Case Study 8: Cambodia’s Accession to the WTO: ‘Fast Track’ Accession by a Least Developed Country07/07/2020 13
I. The problem in context
In 1994, Cambodia applied for membership of the WTO. Following the Doha Declaration of November 2001 that eased membership conditions for least developed counties, Cambodia’s membership was finally approved in September 2003 at the Cancun Ministerial Conference. However, membership did not become effective until a year later because an internal political deadlock in Cambodia after the July 2003 elections delayed ratification.
Some Cambodian policy players were surprised by approval of Cambodia’s membership of the WTO, as negotiations had been conducted without the active participation of stakeholders. There was 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.(1) None of the country’s parliamentarians knew about the substance of the negotiations. The government was expected to reveal detailed agreements with the WTO at the ratification debate in the National Assembly. Critics say that Cambodia has just thrown itself in at the deep end by becoming a member of the WTO.
With an estimated average per capita income of US$300, Cambodia is the poorest and least developed country in the east Asian region, and one of the poorest in the world.(2) Since its emergence from war and upheaval, Cambodia has been very keen for economic recovery, to integrate itself into the world community by means of internal reforms. Though initial reforms have produced some positive results, the country is still plagued with major socio-economic problems. Its engine of growth for the past few years — the garment industry — is facing uncertainty and is looking towards the WTO for solutions.
The government and some business people have high expectations of WTO membership. They expect it to help protect and expand markets for Cambodian garment exports and other products after the removal of US quotas from 2005, even though Cambodian industries have not been well known for their cost-effectiveness and competitiveness. Civil society members are more sceptical, as apparently membership comes with many conditions with which the country as a whole may not be able to comply, even with a five-year grace period. There seem to be reasonable 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 country needs for genuine institutional and policy reforms. Cambodia will indeed have a steep learning curve. It is, in effect, a litmus test according to which accession will make or break the country after its ratification by the National Assembly.
The objective of this case study is to tell the story of Cambodia’s accession process, and the ways in which policy-makers, the private sector and civil society perceive and deal with the issues of WTO membership.
II. The roles of stakeholders in the accession process
Given the important role of international trade in alleviating poverty and promoting economic growth, Cambodia initiated ambitious preliminaries to becoming a member of the Association of South East Asian Nations (ASEAN) and the WTO. The Cambodia government filed an official WTO application on 8 December 1994, and a working party was established two weeks later to consider it. According to Lu Laysreng, then Under-Secretary of State for Commerce, the Council of Ministers agreed to push for Cambodian entry into the WTO: ‘It is very important for Cambodia to join the WTO, because it provides facilities for us to move into a world association of business people.’ Cambodia then started to work on a number of issues that had to be resolved to enable Cambodia to join the WTO, including lower tariff rates, the adoption of an accounting system based on the Anglo-Saxon model, and the adoption of a hybrid legal system integrating Anglo-Saxon and French standards.(3)
After attending the four-day ministerial conference in Singapore in December 1996 as a new official observer, Cambodia understood that it was not easy to be a WTO member, but the Minister of Commerce, Cham Prasidh, remained determined: ‘Cambodia will enter the WTO after 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.(4)
Membership was delayed due to political turmoil and state institutions that were not ready. Street fighting 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 be considered to comply with WTO standards. It was not until April 1999 that Cambodia was permitted 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. In January 2001, questions and answers relating to the memorandum and conditions for accession were circulated.(5) Cambodia organized five sets of multilateral negotiations through a working party from June 2001 to July 2003, and nine bilateral agreements from August 2001 to August 2003.
The speed of the accession process seemed to accelerate after the Doha Round held in November 2001, 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 help least developed countries to join the world trading system more easily. During his visit to Cambodia just after the Doha Round, WTO Director-General Mike Moore declared that he would be very disappointed if Cambodia did not become a member within the next year, before he left his post on 1 September 2002. However, he played down his ambitious view, stating, ‘It is always difficult work, and there is much to be done…. It is especially difficult when there is a vacuum [here] of public administration and public laws.’(6)
In August 2001 a team of experts from six world organizations came to Cambodia to assess the country’s ability to join the WTO. Funded by a trust fund provided by donors, managed by the World Bank, the team spent three weeks researching and assessing Cambodia’s strengths and weaknesses in preparation for its possible entry into the WTO. Cambodia was selected as one of three pilot countries to receive integrated framework attention. ‘This is a pro-poor trade strategy’, according to Sandy Cuthbertson of the Centre for International Economics.(7) The first public forum on Cambodia’s effort to join, gathering together experts, government officials and civil society, was held in August 2002.(8)
The working party met for the first time on 16 April 2003 to consider the memorandum, and on 22 July it indicated that Cambodia would become a member of the WTO in September 2003. At Cancún in Mexico, on 11 September 2003, WTO ministers approved Cambodia’s membership agreements, and invited the country to become the 147th member. It would have been the first least 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 delay Nepal instead became the first least developed country to enter the WTO. Cambodia had to wait until early September 2004, when the Cambodian parliament unanimously ratified accession to the WTO after the resolution of the political impasse.
