NON-TARIFF MEASURES FACING ASIA PACIFIC EXPORTERS CAMBODIAN CASE STUDY. Dourng Kakada and Sok Hach

Transcription

1 NON-TARIFF MEASURES FACING ASIA PACIFIC EXPORTERS CAMBODIAN CASE STUDY Dourng Kakada and Sok Hach July

2 TABLE OF CONTENTS Cover 0 Table of Contents 1 Executive summary 2 Abbreviations and Acronyms 4 Acknowledgements 5 I. Background 6 II. Overview of Cambodian Economy 7 III. Overview of Cambodian Trade 9 1. Exports Imports Informal Trade 11 IV. Common Non-Tariff Barriers to Cambodian Exports Internal Barriers External Barriers 13 V. Specific Non-Tariff Barriers by Products Garments Rubber Rice Fish and Fish Products Pharmaceutical Products Other Products and Measures Imposed by Importing Countries 20 VI. Potential Exports if Barriers Removed 21 VII. Conclusions 23 Bibliography 24 Appendix 1: Matrix of Non-Tariff Measures Facing Cambodian Exporters 25 Appendix 2: Table of Non-Tariff Measure Inventory 29 Appendix 3: Questionnaire for Exporters 30 1

3 Executive Summary Cambodian exporters are facing both internal and external non-tariff barriers. Internally, a number of constraints are often cited: high cost of transport, a long clearance process, relatively high cost of shipment, unofficial fees and inefficient bureaucracy, lack of capacity to respond to new trade regulations and lack of laboratory investment. The clearance procedure is negatively characterized as a duplication of activities and overlap of responsibilities among involved agencies and corruption is cited as the worst constraint for exporters. Common Non-Tariff Measures (NTMs) imposed by importing countries which Cambodian exporters are currently facing can be categorized into three main types: Standard, Conformity Assessment and Sanitary and Phytosanitary (SPS) measure. Standards vary according to importing countries whose requirements are often higher than local ones. The country is lacking a way to have its test and assessment recognised and compliant with requirements of importing countries. SPS measure is used to ensure food safety for consumers and to prevent the spread of pests or diseases. SPS measures require new expertise, laboratories and an adequate system in place. These are currently not yet available in the country. After further analysis of several sensitive exported commodities, specific NTMs are found. Garments are a facing rule of origin criterion attached to Everything But Arms initiative by the EU and as a result, this industry does not benefit fully from this preference initiative. To be qualified for this preference, a garment must to be wholly obtained and locally produced starting from yarn or at least 40 percent of cumulative value added must come from within ASEAN. It is a serious problem for this country as the textile industry is very weak and nearly absent; most fabrics and accessories are currently imported from countries not qualified as originating from Cambodia such as China, Taiwan, Hong Kong and Korea. The rubber is suffering from price discount about 20 percent due to lack of certification issued by an internationally recognised, accredited laboratory. An estimate of about US$ 10 millions every year is lost due to this price discount. Rice exports to China have been banned for a reason of preventing pests and diseases from being introduced into China. A number of complicated requirements were imposed and supplied by China. In this regard, Cambodia is prepared to provide the information required for facilitating the early completion of any risk assessment concerning plants from Cambodia. The study also found that a rice exporter is affected by policies of government purchase and subsidies of Thailand and Vietnam through informal paddy exports in areas along borders. Since 1997, fishery products exported to the EU have been banned. To protect the health of European consumers, all third countries intending to export fishery products to the EU must be authorized by the European Commission and included in the approval list prior to exports. The approval list is comprises a number of conditions which basically requires new expertise, additional established legislations and recognised laboratory tests and are difficult for Cambodia. Additionally, the EU has banned the imports of tuna and swordfish products from a number of countries including Cambodia for the reason of failure to respect international conservation laws. There is only one pharmaceutical company currently exporting its products to a number of countries in Africa. Other companies produce for local consumptions but also intend to export. Cambodian pharmaceutical products are currently not qualified to move into international commerce and to join international bids. 2

