IS CAMBODIA'S REPUTATION AS A TRADE LIBERALIZER

UNCLAS SECTION 01 OF 04 PHNOM PENH 001081

SIPDIS

SENSITIVE
SIPDIS

BANGKOK FOR FCS--ANN BACHER, JIM GOLSEN
FAS--GARY MEYER AND COREY PICKELSIMER
AND USAID/RDMA--SKIP KISSINGER
COMMERCE FOR OTEXA--MARIA D'ANDREA
GENEVA FOR ESA AND USTR
STATE FOR EAP/MLS, EEB/TPP/ABT--GARY CLEMENTS, AND
EEB/TPP/MTA
STATE PLEASE PASS TO USTR FOR DAVID BISBEE

E.O. 12958: N/A
TAGS: ETRD PGOV KTEX EAGR ELAB CB
SUBJECT: IS CAMBODIA'S REPUTATION AS A TRADE LIBERALIZER
LOSING ITS LUSTER?


PHNOM PENH 00001081 001.2 OF 004



1. (SBU) Summary. Seen as a trade liberalization leader
among least developed countries (LDCs) due to its WTO
membership, pilot participation in the Integrated Framework,
and charismatic trade liberalization guru, Cambodia's initial
progress in committing to and implementing trade reforms has
slowed, due to staffing gaps, shortages of human and
technical capacity, and difficulty generating sustained
political will. Nonetheless, Cambodia has made significant
progress in several areas, and Commerce Minister Cham Prasidh
and a new trade reform coordinator are committed to
accelerating the country's progress. With assistance from
the World Bank and IMF, Cambodia is reforming its customs
operations, making the process more efficient and reducing
opportunities for corruption. Cambodian leaders are
concerned that the country's chief exports--garments and
agriculture--may not benefit from trade liberalization under
the Doha Round's proposed Hong Kong "Development Package"
promise of duty free access for 97% of LDCs' exports to rich
countries. The garment industry--which is facing renewed
pressure from Vietnam and China--must increase
competitiveness and productivity if it is to survive. End
Summary.

Cambodia: Once Seen as a Trade Liberalization Leader...
-------------- --------------


2. (U) Since its creation in 1995, just two of the world's
fifty least developed countries have acceded to the World
Trade Organization (WTO): Cambodia and Nepal. Cambodia's
status as the first LDC to join the WTO and its comparatively
quick negotiation process were the start of its reputation as
a leader among developing countries in global trade
liberalization, according to global trade experts who
convened in Phnom Penh for a recent trade policy workshop.


3. (U) Other factors also contributed to Cambodia's glowing
reputation. Cambodia's WTO membership came on the heels of
its 2001 selection as one of three pilot countries to
participate in the Integrated Framework for Trade-Related
Technical Assistance (IF),a multi-donor program that helps
LDCs participate in the multilateral trading system. In
addition, Cambodia's charismatic WTO accession team leader,
former Ministry of Commerce Secretary of State Sok Siphana,
left the Cambodian government in 2004 for a senior position
at the International Trade Center, a joint UNCTAD/WTO
technical cooperation agency, and has served as an informal
icon of Cambodian trade openness to the international
community. Dr. Esperanza Duran, director of the Agency for
International Trade Information and Cooperation (AITIC),
contrasted Cambodia's progress with that of African LDCs, and
noted that Cambodia is the "best example of an LDC that has
moved its trading regime forward."

...Now Losing the Limelight?
--------------


4. (SBU) Nonetheless, some claim Cambodia's moment in the
sun may be fading. Cambodia immediately fell behind on
implementing its WTO accession commitments, beginning with a
year-long political stalemate after the 2003 elections and
continuing with lackluster progress once the government was
formed. Some of this slowness was predictable: it is far
easier to commit to reforms than to actually make them.
Staffing changes also contributed to the slowdown. The
departure of Sok Siphana, temporarily left Cambodia without a
trade liberalization champion. His successor, Pan Sorasak,
is a smart and able interlocutor who, like Sok Siphana, is a
US-educated dual citizen. However, some worry that Pan
Sorasak lacks the charisma and political savvy that made Sok
Siphana so successful.