Not many had known about the membership, however. Just after the Cambodian protocol of accession 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 among workers, 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 Cambodia was invited to join the WTO, many civil society members expressed their concerns about the possible negative impacts of WTO accession on the poor, but they still felt confident that Cambodia could overcome these challenges. ‘We cannot reverse our decision on WTO membership. Our motto is that we must take risks, otherwise there is no change,’ said Keat Sokun of the Cambodia Centre for Human Rights.(9)
According to some in civil society, Cambodia had been inspired since 1994 to join this global trading club, but the information was not widespread, especially in the private sector. Only the Ministry of Commerce and few line ministries were actively involved and participated in the accession process.
Cambodia may not, nevertheless, have done enough homework before joining the world trade body. Raoul M. Jennar of Oxfam Belgium maintained a critical view: ‘Negotiations were conducted 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 the responsibility for this silence…. Government negotiators rejected any assistance offered by international NGOs and only listened to WTO propagandists…. One can regret that Cambodians did not wonder during the negotiations and that they did not consult the 29 least developed countries who are members of the WTO.’(10) Oxfam-GB’s country director Michael Bird also felt that ‘very little work has been done to assess the kinds of impacts of WTO policies’.(11)
However, the government rejected these assessments. Sok Siphana, Secretary of State for Commerce, refuted the statement: ‘we have to have WTO accession because the fate of 220, 000 workers is at stake, if we don’t enter’.(12)
After eleven months of political deadlock, Cambodia finally had a government and the National Assembly began the ratification process. During the debate in the National Assembly on 31 August 2004, Assembly President Prince Norodom Ranariddh said, ‘the vote approving Cambodia’s WTO accession gave the country a space in history among other poor nations inside the global trade group’.(13) And the opposition party had no objection to the WTO accession, but articulated many anxieties. ‘I think entering into the WTO is necessary; it is a global force. There is no country, especially small and poor country like Cambodia, that cannot be marginalized by this global trend, so we must encourage and push to be a full member of the WTO,’ said opposition leader Sam Rainsy.(14) The accession to the WTO was unanimously ratified by the Cambodian parliamentarians, and Cambodia would officially become a member of the WTO in mid-October 2004.
The journey Cambodia embarked upon to join the WTO was like running a marathon, according to Suos Someth, Cambodia’s first permanent representative at the WTO and ambassador to the UN agencies: ‘You may not be the winner, but you will run the 42 kilometres like the others instead of staying outside the competition and watching the others run.’ Cambodia’s progress should be viewed optimistically. ‘It takes a long time to build a nation. Economic growth indicators may paint a bleak picture…. they are only indicators to say where we are going.’(15)
Cambodia is hoping that WTO membership will facilitate its trade negotiation with other economies. As a small country it may not have the bargaining power to negotiate bilaterally with developed countries, but ‘If we don’t have the WTO, it would be a much longer wait because you have to knock on one door at a time’,(16) 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 attract both 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 WTO that are indeed challenges that the country wants to turn into opportunities and benefits. But this can be achieved only if the government has the political will to remove the trade constraints that have stifled the private sector. Accession is expected to force reform in both legal and economic policy. The country can benefit fully from globalization if, and only if, all economic players participate in optimizing their benefit. The role of the government is vital in involving the private sector, farmers and civil society in trade, requiring genuine reform and strong political will.
III. The challenges ahead
The primary objective of Cambodia in becoming a member of the WTO is to protect its fledgling garment industry after the removal of export quotas at the end of 2004 under the Multi-Fibre Agreement (MFA) arrangements, which will be applicable to all members of the WTO. The industry has become a significant part of the Cambodian economy and needs to be sustained. It is estimated it employs more than 200, 000 workers, and indirectly contributes to the livelihood of more than 1 million in rural areas. By 2002, garment exports had grown to form up to 96% of the country’s total exports of goods, from about nil six years previously. About 70% of garment exports have gone to the United States, and were Cambodia not a member of the WTO, the United States might have imposed a high import tariff which would almost certainly have ensured a quick collapse of the non-competitive Cambodian garment industry, rife as it is with high bureaucratic costs.
