Friday, March 28, 2014

The opportunities and challenges to the WTO accession: the case of Cambodia

Cambodia is one of the poorest countries in the world. The government has deployed many efforts to reintegrate itself into the international economy since the signing of the Paris Peace Accord in 1991. Following this accord, the government's strategies aim to open its economic and trade policies to boost its economy and development, which intends to reduce poverty. As part of this strategy, Cambodia became 148th member of the World Trade Organization (WTO) in 2004 approved at the Ministerial Conference in Cancun, Mexico (Simon & Carlos, 2005). Accession to WTO aims to foster free and fair international trade into the world markets, which is believed to accelerate its domestic economic, legal and institutional reforms to create stable business environments and attract more foreign direct investment (FDI). However, being a member of WTO means that most of external trade barriers will be removed. In this context, the accession of Cambodia to the WTO might be exceptionally beneficial for the country but it also poses great challenges for the country as well (EIC, 2003).

Therefore, the main objectives of this paper aim to highlight the opportunities and challenges facing Cambodia. This paper divides into two sections. Section one discusses three main opportunities of WTO accession: first, access to the world markets; second, access to dispute settlement mechanisms for trade issues and non-discrimination; third, improve better governance and credibility. Section two discusses four key challenges of WTO accession: first, commit in legal and judicial system reforms; second, compete in global markets; third, protect trade-related aspects of intellectual property rights (TRIPS); fourth, forgo high tariff on agriculture products and protect small farmers. 

First, by accession to WTO, Cambodia can integrate its market access to the world economy, which may result in higher exports to the foreign markets and boost FDI inward for the country. This is the substantial milestones not only for the Cambodian economy but for all the Least Developed Countries (LDCs), which seek to leverage the benefits of trade. By this accession, Cambodia is treated by all the WTO3 members as a most-favoured nation (MFN), which cannot be discriminated against unfairly according to the principles and rules underlying the trading system. This provides superior market access in a wide range of products and a wide range of countries. For instance, the garment industry4 is one of the Cambodian key industries, which are the powerful stimulus to the Cambodian development. By this accession, Cambodia could protect its garment industry after the export quotas removal under the Multi Fibre Agreement (MFA) arrangements, which are applicable to the WTO members. After the removal, all exports, especially those to the United States (US) markets, will be subject to a high import tariff (EIC, 2003). For instance, about 50 percent of the garment exports have been delivered to the foreign markets, particularly the US. Thus, by accession to WTO could help to secure a lower tariff rate for the LDCs like Cambodia. Indeed, without a WTO membership, it could be difficult for the Cambodian garment export industries to cope competitively with the normal US tariff regime, particularly, after the quota system is removed. This means that a high import tariff imposed by the US might ensure a quick collapse of the non-competitive Cambodian garment industries. 

From these observations, becoming a WTO member is very important for Cambodia to accelerate its economic development process and to raise the living standards of the people through market access to the world markets. Importantly, it also sends a strong signal to trade and investment partners about the future directions of Cambodia, which could attract more FDI inwards. Yet, it does not mean that integration into the global markets access brings higher exports and FDI inwards for the country. Many developed countries still maintain high tariff peaks barriers to protect policy, which close markets for the Cambodian export products.

Second, by accession to WTO, Cambodia can join the WTO dispute settlement mechanism5, which is an effective system for dealing with the disputes of international trade. This mechanism is widely recognized as one of the most critical and successful features of trade regime and is very crucial for offering security, safety and predication to the economic issues of the member countries. With suitable dispute settlement mechanisms under the WTO agreements, it would support small and vulnerable economies like Cambodia from any violations, which might be made by the big markets, particularly, from the developed countries. This mechanism is also considered as an important factor in upgrading the rights and obligations of the members under the agreements. This factor is very important for Cambodia to ensure current investment and attract more foreign direct investment for the country. Thus, by accession to this mechanism, the WTO members can shine the spotlight of international legal scrutiny on the protectionist practices of their trading partners. This means that it is significant for the developing countries like Cambodia, which typically lack the market size to exert much influence through more power-oriented trade diplomacy.

In addition, Cambodia can fully benefit from the rights accorded to all members under the WTO agreements such as non-discrimination by other WTO members known as MFN, and potential increase in FDI. For instance, the developed countries provide market opportunities for goods from the developing countries like Cambodia, with better terms and zero percent tariff rates, which could promote more investments, and thus create more local employments in the country. 

On the other hand, Cambodia faces the concept of bad governance and weakness of the government, that is, lack of control, corruption and illegal monopolies, which would discourage and threaten the foreign investors. This signal could affect on the trade environment in the country (WTO, 2003).

Therefore, by accession to WTO offers the opportunities for Cambodia to set up a legal framework, which would improve better governance and credibility. It is significant for the economy of the country to introduce its credibility in the commercial policy, which is a consequence of adherence to WTO rules. Better governance and credibility is very vital for both domestic producers and exporters from other countries wishing to access the economy’s markets in Cambodia. Thus, by strengthening better governance and enhancing credibility would significantly improve the confidences of the foreign investor.

