Executive Summary

• Cambodia and China are in the process of negotiating bilateral Free Trade Agreement (FTA) which is expected to boost bilateral trade and investment. The negotiation is expected to be concluded sometime this year.
• After the conclusion of the FTA, Cambodia will be able to expand its export market to China, thereby allowing the country to diversify its export market, especially for its agricultural products.
• To gain maximum benefits from the opportunities to be offered by the FTA, Cambodia will need to make greater efforts in strengthening its governance and capacity in production and export.
• Cambodia needs to enhance its regulation and governance in order to improve the quality of China’s investments to ensure fair trade between the two countries.

Introduction

Cambodia and China have recently started studying a possibility to establish a bilateral Free Trade Agreement (FTA). The first round of the official negotiation was conducted in Beijing from 20th to 21st January 2020, during which the officials from both countries met to discuss the Agreement that is expected to be concluded in the near future. According to the report of the meeting, the two countries aim to conclude the deal by mid-year and to sign it by the end of 2020. If successfully concluded, this FTA will be a new mechanism boosting and diversifying the economic potentials and vision of the two nations.

FTA: Why It Matters for Cambodia and China?

The FTA with China will benefit Cambodia in two ways. Firstly, the agreement will encourage greater trade and investment flow between Cambodia and China through the reduction and/or removal of tariff and non-tariff barriers. By concluding the deal with China, Cambodia may enjoy more diverse and cheaper products in the market, as trade and investment will give consumers and businesses greater access to a wider range of competitively priced goods and services. Moreover, the trade and investment will spur more economic growth and national development, which will enable Cambodia to achieve its target of becoming an upper-middle income country by 2030.

Secondly, the FTA will serve as a new source for Cambodia’s export. Cambodia’s economy has been growing rapidly to a point where it will need more exporting markets besides the EU and the US. These two traditional markets have been providing trade preferential treatments to Cambodia through the Everything but Arms (EBA) and the Generalized System of Preferences (GSP) respectively. China has been reportedly interested in importing Cambodia’s agricultural products such as rice, mangos, soya beans, corn, coconut oil and cassava. In this sense, China can provide Cambodia a preferential tariff treatment of the mentioned agricultural products and/or other products in order to meet the former’s local consumption demands. By the same token, Cambodia will increase its export volume under this improved preferential trade scheme, which could eventually modernise the exporting industries of the nation.

Moreover, the FTA with China will serve as a basis that may enable Cambodia to reach similar trade deals with China’s other trading partners, such as Singapore, South Korea, Australia, New Zealand, Switzerland, and Pakistan, all of which have by far signed FTAs with this world’s second biggest economy. Therefore, the FTA with China is crucial for Cambodia, as the Kingdom is trying to look for more opportunities to diversify its export destinations, thereby reducing its heavy dependence on Western markets.

As for China, the FTA with Cambodia may fulfil its strategic and economic interests. It is important for China to strengthen its ties with other developing economies including those in Southeast Asia so that Beijing can promote its value and soft power in the region. Cambodia has enjoyed strong annual economic growth rate of 7 per cent, partly owing to good bilateral relations with China. Hence, this suggests that other Southeast Asian countries may reap similar economic benefits should they are on good terms with China. Ultimately, the FTA will promote a more comprehensive economic integration in Southeast Asia, allowing Chinese companies to have more active roles in Cambodia and in the region.

The FTA will offer a new opportunity for growth to both China and Cambodia. Considering the positive trading and investment trends in the recent years, the two countries will likely gain reciprocal benefits. Specifically, the trade volume between the two countries has steadily increased from USD 5.16 billion in 2016 to USD 6.04 billion in 2017, and to USD 7.4 billion in 2018.1 Both countries aim to reach USD 10 billion in trade a year by 2023.2 As of investment, China is the biggest source of investment to Cambodia, investing USD 3.7 billion in 2019.3 Therefore, the FTA is arguably an important initiative for Cambodia to engage more deeply with China in terms of boosting bilateral trade and Foreign Direct Investment (FDI). As a result, Cambodia’s economic growth will still be sustained even though the EBA may be withdrawn. The FTA with China is considered a crucial mechanism to promote Cambodia’s economic growth, a strong underpinning of the Kingdom’s long-term peace and stability.

Cambodia-China Bilateral Relations

The establishment of Cambodia-China FTA cannot be fully understood without making reference to the close relationship between the two states in almost every sector including their cooperation on aspects of politics, security, economy, culture and people-to-people exchanges. Cambodia and China have promoted a very close and deep cooperation, as evidenced by the signings of the Comprehensive Strategic Cooperation Partnership in 2010 and the Cambodia- China Community of Shared Future in 2019. Therefore, the FTA is also a mechanism which illustrates the strong commitment by the two leaders to enhancing the living standard of the two peoples, deepening cooperation within the Belt and Road Initiative cooperation framework and making positive contributions to regional and global peace and prosperity.

China and Cambodia relations has brought tangible benefits to both countries and their respective peoples, and it has positively contributed to peace and development in the region and the world at large. Such a relations can serve as a role model for state-to-state relations. China respects the independence, sovereignty and territorial integrity of Cambodia, and Cambodia has consistently embraced the One China policy. The success story of China’s relations with Cambodia particularly in the FTA will further promote Cambodia-China Comprehensive Strategic Partnership. In short, it will serve as a role model of the modern relationship between a great power and a small state, whose foundation is based on the principles of equal sovereignty, mutual respect, and win-win cooperation.

Challenges of FTA to Cambodia

As a developing country, Cambodia needs to prepare well to gain maximum benefits from the opportunities to be created by the FTA and to minimise risks from any possible fallout the Kingdom may face. To put it another way, trade and economic deficits, reduced tariff revenues, excessive influx of Chinese products into Cambodian market, and the unsustainable exploitation of natural resources may put Cambodia in a disadvantaged position.

Apart from the mentioned challenges, the business community in Cambodia is not strong and well-coordinated yet. Hence, those with well-established connections would likely enjoy more advantages from the special trading preferences vis-à-vis those with less connections. Cambodia’s younger entrepreneurs are more interconnected than the older ones as they have formed social and professional networks to support one another. Cambodia has also faced with challenges in doing direct trade with China without passing through Chinese middlemen. For instance, when Cambodia receives rice quota from China, its businessmen often end up making deals at the mercy of Chinese traders.

Policy Recommendations for Cambodia

To overcome the above challenges, the Cambodian government needs to enhance its governance and regulatory frameworks to improve the quality of Chinese investments coming into the country, especially China’s export-oriented investment projects, and to promote mutual interests based on fair trade. Moreover, the Cambodian business community needs to be more united in order to maintain its competitiveness.

The Cambodian entrepreneurs need to be more proactive in product innovation, market research, and data analysis in order to always stay ahead of the curve and stay competitive in an increasingly uncertain and unpredictable marketplace. More financial support and capacity building programs for the Cambodian entrepreneurs are needed. The government needs to create a business ecosystem to support the local Cambodian entrepreneurs and to help them grasp the opportunities deriving from the Cambodia-China FTA.

Conclusion

Cambodia-China FTA, if it is concluded, will be the first bilateral free trade agreement that Cambodia has ever concluded with a foreign country. It will also be an important free trade agreement which showcases China’s commitment to helping one of its closest friends in the region. Having said that, although the two counterparts have just started their first round of official negotiation, Cambodia and China have expressed their firm commitment to signing the FTA within the year of 2020 in order to promote the sustained economic growth of the two states.

The opinions expressed are the author’s own and do not reflect the views of the Asian Vision
Institute.