The garment industry itself seems to aim for a market niche that gives its products some competitive advantage — the offer of products that are produced by workers whose labour rights are upheld. Sok Siphana of the Ministry of Commerce says, ‘Companies will always go to China for their profit, yet profit alone is not always the basis for business; image-conscious multinationals will continue using Cambodia because of our high labour standards.’(17)
The Garment Manufacture Association of Cambodia (GMAC) — it was most active in pushing Cambodia towards WTO membership — continues to welcome the International Labour Organization (ILO) inspection of working conditions at garment factories to ensure the support of 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, buyers are talking about social accountability.’(18)
On the government side, efforts to reduce negative social impacts are also expressed: ‘We have to educate workers about the influence of globalization, and push employers to respect labour laws in their factories,’ states Ing Kunthaphavi, then secretary of state for Women’s Affairs and Veterans.
It remains to be seen, however, just how much business will be retained simply by Cambodia’s reputation for good labour standards.(19) ‘How much we can link the ILO and labour law to increase sale remains to be seen,’ said Tan Keat Chong, general manager of PCCS Garments Ltd. ‘If that can be achieved, there is a fighting chance this industry can survive.’(20)
Nevertheless, experts think that this kind of niche market can succeed only in the short term. In the long run, it may not be possible to sustain an industry growth that is largely driven by competition in costs and product quality. The cost of labour compliance will help to make total production costs uncompetitive. According to a GMAC study on the survival of the garment industry after the bilateral textile agreement expires, buyers still insist on lower prices regardless of Cambodia’s high labour standards.
Government officials, however, are optimistic that the country will retain jobs created by the volatile garment industry. Minister of Commerce Cham Prasidh maintains, ‘After joining the WTO, the garment industry will not move anywhere, but will stay in Cambodia. While some garment factories want to move to China, there are twenty-six new companies applying to open new factories. So the existing will stay and the newcomers will move in because there will be quota free conditions after 2004. Cambodia introduces a strategy to link international trade to labour conditions.’(21)
The challenges facing Cambodia in this area are twofold: enacting all necessary reform legislation 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 commercial court. According to a government source, forty-seven laws and regulations are needed to fulfil WTO 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 political deadlock 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 per legislative working month. On past experience, however, the Cambodian parliament is not likely to 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 that will be conducive to improving investor confidence. Cambodia has committed itself to drastic institutional 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 weak administration and institutions, it is highly unlikely that those reforms will be achieved unless there is a genuinely strong political will. Cham Prasidh, Minister of Commerce, warns, ‘Whether Cambodia will fully benefit from the WTO depends on what it will achieve in the future. WTO gives Cambodia a lot of opportunities, but it is not sure that the opportunities will become a full comparative advantage if we do not do some necessary reforms, such as administration and legal reform.’(22)
On the business front, improving the competitiveness of the private sector will be a prime challenge for Cambodia. WTO membership will open foreign markets to Cambodian exports as well as opening the local market to imports. To survive, and perhaps prosper, in either one or both of the markets, the Cambodian private sector will need to be competitive to take on the world. The current indication is that the local production sector may have difficulties in competing with foreign producers. Business people consistently cite increasing corruption and lack of available credit as the two most important constraints that have prevented the sector from being more competitive and attracting appropriate long-term investments. The opposition leader agrees that WTO membership will open up the market for domestic producers, but questions whether Cambodia can take advantage of the larger market:
WTO will give possibilities and a global market to the farmers, artisans, craftsman and producers. 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 necessary jobs to do to achieve the objectives…. You have the right to sell to the global market, but ask yourself what can you really sell to those markets? You have the right to sell, but you have nothing to sell, so what for?(23)
The first concern of trade liberalization is the issue of reciprocity of benefit, and the government needs to ensure that the country will have sufficient production capacity to benefit from the larger market. Cambodia is classified as an import country with limited production capacity, and seems unlikely to have a larger production capacity soon. The government also expresses the same concerns. According to Under-Secretary of State Chhim Narith at the Ministry of Commerce, Cambodia will not get any benefit from the WTO, if it does not have its own products or factories.
The decision to join the WTO was made without any real analysis of its advantages, says Jean Claude Levasseur, Representative of the UN Food and Agriculture Organization. ‘If we do not help people build their own capacities, the WTO will not help them…. Cambodian rice is not popular yet, meaning that farmers need to make major changes before rice becomes a viable export.’(24) The main problem, according to the executive director of CEDAC,(25) Yang Saing Koma, is that Cambodia is not well prepared. He says that farmers now produce mainly for themselves; it will take a long time before they can produce enough and become sufficiently organized to enter the market. He believes that export-oriented agriculture will favour large agribusiness interest rather 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 more than 10%. Opening the door to foreign goods may increase the deficit, thereby increasing the difficulty 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 may suffocate local suppliers, including small and medium-sized enterprises. There will always be industries in which foreign competitors are more efficient than domestic producers. When import barriers are lowered, the foreign producers will be able to attract the domestic consumers with lower prices and high quality. Domestic firms competing in those markets will face downward pressure on sale and profit, which in turn can lead to lower wages, job losses and perhaps even company closure.