However, by accession to WTO, it does not mean a panacea6. Simultaneously, it will also bring the challenges to the Cambodian government as well. One of the most challenging tasks facing Cambodia is to make its commitments in legal and judicial system reforms such as the establishment of a specialised commercial court and the enforcement of rule of law as part of its accession to WTO (Bernard, et al, 2002). For instance, 47 laws and regulations are needed to fulfil the requirements of the WTO membership and needed to be passed by 2006 (EIC, 2003). This means that the government needs to implement committed reforms to align its domestic institutions and policies with the disciplines of WTO. Indeed, the government also needs to re-establish itself as an open-market and democratic country. Particularly, the social justices, human development, and the rules of human rights, which are the most immediate and important tasks for the government, are needed to be promoted to enhance the investment for reconstruction and development, and reform the central institutions of macro-economic management. For example, according to a report of the World Bank (WB), the CamControl and customs office are one of the most corrupt government agencies (2003). Therefore, if these institutions are not well managed, it could damage the Cambodian economy, which increase unemployment and make the Cambodian people poorer.

However, if all of these reforms are carried out properly, it would stimulate related economic reforms, which will be conducive to improving the investor confidences and hence it could attract more foreign investments for the country, which leads to the development of the country as whole.

Moreover, another primary challenging tasks facing Cambodia is to make local industries and private sectors more competitive. It would open the foreign markets for Cambodian exports as well as opening the domestic market for imports. In this situation, the Cambodian local product sectors might be difficult for competing with the foreign producers since its production cost is not competitive. That is for such reason as poor infrastructure, high energy prices and corruption in the country. For instance, the Cambodian agriculture products are not competitive with the agriculture products in the neighbouring countries due to high trade costs, which involve some unregulated practices in the exporting process. For this reason, the local industries and private sectors face difficulties to compete with the foreign investors.

In addition, the agreements of TRIPS are needed to be fully implemented while accession to the WTO. Therefore, the implementation of intellectual property rights, which intends to protect authors, inventors, brands and names against imitation and reproduction, could affect the Cambodian education and human resource development. For example, the pirated compact disk, video compact disk, and copied books, unlicensed films might no longer exist in Cambodia due to the pressures of this accession. Thus, a high price of the original books and related educational materials with copyright cannot be afforded by the Cambodian citizens in such a poor country like Cambodia, which the majority of the population earning is less than one dollar per day. For this reason, the enforcement of intellectual property rights law would take away the livelihood of thousands, and cut off many from educational and entertainment materials.

The Cambodian agriculture also plays a major role in the Cambodian economy. More than 80 percent of the workforce is in the agricultural sectors and most of them are small and poor farmers. By accession to WTO, the government needs to take specific attention given to the impacts of this accession, particularly on agriculture with a focus on small farmers (Benedicte, 2004). There will be of a risk of social crisis if the impact is not mitigated. It might be useful for implementing a price policy to protect the farmers’ income under the constraints of WTO. In addition, under the WTO membership, Cambodia basically needs to forgo its rights to use high tariffs and farm subsidies in the agriculture products. Some of the requirements, which are imposed on Cambodia, go far beyond what the US and the European Union (EU) commits themselves in the negotiations (Oxfam, 2003). Thus, the Cambodian government limits its tariff to an average rate of about 30% for agriculture products and 20% for industrial products. Cambodia also agrees not to subsidize its agricultural exports, although the other least developed countries are not required to undertake such commitments. However, this provision could effectively seal off Cambodia’s right under the agreement on agriculture (AOA) to introduce export subsidies on any agricultural product in the future (Cham, 2004). 

Finally, by accession to the WTO could be exceptionally beneficial for the country but it also poses great challenges for the country as well. By this accession, the WTO offers several opportunities for Cambodia. That is; accessions to foreign markets; accession to dispute settlement mechanisms for trade issues and non-discrimination, and improving better governance and credibility. It is the substantial milestone for the Cambodian economy and an effective lever to promote trade liberalization and market access in the world markets, and also sends a strong signal to trade and investment partners about future directions of Cambodia’s investment. With suitable dispute settlement mechanisms under the WTO agreements, it would support small and vulnerable economies like Cambodia from any violations made by the big markets from the developed countries. This mechanism is very crucial for offering security, safety and predication to the economic issues of the member countries. Cambodia also has the opportunities to improve its own governance and credibility for the foreign investors.  Therefore, all of these opportunities would lead to an overall economic growth, which is believed to lead to reduce poverty in the country. 

Yet, matching the opportunities and facing the challenges, the Cambodian governments have significant roles to play under the WTO agreements. By participating in these global economies, Cambodia needs to face several challenges to fully take the advantages of this accession. That is, Cambodia needs substantive legal and judicial system reforms and competing in global markets. The government needs to speed up its legal and judicial system reforms to transform Cambodia to a country governed by the rule of law, and protect trade-related aspects of intellectual property rights (TRIPS), and forgo high tariff on agriculture products and protect small farmers. Therefore, the Cambodian government strongly believe that by receiving these opportunities and facing these challenges would significantly accelerate its domestic economic, legal and institutional reforms to create stable business environments and attract more FDI for a long term goal of the country’s development as a whole.
(Writer: Bong Angkeara)