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Wto cambodia


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Wto cambodia

  1. 1. The problem in contextIn 1994, Cambodia applied for membership of the WTO. Following the Doha Declaration ofNovember 2001 that eased membership conditions for least developed counties, Cambodia’smembership was finally approved in September 2003 at the Cancun Ministerial Conference.However, membership did not become effective until a year later because an internal politicaldeadlock in Cambodia after the July 2003 elections delayed ratification.Some Cambodian policy players were surprised by approval of Cambodia’s membership of theWTO, as negotiations had been conducted without the active participation of stakeholders. Therewas neither comprehensive research nor public debate on the costs and benefits of joining.According to a survey done by the Economic Institute of Cambodia just days after this approval,more than half of Cambodians living in Phnom Penh, the capital, had never heard of the WTO.None of the country’s parliamentarians knew about the substance of the negotiations. Thegovernment was expected to reveal detailed agreements with the WTO at the ratification debatein the National Assembly. Critics say that Cambodia has just thrown itself in at the deep end bybecoming a member of the WTO.With an estimated average per capita income of US$300, Cambodia is the poorest and leastdeveloped country in the east Asian region, and one of the poorest in the world. Since itsemergence from war and upheaval, Cambodia has been very keen for economic recovery, tointegrate itself into the world community by means of internal reforms. Though initial reformshave produced some positive results, the country is still plagued with major socio-economicproblems. Its engine of growth for the past few years — the garment industry — is facinguncertainty and is looking towards the WTO for solutions.The government and some business people have high expectations of WTO membership. Theyexpect it to help protect and expand markets for Cambodian garment exports and other productsafter the removal of US quotas from 2005, even though Cambodian industries have not been wellknown for their cost-effectiveness and competitiveness. Civil society members are moresceptical, as apparently membership comes with many conditions with which the country as awhole may not be able to comply, even with a five-year grace period. There seem to bereasonable doubts that the benefits will really exceed the costs associated with membership.To some, however, the conditions imposed for WTO accession may just be what the countryneeds for genuine institutional and policy reforms. Cambodia will indeed have a steep learningcurve. It is, in effect, a litmus test according to which accession will make or break the countryafter its ratification by the National Assembly.The objective of this case study is to tell the story of Cambodia’s accession process, and theways in which policy-makers, the private sector and civil society perceive and deal with theissues of WTO membership.
  2. 2. II. The roles of stakeholders in the accession processThe membership applicationGiven the important role of international trade in alleviating poverty and promoting economicgrowth, Cambodia initiated ambitious preliminaries to becoming a member of the Association ofSouth East Asian Nations (ASEAN) and the WTO. The Cambodia government filed an officialWTO application on 8 December 1994, and a working party was established two weeks later toconsider it. According to Lu Laysreng, then Under-Secretary of State for Commerce, the Councilof Ministers agreed to push for Cambodian entry into the WTO: ‘It is very important forCambodia to join the WTO, because it provides facilities for us to move into a world associationof business people.’ Cambodia then started to work on a number of issues that had to be resolvedto enable Cambodia to join the WTO, including lower tariff rates, the adoption of an accountingsystem based on the Anglo-Saxon model, and the adoption of a hybrid legal system integratingAnglo-Saxon and French standards.After attending the four-day ministerial conference in Singapore in December 1996 as a newofficial observer, Cambodia understood that it was not easy to be a WTO member, but theMinister of Commerce, Cham Prasidh, remained determined: ‘Cambodia will enter the WTOafter the country joins ASEAN…. by the end of 1997,’ he said. ‘If we are late joining the WTO,we are alone in trade’, he warned.Membership was delayed due to political turmoil and state institutions that were not ready. Streetfighting in July 1997 between the two ruling coalition parties delayed the plan to join ASEAN,which effectively slowed down the WTO accession process. There were many other issues,including the judicial system, administrative reform and trade policy, that needed to beconsidered to comply with WTO standards. It was not until April 1999 that Cambodia waspermitted to join ASEAN, a milestone for the country’s economic integration.In June 1999 a memorandum on Cambodia’s foreign trade regime was submitted to the WTO,consisting of more than 100 pages answering 179 questions asked by the organization. InJanuary 2001, questions and answers relating to the memorandum and conditions for accessionwere circulated. Cambodia organized five sets of multilateral negotiations through a workingparty from June 2001 to July 2003, and nine bilateral agreements from August 2001 to August2003.The speed of the accession process seemed to accelerate after the Doha Round held in November2001, just two months after the terrorist attack on the World Trade Center in the United States.One of the great achievements of the Doha Round was the Doha Declaration, which would helpleast developed countries to join the world trading system more easily. During his visit toCambodia just after the Doha Round, WTO Director-General Mike Moore declared that hewould be very disappointed if Cambodia did not become a member within the next year, beforehe left his post on 1 September 2002. However, he played down his ambitious view, stating, ‘It isalways difficult work, and there is much to be done…. It is especially difficult when there is avacuum [here] of public administration and public laws.’