‘Cambodia has nothing to export to the potential global market and on the other hand, foreigners send their products to Cambodian market, taking the market share from Khmer farmers. Cambodian products cannot compete with the neighbouring countries; how would we compete in the global market if we cannot even compete in our own market,’(26) asks Sam Rainsy. The government maintains that since the local market has been virtually free up to now, it has already been 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 the WTO, I do not expect that it will have a new impact or an inflow of products that have not already reached Cambodia.’(27)
Cambodia has basically forgone its rights under WTO membership to use high tariffs and farm subsidies in agriculture, while others are still holding on to them. According to Oxfam, some of the requirements imposed on Cambodia go far beyond what the United States and the European Union are willing to commit themselves to in the present round of negotiations. Tariff ceilings are a case in point. The Cambodian government has committed to limiting its tariff to an average rate of about 30% for agriculture produce and 20% for industrial products.
Cambodia has also agreed not to subsidize its agricultural exports, although under the Agreement on 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 on Agriculture to introduce export subsidies on any agricultural product in the future when necessary 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 Cambodia has never had any export subsidies on agriculture, and the government can always increase its import tariffs on agricultural products to protect local producers. Besides, according to Minister Cham Prasidh, the government is committed to a really free trade environment: ‘We are a pragmatic 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 for sustainable development of the agriculture sector, while the international trend calls for the elimination of the subsidy.’(28)
Given WTO membership, Cambodia needs to live, and perhaps prosper, under a low- or nil-tariff regime. Globalization calls for reduction in tariffs, which are still the main source of government revenue, accounting for 73% of tax revenue. Cambodian tariff rates, at an average of 29%, are already low compared with other least developed countries and Cambodia cannot afford to go lower.(29) Under a succession of International Monetary Fund (IMF) programmes Cambodia has embarked upon a rapid trade liberalization exercise. Average tariff rates have been halved since 1996. A further reform was introduced in 2001, including a sharp reduction in maximum tariff levels. In addition to the shock caused by such rapid reform, the reduction in applied tariff rates demanded by the IMF and the World Bank weakened Cambodia’s bargaining position of during the WTO accession process.
Perhaps one of the most challenging tasks facing Cambodia is to make local industries competitive. Cambodian products are not ready for competition in the global market, since their production costs are not competitive for such reasons as poor infrastructure, high energy prices and corruption. According to a World Bank report(30) the most corrupt government agencies are the customs office and CamControl.(31) ‘If these two institutions are not well managed and controlled, it will destroy the Cambodian economy, increase unemployment and make the Cambodian people poorer and poorer’, observes Sam Rainsy.
Cambodian agriculture products are not competitive when compared with those of its neighbouring countries, not because of production costs, but because of high trade costs that involve some unregulated practices in the exporting process. But Minister Cham Prasidh explains that in the agriculture sector, the high price of Cambodian products stems from a small economy of scale. Therefore the government will help farmers to form an association from which they will benefit. In addition some corrupt practices in customs valuation will automatically disappear when the government introduces a computerized system.(32)
The implementation of copyright law will affect education and other fields relating to human resource development. In a poor country such as Cambodia, books, CDs and VCDs with copyright simply cannot be afforded because they would be too expensive for the average citizen. Pirated CDs, VCDs, and DVDs as well as copied books, unlicensed films and even imitations of circus performances and pantomimes may soon cease to exist in Cambodia. With the majority of the population earning less than one dollar per day, the enforcement of copyright law would take away the livelihood of thousands, and cut off many from educational and entertainment materials.
IV. Concluding remarks
Even though it may not have been well thought through, WTO membership may just be a panacea Cambodia needs in order to improve its own governance and credibility. Cambodia has made a large number of commitments relating to the institutional reforms as part of its terms of accession to the WTO, especially to speed up its legal and judicial system reforms in order to transform Cambodia to a country governed by the rule of law. These commitments, if carried out, would stimulate other related economic reforms to improve investor confidence.
There are many crucial challenges ahead to test the government’s resolve to make WTO membership 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 the world market. Industries and agriculture will have a new regime: growing with low or nil tariffs and no subsidy. Industries are to be competitive. And the protection of intellectual property rights will compel the Cambodian government somehow to make copyright materials available to the country’s poor majority.
A market niche is to be built on upholding workers’ rights in the expectation that it will help to sustain growth. Indeed, Cambodia has so far enjoyed the quota system granted by the United States, the main reason for the dramatic expansion of its garment industry. It is thus quite clear that the current success of the garment industry depends exclusively on the artificial comparative advantage known as special treatment that will be phased out at the end of 2004. Hence the niche market, such as linkage between labour standards and the market, will be undoubtedly helpful in the short term, while long-term growth will be more dependent on high quality and low-cost labour.
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