Regional Free-Trade Deal, World’s Biggest, Could Push Firms to Cambodia

3 min read
Rice for sale in Phnom Penh’s Boeng Keng Kang market on March 8, 2020 (Matt Surrusco/VOD)

Economists say the standardizing of regulations in 15 countries that signed a regional free-trade deal could make it attractive for companies to operate in or relocate to low-cost countries like Cambodia.

The Regional Comprehensive Economic Partnership (RCEP), signed by Asean countries plus Australia, China, Japan, New Zealand and South Korea on Sunday, lowers tariffs in the bloc over 20 years and makes trade rules and regulations consistent across it.

The deal “comes at a time when the backlash against globalization and protectionist pressures are rising throughout the world,” said economist Jayant Menon, a visiting senior fellow at the ISEAS-Yusof Ishak Institute. “It will create the world’s largest [free-trade agreement], accounting for almost a third of world output and population.”

The benefit to Cambodia will depend on how it chooses to take advantage of the opportunities presented, and if it uses the agreement to accelerate domestic reforms, Menon said.

“RCEP’s focus is on harmonizing rules and regulations, leading to regulatory convergence that will support the growth and development of regional supply chains,” he said. “Cambodia could benefit from the relocation of firms as a result of these reforms that reduce costs.”

Chris Devonshire-Ellis, founder of professional services firm Dezan Shira & Associates, wrote in Asean Briefing that unified rules would make it attractive to move labor-intensive work, such as finishing garments, to countries like Cambodia.

“This will see investment interest increase in countries with lower-cost and lesser-skilled workers such as Cambodia, Laos, and Myanmar, and will be of special interest to manufacturers from Australia, Japan, New Zealand, Singapore, and South Korea where production costs are higher,” Devonshire-Ellis said.

Countries that signed the deal will also mutually recognize each other’s professional qualifications, “potentially opening doors for RCEP market opportunities for lawyers, dentists, doctors, and other professions,” he said.

Chan Sophal, director of the Center for Policy Studies, said he could envision Japanese manufacturers further moving parts of their production from Thailand to Cambodia to take advantage of lower costs.

“They can have a factory in a country with low labor costs,” he said. “Some Japanese factories have [already] moved from Thailand to the special economic zone in Phnom Penh to produce parts of electronics or cars and then send [the parts] back to assemble in Thailand.”

Most of Cambodian exports currently went outside the new agreement, to the U.S. and E.U., but there was room to grow within the region, he added.

Agricultural exports such as mangoes, cashews, black pepper and other products had potential for export, he said. However, Cambodian products could also face increasing competition from imports, he said.

Seang Thay, spokesperson for the Ministry of Commerce, could not be reached for comment.

Ros Sopharith, director of the Kampongthom Rice Mill, said he didn’t know himself what the trade agreement entailed, but assumed it could help with the obstacles he faced in exporting rice.

Cambodian rice was of good enough quality, but the cost of electricity and fertilizer were higher than competitors, Sopharith said.

“Our country does not have any large fertilizer-producing factories, and electricity is still being brought in from overseas, so it makes our production price a bit difficult to compete with other countries,” he said.

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