  3. 3. In August 2001 a team of experts from six world organizations came to Cambodia to assess thecountry’s ability to join the WTO. Funded by a trust fund provided by donors, managed by theWorld Bank, the team spent three weeks researching and assessing Cambodia’s strengths andweaknesses in preparation for its possible entry into the WTO. Cambodia was selected as one ofthree pilot countries to receive integrated framework attention. ‘This is a pro-poor tradestrategy’, according to Sandy Cuthbertson of the Centre for International Economics. The firstpublic forum on Cambodia’s effort to join, gathering together experts, government officials andcivil society, was held in August 2002.The negotiation processThe working party met for the first time on 16 April 2003 to consider the memorandum, and on22 July it indicated that Cambodia would become a member of the WTO in September 2003. AtCancún in Mexico, on 11 September 2003, WTO ministers approved Cambodia’s membershipagreements, and invited the country to become the 147th member. It would have been the firstleast developed country to join the WTO through a full working party negotiation process.However, Cambodia’s parliament had yet to ratify the agreed terms, and because of the delayNepal instead became the first least developed country to enter the WTO. Cambodia had to waituntil early September 2004, when the Cambodian parliament unanimously ratified accession tothe WTO after the resolution of the political impasse.Not many had known about the membership, however. Just after the Cambodian protocol ofaccession was approved by the WTO in September 2003, the Economic Institute of Cambodia(EIC), a newly established think tank institute, conducted a survey in Phnom Penh amongworkers, business people and leaders of civil society, on Cambodia’s accession to the WTO.Only 40% of workers and 50% of small and medium-sized business had heard of the WTO.During a forum organized by EIC on 29 October 2003, about a month and a half after Cambodiawas invited to join the WTO, many civil society members expressed their concerns about thepossible negative impacts of WTO accession on the poor, but they still felt confident thatCambodia could overcome these challenges. ‘We cannot reverse our decision on WTOmembership. Our motto is that we must take risks, otherwise there is no change,’ said KeatSokun of the Cambodia Centre for Human Rights.According to some in civil society, Cambodia had been inspired since 1994 to join this globaltrading club, but the information was not widespread, especially in the private sector. Only theMinistry of Commerce and few line ministries were actively involved and participated in theaccession process.Cambodia may not, nevertheless, have done enough homework before joining the world tradebody. Raoul M. Jennar of Oxfam Belgium maintained a critical view: ‘Negotiations wereconducted in the highest secrecy. There was no debate at the National Assembly, or in the press,or among NGOs…. Government, parliamentarians, journalists and associations all share theresponsibility for this silence…. Government negotiators rejected any assistance offered byinternational NGOs and only listened to WTO propagandists…. One can regret that Cambodians
  4. 4. did not wonder during the negotiations and that they did not consult the 29 least developedcountries who are members of the WTO.’ Oxfam-GB’s country director Michael Bird also feltthat ‘very little work has been done to assess the kinds of impacts of WTO policies’.However, the government rejected these assessments. Sok Siphana, Secretary of State forCommerce, refuted the statement: ‘we have to have WTO accession because the fate of 220, 000workers is at stake, if we don’t enter’.The ratification of WTO membershipAfter eleven months of political deadlock, Cambodia finally had a government and the NationalAssembly began the ratification process. During the debate in the National Assembly on 31August 2004, Assembly President Prince Norodom Ranariddh said, ‘the vote approvingCambodia’s WTO accession gave the country a space in history among other poor nations insidethe global trade group’. And the opposition party had no objection to the WTO accession, butarticulated many anxieties. ‘I think entering into the WTO is necessary; it is a global force. Thereis no country, especially small and poor country like Cambodia, that cannot be marginalized bythis global trend, so we must encourage and push to be a full member of the WTO,’ saidopposition leader Sam Rainsy. The accession to the WTO was unanimously ratified by theCambodian parliamentarians, and Cambodia would officially become a member of the WTO inmid-October 2004.The journey Cambodia embarked upon to join the WTO was like running a marathon, accordingto Suos Someth, Cambodia’s first permanent representative at the WTO and ambassador to theUN agencies: ‘You may not be the winner, but you will run the 42 kilometres like the othersinstead of staying outside the competition and watching the others run.’ Cambodia’s progressshould be viewed optimistically. ‘It takes a long time to build a nation. Economic growthindicators may paint a bleak picture…. they are only indicators to say where we are going.’Cambodia is hoping that WTO membership will facilitate its trade negotiation with othereconomies. As a small country it may not have the bargaining power to negotiate bilaterally withdeveloped countries, but ‘If we don’t have the WTO, it would be a much longer wait becauseyou have to knock on one door at a time’, says Secretary of State for Commerce Sok Siphana.Cambodia can use the WTO as an international force to negotiate.WTO membership will offer Cambodia access to the world market that is expected to attractboth local and foreign direct investment to help overcome its current weak production capacity.As Cambodia intends to change anyway, it can incorporate the changes imposed by the WTOthat are indeed challenges that the country wants to turn into opportunities and benefits. But thiscan be achieved only if the government has the political will to remove the trade constraints thathave stifled the private sector. Accession is expected to force reform in both legal and economicpolicy. The country can benefit fully from globalization if, and only if, all economic playersparticipate in optimizing their benefit. The role of the government is vital in involving the privatesector, farmers and civil society in trade, requiring genuine reform and strong political will.
  5. 5. III. The challenges aheadThe primary objective of Cambodia in becoming a member of the WTO is to protect its fledglinggarment industry after the removal of export quotas at the end of 2004 under the Multi-FibreAgreement (MFA) arrangements, which will be applicable to all members of the WTO. Theindustry has become a significant part of the Cambodian economy and needs to be sustained. It isestimated it employs more than 200, 000 workers, and indirectly contributes to the livelihood ofmore than 1 million in rural areas. By 2002, garment exports had grown to form up to 96% of thecountry’s total exports of goods, from about nil six years previously. About 70% of garmentexports have gone to the United States, and were Cambodia not a member of the WTO, theUnited States might have imposed a high import tariff which would almost certainly haveensured a quick collapse of the non-competitive Cambodian garment industry, rife as it is withhigh bureaucratic costs.The market nicheThe garment industry itself seems to aim for a market niche that gives its products somecompetitive advantage — the offer of products that are produced by workers whose labour rightsare upheld. Sok Siphana of the Ministry of Commerce says, ‘Companies will always go to Chinafor their profit, yet profit alone is not always the basis for business; image-consciousmultinationals will continue using Cambodia because of our high labour standards.’The Garment Manufacture Association of Cambodia (GMAC) — it was most active in pushingCambodia towards WTO membership — continues to welcome the International LabourOrganization (ILO) inspection of working conditions at garment factories to ensure the supportof the human-rights-conscious buyers in the marketplace. According to Ray Chew of GMAC,‘We need to promote a national brand name based on compliant labour standards. Today, buyersare talking about social accountability.’On the government side, efforts to reduce negative social impacts are also expressed: ‘We haveto educate workers about the influence of globalization, and push employers to respect labourlaws in their factories,’ states Ing Kunthaphavi, then secretary of state for Women’s Affairs andVeterans.It remains to be seen, however, just how much business will be retained simply by Cambodia’sreputation for good labour standards. ‘How much we can link the ILO and labour law to increasesale remains to be seen,’ said Tan Keat Chong, general manager of PCCS Garments Ltd. ‘If thatcan be achieved, there is a fighting chance this industry can survive.’Nevertheless, experts think that this kind of niche market can succeed only in the short term. Inthe long run, it may not be possible to sustain an industry growth that is largely driven by