AITIC Official Claims Cambodia Got a Raw Deal
-------------- -


5. (SBU) Part of the problem with Cambodia's lagging
accession progress, Dr. Duran told Econoff, is that Cambodia
was a poor negotiator during WTO membership talks.
Negotiations proceeded quickly because Cambodia gave away too

PHNOM PENH 00001081 002.2 OF 004


much: voluntarily giving up transition time to begin
implementing trade-related investment measures (TRIMS) and
trade-related aspects of intellectual property rights
(TRIPS),and not reducing tariffs more gradually in
conjunction with fiscal reform--perhaps under an IMF
technical assistance program. Dr. Duran noted that Nepal's
accession package allowed higher bound tariffs and minimal
rates than Cambodia's package. An AITIC brief states that
the working parties involved in LDC accession are not
utilizing the special treatment that LDCs should be afforded
according to WTO guidelines. The report concludes that
accession commitments "sometimes go far beyond what is
commensurate with (the LDC's) level of development."

Cambodian Concerns about the Doha Round
--------------


6. (U) Thay Bunthon, First Secretary at Cambodia's Mission
to the WTO, made a sophisticated presentation about what
Cambodia stood to gain and lose in Doha Round agriculture
negotiations. Bunthon noted that rules of origin must be
simple and transparent if Cambodia is to benefit from
duty-free, quota-free access. Tuot Saravuth, Deputy Director
at the Ministry of Agriculture, Forestry, and Fisheries, also
noted that WTO agricultural standards, such as sanitary and
phytosanitary standards, could prevent Cambodia from
effectively exporting its agricultural goods.


7. (U) Cambodian government officials also raised concerns
about the Hong Kong "Development Package," noting that
countries could use the 3% of tariff line items they are
allowed to exclude from duty-free, quota-free access to
Cambodia's detriment. Saravuth asserted that Japan plans to
exclude tariff lines encompassing almost all of Cambodia's
agricultural exports, while Bunthon worried that the US and
European countries might exclude garments. As Cambodian
officials are quick to point out, because Cambodia exports
mainly high-tariff apparel, Cambodia paid the same amount of
duty to the US Treasury (USD 367 million) on its USD 2.2
billion in 2006 exports as did France, which exported over
USD 36 billion to the US. (Note: Commerce Minister Cham
Prasidh traveled to Washington July 17-20 to meet with USG
officials, congressional leaders, and the US private sector
to raise these same concerns and to make the case for the
broadest possible coverage under any possible duty-free,
quota-free preferences for LDCs. End Note.)

Government Officials Tout Customs Reforms
--------------


8. (SBU) Speakers from the Ministry of Commerce and the
Customs and Excise Department highlighted Cambodia's
achievements in customs reform, including a 370% increase in
revenue collection over the past nine years (albeit starting
from a low base) and the recently passed Law on Customs.
Several other reforms are in the works, including a strategic
review of the role of safety regulator CamControl and
harmonizing filing procedures for VAT, income tax, and
company registration. Cham Prasidh has pushed aggressively
for several of these changes, and customs reform is an
on-going discussion item in the US-Cambodia Trade and
Investment Framework Agreement (TIFA) dialogue. (Comment:
Customs reforms are sorely needed. Not only is the current
process cumbersome, the Customs and Excise Department is seen
as Cambodia's most corrupt government institution according
to USAID-funded surveys. End comment.)


9. (U) A new single window approach to trade facilitation
will be piloted in Sihanoukville in 2008. The single window
system, which is designed to make clearing customs quicker
and less susceptible to bribery, will include several
elements: a flat fee for customs services, a single
administrative document (slated to become mandatory in
September 2007),and a computerized ASYCUDA customs system
(to be piloted in Sihanoukville in December 2007). Both the
World Bank and USAID support the single window process: the
World Bank funds ASYCUDA and Cambodia's single window is
supported by regional USAID efforts to facilitate an

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ASEAN-wide single window.


10. (SBU) Beyond the high-ranking speakers, other customs
officials seem to be aware of the reform process, but are not
necessarily pro-active champions of change. One customs
official told Econoff informally about the current method of
customs valuation and the new methods the agency would need
to employ to become consistent with WTO standards, but said
that there was no rush to begin looking at this in earnest
until the implementation deadline. (Note: Under its WTO
accession agreement, Cambodia is to implement the Customs
Valuation Agreement in phases during a set transition period.
End Note.)

