$30. The distribution of these imported food and beverage products supplied to hotels and restaurants are supplied from Phnom Penh, where major importers/retailers are located. These importers are bringing the products into Phnom Penh mainly from three sources: Thailand via road from Aranyaprathet (Poipet), Vietnam via road/air to Phnom Penh, Singapore and Malaysia via sea freight through Sihanoukville deep seaport.

F. Conclusion Economic integration has been increasing, and the process is irreversible. It is difficult to conclude a priori that integration is either good or bad for Cambodia. Much will depend on how adroitly the process is managed. In any case, economic integration will definitely have both positive and negative impacts. The positive impacts will have to be maximized, and the negative impacts will have to be well managed if Cambodia is to benefit unequivocally from integration. The government needs to maintain macroeconomic stability so as to create the proper conditions for investment and savings, to push for outward-oriented policies to promote efficiency through increased trade and investment, to promote structural reform to encourage domestic competition, and to create strong institutions to foster good governance.

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