4 Two requirements among others cited by stakeholders are serious namely Good Manufacturing Practices (GMP) and the Bio-equivalent study. The study also found some other products and barriers imposed by importing countries. Confirel products, a range of products made from sugar palm trees, need to complete complicated documents to obtain Certificate of Approved Labels for Foods to access Chinese markets. These requirements induce time consuming administrative hassles, and extra cost. Black peppers are not accessible to Japanese markets due to the requirement of a certificate of sterilisation, which requires exporters to pay a huge cost to invest in technology development. The Australian draft action list which names countries where Giant Africa Snail (GAS) are known to exist and thereby subjects these countries to more restrictive inspection, also includes Cambodia. Cambodia will face an obstacle to enter into organic markets if the country does not rush to put in place the organic certification system. A number of requirements and procedures needed for organic market access include certificates, standards, regulations, labelling and consumer recognition etc. If these barriers are removed, the country can obtain a huge advantage. It allows Cambodia to diversify exported products and destinations. The export volume is significantly increased and exporters have bargaining power on price. Finally, the benefits should be reached by people employed in agriculture sector in rural area and rapid poverty reduction. In conclusion, most non-tariff barriers facing Cambodian exporters are concerned with Sanitary and Phytosanitary (SPS) measures conditional upon the scope of this study. The study also found barriers in other NTM inventory such as government aids, customs and administrative procedures and Technical Barriers to Trade (TBT). The compliance with development and harmonisation of standards is particularly hampered by lack of expertises and internationally recognized laboratories. There are some points emerging from consultations with stakeholders including the fact that the technical assistance (TA) on trade facilitation seems more focused on easing imports into the country rather than smoothing exports. 3

5 Abbreviations and Acronyms AFTA ASEAN Free Trade Area AIRD Associates for International Resources and Development AQIS Australia Quarantine Inspection Service AQSIQ General Administration of Quality Supervision, Inspection and Quarantine CamControl Cambodia Import Export Inspection and Fraud Repression Department ASEAN Association of South-East Asian Nations CED Custom and Excise Department CEDAC Centre d Etude et de Développement Agricole Cambodgien ( Study and Development Centre for Cambodian Agriculture) CPE Cambodia Pharmaceutical Enterprise CRRI Cambodian Rubber Research Institute EBA Everything But Arms EC European Community EIC Economic Institute of Cambodia EU European Union GAS Giant Africa Snail GDP Gross Domestic Product GMO Genetically Modified Organism GMP Good Manufacturing Practices GSP Generalized System of Preferences HACCP Hazard Analysis and Critical Control Point IMF International Monetary Fund IRA International Rubber Association LDC Least Developed Country MAFF Ministry of Agriculture, Forestry and Fisheries MIME Ministry of Industry, Mines and Energy MOC Ministry of Commerce MOH Ministry of Health MRA Mutual Recognition Agreement PPM Pharma Product Manufacturing SOFRECO Société Française de Réalisation d Etudes et de Conseil (French Company of Realization of Study and Counsel) SPS Sanitary and Phytosanitary TBT Technical Barrier to Trade UNTAC United Nations Transitional Authority in Cambodia WHO World Health Organization 4

6 Acknowledgements The authors 1 are grateful to government officials from Department of International Standards in Cambodia, Industrial Techniques, Trade Preferences, CamControl, Drug and Food, Fishery, Agronomy and Agriculture Land Improvement, and CRRI for kindly agreeing to be interviewed and providing relevant, detailed information. The authors would like to thank Mona Haddad from the World Bank and Bijit Bora from WTO for their constructive comments on the paper. The authors also appreciate Garment Manufacturer Association in Cambodia (GMAC), SME Cambodia Association and exporters which received us for interview. Last but not least, special thanks to Tim Anderson, English editor, and research assistants of Economic Institute of Cambodia namely Tuy Chakriya, Yem Sokha and Thak Socheat for their supports during this study. The remaining errors are the responsibility of the authors. Dourng Kakada Sok Hach July Dourng Kakada is a researcher of Economic Institute of Cambodia (EIC), Phnom Penh, Cambodia Sok Hach is a director of Economic Institute of Cambodia (EIC), Phnom Penh, Cambodia 5