Making the Garment Industry More Competitive
--------------


11. (U) Dr. Duran noted that two pillars of the Cambodian
economy, agriculture and garments, were slow to be subject to
global trade liberalization. Exceptions permitting the use
of non-tariff barriers, particularly export subsidies,
watered down agricultural free trade until this issue was
addressed during the Uruguay Round. The Multifiber
Agreement, in place until January 2005, protected domestic
textile production in wealthy countries, she asserted.
(Comment: The quotas in place under the Multifiber Agreement
also protected Cambodia from competition with more efficient
neighbors. End Comment.) She suggested that Cambodia
strengthen its garment industry by building vertical supply
chains which include more efficient sales and distribution
and reducing shipping time--both of fabric and other supplies
into Cambodia and of finished garments out to their
destinations. (Note: Shipping costs are also a major
obstacle: it costs USD 750 to ship a container from Vietnam
but USD 2400 to ship from Cambodia. End Note.)


12. (U) Garment Manufacturers Association of Cambodia (GMAC)
Chairman Van Sou Ieng emphasized the need for Cambodia to
move beyond its reputation for good labor conditions and to
make its industry more competitive. Van noted that buyers
care most about price, then about delivery time, and finally
about quality and labor compliance. Describing labor law
compliance as a "gimmick," the Chairman said that Cambodia
had been trying to create a niche market for itself by
focusing on the least important criteria for buyers (labor
conditions),which has had the paradoxical affect of raising
costs--the buyers' top concern. (Comment:
Socially-conscious garment buyers give us a more nuanced view
of the value of Cambodia's reputation for excellent working
conditions. They say that labor compliance is now a
prerequisite for even considering sourcing from a factory,
rather than a competitive advantage which distinguishes one
factory or country from another. Cambodia will still need to
compete with the growing number of factories worldwide who
have acceptable labor conditions. End Comment.)


13. (U) Striking an optimistic note, Van said that Cambodia
may edge out competition from Vietnam and China due to tight
labor markets and rising costs in those countries,
particularly as garment factories relocate from traditional
Vietnamese and Chinese production centers to lower cost areas
in those countries further away from ports and efficient
transportation. In order to survive, Van urged the industry
to increase its productivity by tying production directly to
wages via piece rates (i.e. pay per piece sewn) rather than
hourly or daily wages subject to government minimum wage
rules. Cambodia also needs to improve its infrastructure to
provide cheaper electricity, better roads, and more water and
telephone connections, he said.

Comment
--------------


14. (SBU) While the views expressed by Dr. Duran and the
AITIC brief express a not uncommon sentiment that LDCs are
losing out from global trade liberalization, they also fail
to highlight the real credit that Cambodia deserves for its
role in driving its own WTO accession process and undertaking

PHNOM PENH 00001081 004.2 OF 004


an economic reform agenda under very challenging
circumstances. While Cambodia could have pressed for less
demanding accession requirements, the RGC realized that such
an approach would be less effective in supporting the
country's long-term economic goals. Moreover, longer
transition times for TRIMS and other rules would serve little
purpose in protecting Cambodia's relatively unindustrialized
economy. Commerce Minister Cham Prasidh is proud of
Cambodia's openness to foreign investors and service
providers, and he clearly recognizes the imperatives of
global trade. Cambodia's remarkable economic growth
rates--13 percent in 2005 and 10 percent in 2006--and rapidly
increasingly levels of FDI attest to its success.


15. (SBU) Cambodia's progress in implementing economic
reforms--which include but are not limited to WTO accession
commitments--has been uneven. While Cambodia has a long way
to go before its trading regime is fully in line with WTO
rules, this is due to a variety of factors including the
relatively recent arrival of peace and security and shortages
of financial resources, human and technical capacity, and
sustained political will. Cambodia is working to address
these challenges in increasingly sophisticated ways. As the
World Bank/IMF-supported improvements in trade facilitation
and the impressive rise and survival of the garment industry
show, successes can happen here, but they are hard won.
Continued USG engagement with Cambodia on economic
issues--such as via the TIFA dialogue--is essential to
ensuring that reforms are supported and accelerated.
CAMPBELL