  6. 6. competition in costs and product quality. The cost of labour compliance will help to make totalproduction costs uncompetitive. According to a GMAC study on the survival of the garmentindustry after the bilateral textile agreement expires, buyers still insist on lower prices regardlessof Cambodia’s high labour standards.Government officials, however, are optimistic that the country will retain jobs created by thevolatile garment industry. Minister of Commerce Cham Prasidh maintains, ‘After joining theWTO, the garment industry will not move anywhere, but will stay in Cambodia. While somegarment factories want to move to China, there are twenty-six new companies applying to opennew factories. So the existing will stay and the newcomers will move in because there will bequota free conditions after 2004. Cambodia introduces a strategy to link international trade tolabour conditions.’Legislation and reform implementationThe challenges facing Cambodia in this area are twofold: enacting all necessary reformlegislation for membership in time and carrying it out. As part of its accession to the WTO,Cambodia has made a large number of commitments in legal and judicial system reforms,including the enforcement of the rule of law and the establishment of a specialized commercialcourt. According to a government source, forty-seven laws and regulations are needed to fulfilWTO membership requirements. Fourteen laws and regulations have already been adopted,while the other thirty-three are to be passed within the next two years. However, the politicaldeadlock after the elections of July 2003 has already delayed this ambitious scheduling.Effectively, the schedule imposes the passing of more than two laws and sets of regulations perlegislative working month. On past experience, however, the Cambodian parliament is not likelyto meet the deadline; it has, on average, taken three months to adopt a piece of legislation.If carried out properly, these commitments would stimulate other related economic reforms thatwill be conducive to improving investor confidence. Cambodia has committed itself to drasticinstitutional reforms that will supposedly take place during a transitional period of five years,under the Doha Agreement on a least developed country accession. Given the current weakadministration and institutions, it is highly unlikely that those reforms will be achieved unlessthere is a genuinely strong political will. Cham Prasidh, Minister of Commerce, warns, ‘WhetherCambodia will fully benefit from the WTO depends on what it will achieve in the future. WTOgives Cambodia a lot of opportunities, but it is not sure that the opportunities will become a fullcomparative advantage if we do not do some necessary reforms, such as administration and legalreform.’Increasing supply capacity for exportsOn the business front, improving the competitiveness of the private sector will be a primechallenge for Cambodia. WTO membership will open foreign markets to Cambodian exports as
  7. 7. well as opening the local market to imports. To survive, and perhaps prosper, in either one orboth of the markets, the Cambodian private sector will need to be competitive to take on theworld. The current indication is that the local production sector may have difficulties incompeting with foreign producers. Business people consistently cite increasing corruption andlack of available credit as the two most important constraints that have prevented the sector frombeing more competitive and attracting appropriate long-term investments. The opposition leaderagrees that WTO membership will open up the market for domestic producers, but questionswhether Cambodia can take advantage of the larger market:WTO will give possibilities and a global market to the farmers, artisans, craftsman andproducers. If we don’t have that market, we cannot go to mass production and cheap products….Joining the WTO is a necessary component but not sufficient. There are many other necessaryjobs to do to achieve the objectives…. You have the right to sell to the global market, but askyourself what can you really sell to those markets? You have the right to sell, but you havenothing to sell, so what for?The first concern of trade liberalization is the issue of reciprocity of benefit, and the governmentneeds to ensure that the country will have sufficient production capacity to benefit from thelarger market. Cambodia is classified as an import country with limited production capacity, andseems unlikely to have a larger production capacity soon. The government also expresses thesame concerns. According to Under-Secretary of State Chhim Narith at the Ministry ofCommerce, Cambodia will not get any benefit from the WTO, if it does not have its ownproducts or factories.The decision to join the WTO was made without any real analysis of its advantages, says JeanClaude Levasseur, Representative of the UN Food and Agriculture Organization. ‘If we do nothelp people build their own capacities, the WTO will not help them…. Cambodian rice is notpopular yet, meaning that farmers need to make major changes before rice becomes a viableexport.’ The main problem, according to the executive director of CEDAC, Yang Saing Koma, isthat Cambodia is not well prepared. He says that farmers now produce mainly for themselves; itwill take a long time before they can produce enough and become sufficiently organized to enterthe market. He believes that export-oriented agriculture will favour large agribusiness interestrather that the majority of Cambodia’s poor.Thus the benefit of the WTO may be limited because of Cambodia’s weak production capacity,and disadvantages could increase. Cambodia has experienced a current-account deficit of morethan 10%. Opening the door to foreign goods may increase the deficit, thereby increasing thedifficulty for the government financing either through reserves or by borrowing, or both.Moreover, liberalizing trade in services will open the market for foreign competition that maysuffocate local suppliers, including small and medium-sized enterprises. There will always beindustries in which foreign competitors are more efficient than domestic producers. When importbarriers are lowered, the foreign producers will be able to attract the domestic consumers withlower prices and high quality. Domestic firms competing in those markets will face downwardpressure on sale and profit, which in turn can lead to lower wages, job losses and perhaps evencompany closure.
  8. 8. ‘Cambodia has nothing to export to the potential global market and on the other hand, foreignerssend their products to Cambodian market, taking the market share from Khmer farmers.Cambodian products cannot compete with the neighbouring countries; how would we compete inthe global market if we cannot even compete in our own market,’ asks Sam Rainsy. Thegovernment maintains that since the local market has been virtually free up to now, it has alreadybeen so flooded with export products that formal trade liberalization will make little difference.‘Demand from about 13 million people has already been fulfilled; therefore when we join theWTO, I do not expect that it will have a new impact or an inflow of products that have notalready reached Cambodia.’Agriculture issuesCambodia has basically forgone its rights under WTO membership to use high tariffs and farmsubsidies in agriculture, while others are still holding on to them. According to Oxfam, some ofthe requirements imposed on Cambodia go far beyond what the United States and the EuropeanUnion are willing to commit themselves to in the present round of negotiations. Tariff ceilingsare a case in point. The Cambodian government has committed to limiting its tariff to an averagerate of about 30% for agriculture produce and 20% for industrial products.Cambodia has also agreed not to subsidize its agricultural exports, although under the Agreementon Agriculture, other least developed countries are not required to undertake such a commitment.Critics say that this provision will effectively seal off Cambodia’s right under the Agreement onAgriculture to introduce export subsidies on any agricultural product in the future whennecessary to protect the livelihood of poor farmers, or to effect development priorities. However,the government argues that the agreement will not affect agricultural development, as Cambodiahas never had any export subsidies on agriculture, and the government can always increase itsimport tariffs on agricultural products to protect local producers. Besides, according to MinisterCham Prasidh, the government is committed to a really free trade environment: ‘We are apragmatic country; Cambodia cannot afford farm subsidies which are not good thing for long-term competitiveness…. The government does not believe that the subsidy is a good strategy forsustainable development of the agriculture sector, while the international trend calls for theelimination of the subsidy.’Given WTO membership, Cambodia needs to live, and perhaps prosper, under a low- or nil-tariffregime. Globalization calls for reduction in tariffs, which are still the main source of governmentrevenue, accounting for 73% of tax revenue. Cambodian tariff rates, at an average of 29%, arealready low compared with other least developed countries and Cambodia cannot afford to golower. Under a succession of International Monetary Fund (IMF) programmes Cambodia hasembarked upon a rapid trade liberalization exercise. Average tariff rates have been halved since1996. A further reform was introduced in 2001, including a sharp reduction in maximum tarifflevels. In addition to the shock caused by such rapid reform, the reduction in applied tariff ratesdemanded by the IMF and the World Bank weakened Cambodia’s bargaining position of duringthe WTO accession process.
