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 PHNOM PENH 00001081 003.2 OF 004 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