  9. 9. CompetitivenessPerhaps one of the most challenging tasks facing Cambodia is to make local industriescompetitive. Cambodian products are not ready for competition in the global market, since theirproduction costs are not competitive for such reasons as poor infrastructure, high energy pricesand corruption. According to a World Bank report the most corrupt government agencies are thecustoms office and CamControl. ‘If these two institutions are not well managed and controlled, itwill destroy the Cambodian economy, increase unemployment and make the Cambodian peoplepoorer and poorer’, observes Sam Rainsy.Cambodian agriculture products are not competitive when compared with those of itsneighbouring countries, not because of production costs, but because of high trade costs thatinvolve some unregulated practices in the exporting process. But Minister Cham Prasidhexplains that in the agriculture sector, the high price of Cambodian products stems from a smalleconomy of scale. Therefore the government will help farmers to form an association fromwhich they will benefit. In addition some corrupt practices in customs valuation willautomatically disappear when the government introduces a computerized system.Protection of intellectual property rightsThe implementation of copyright law will affect education and other fields relating to humanresource development. In a poor country such as Cambodia, books, CDs and VCDs withcopyright simply cannot be afforded because they would be too expensive for the averagecitizen. Pirated CDs, VCDs, and DVDs as well as copied books, unlicensed films and evenimitations of circus performances and pantomimes may soon cease to exist in Cambodia. Withthe majority of the population earning less than one dollar per day, the enforcement of copyrightlaw would take away the livelihood of thousands, and cut off many from educational andentertainment materials.IV. Concluding remarksEven though it may not have been well thought through, WTO membership may just be apanacea Cambodia needs in order to improve its own governance and credibility. Cambodia hasmade a large number of commitments relating to the institutional reforms as part of its terms ofaccession to the WTO, especially to speed up its legal and judicial system reforms in order totransform Cambodia to a country governed by the rule of law. These commitments, if carriedout, would stimulate other related economic reforms to improve investor confidence.
  10. 10. There are many crucial challenges ahead to test the government’s resolve to make WTOmembership work for the country.Much more legislation needs to be in place and, perhaps more significantly, to be implemented.The production base needs to expand so that the country can draw benefits from exports to theworld market. Industries and agriculture will have a new regime: growing with low or nil tariffsand no subsidy. Industries are to be competitive. And the protection of intellectual propertyrights will compel the Cambodian government somehow to make copyright materials availableto the country’s poor majority.A market niche is to be built on upholding workers’ rights in the expectation that it will help tosustain growth. Indeed, Cambodia has so far enjoyed the quota system granted by the UnitedStates, the main reason for the dramatic expansion of its garment industry. It is thus quite clearthat the current success of the garment industry depends exclusively on the artificial comparativeadvantage known as special treatment that will be phased out at the end of 2004. Hence the nichemarket, such as linkage between labour standards and the market, will be undoubtedly helpful inthe short term, while long-term growth will be more dependent on high quality and low-costlabour.