7 I. Background Exporters face two barriers namely Tariff and Non-Tariff Barriers imposed by importing countries. The tariff barriers are substantially reduced as a result of regionalisation and globalisation. The progressive elimination of non-tariff barriers is the scope of intense discussions within the WTO framework. While tariffs are relatively easy to obtain and measure, and their impact on trade relatively easy to assess, the same is not true of non-tariff measures (NTMs). The term non-tariff measure is defined to include export restraints and subsidies, or measures with similar effect, not just import restraints. 2. Based on Negotiating Group on Market Access document (TN/MA/S/5/Rev.1), NTMs are basically categorized into seven parts: Part I: Government Participation in Trade and Restrictive Practices Tolerated by Governments Part II: Customs and Administrative Entry Procedures Part III: Technical Barriers to Trade Part IV: Sanitary and Phytosanitary Measures Part V: Specific Limitations Part VI: Fees on Imports Part VII: Others, including intellectual property issues, safeguard measures and distribution constraints. Some work on non-tariff regulation of trade has already been undertaken in the countries covered by this project, providing a useful basis on which to build. 3 In addition, work on non-tariff measures involving a range of analytical approaches has been undertaken. The OECD recently compiled a very useful analytical summary of this work, but much more needs to be done. 4 This project is intended to contribute to this body of work, by focusing on NTMs as they relate to exporters in the economies of the Asia Pacific. This study examines the NTMs facing Cambodian exporters of several major exported commodities. The list of NTMs is not complete due to limited time and resources, but it illuminates the main sources of constraints for sensitive exported products, which were imposed by importing countries. There were 23 interviews composed of eight from government officials, two from business associations, 12 exporters and one from a research institute. First, the study tried to assess barriers in five main exported products namely garments, rubber, rice, fish and fish products and pharmaceutical products. These products occupy more than 90 percent of the total exports. The barriers of these products are 2 Bijit Bora, Aki Kuwahara and Sam Laird: Quantification of Non Tariff Measures, Policy Issues in International trade and Commodities, Study series No. 18, UNCTAD, The two PECC studies from 1995 analysed NTB using the UNCTAD classification. Recent studies on Africa include: Nyangito, H. et al., "Improving Market Access Through Standards Compliance: A Diagnostic Road Map for Kenya", in Wilson, J. and Abiola V. (Eds.) (2003) Standards and Global Trade: A Voice for Africa (Washington D.C.: World Bank), Pp. 1-64; and Rudaheranwa, N. et al., "Enhancing Uganda's Access to International Markets: A Focus on Quality" in Wilson, J. and Abiola V. (Eds.) (2003) Standards and Global Trade: A Voice for Africa (Washington D.C.: World Bank), Pp OECD (2003), Overview of Non-Tariff Barriers: Findings From Existing Business Surveys (Paris: OECD in doc. TD/TC/WP(2002)38/FINAL) 6

8 assessed through standard literature research and interviews with all appropriate stakeholders. Other barriers to products are assessed by reading the standard literature and interviews with business associations and relevant government officials. This paper covers an overview of the Cambodian Economy and Trade, Common Non-Tariff Barriers to Cambodian Exporters, Specific Non Tariff Barriers by Products and analysis of potential exports if barriers are removed. Finally, the paper concludes with the findings and raises some points which emerged from interviews with stakeholders. II. Overview of the Cambodian Economy Cambodia was pursuing a centrally planned economic system after the collapse of the Khmer Rouge regime. In 1989, the country began the transformation to a free market oriented economic system even though the country was still in civil war. Due to the support of the international community, the signing of the 1991 Paris Peace Accords to unify all conflict parties happened and led to a free and fair national election in 1993 under the auspices of the United Nations Peace keeping Process known as United Nations Transitional Authority in Cambodia (UNTAC). With the establishment of the first coalition government, Cambodia intended in earnest to restore itself into peaceful country. To back political aims, many reforms have been undertaken with assistance of international community and about US$ 500 millions each year is funded by various donors. Its GDP reaches about US$ 4.6 billions and per capita GDP is about US$ 325. Its growth rate is about 6 percent per annum, but decline is forecasted incoming years. This is due to the elimination of worldwide quotas system for garment industry which currently plays a crucial role in Cambodian economic development and poverty reduction. 7

9 Table 1: Main Economic Indicators Nominal GDP (million US$) 578 1,313 3,592 3,721 3,983 4,195 4,582 Real GDP (% increase) 4.8% 7.5% 7.0% 5.7% 5.5% 5.3% 6.5% GDP per Capita (US$) GDP per Capita (% increase) - 5.9% 1.6% 1.0% 4.4% 2.7% 6.6% Riel/Dollar Parity (year average) ,859 3,924 3,921 3,980 4,014 Inflation in Riel (year average) 4.0% 141.0% -0.8% -0.9% 0.0% 1.2% 4.0% Inflation in Dollar (year average) 4.0% 0.4% -1.8% -2.5% 0.1% -0.3% 3.1% Budget Revenue (% GDP) 19.7% 3.3% 10.4% 10.7% 11.3% 10.5% 10.7% Budget Expenditure (% GDP) 29.2% 17.0% 15.3% 16.3% 17.7% 17.5% 15.7% Current Public Deficit (% GDP) -3.8% -12.7% 1.4% 1.1% 1.1% 0.4% 1.6% Overall Public Deficit (% GDP) -9.5% -13.7% -4.9% -5.7% -6.5% -7.0% -5.0% Export of Goods (% GDP) 13.2% 7.9% 38.3% 41.8% 41.6% 48.1% 50.9% Import of Goods (% GDP) 19.8% 18.3% 48.5% 53.2% 55.1% 59.8% 64.2% Trade Balance (% GDP) -6.6% -10.4% -10.2% -11.4% -13.4% -11.7% -13.3% Current Account Balance (% GDP) -7.9% -10.6% -7.2% -8.6% -10.5% -9.6% -10.7% Net Foreign Reserves (million US$) Money - M1 (% GDP) 12.5% 5.7% 3.5% 4.2% 4.9% 5.4% 6.1% Money - M2 (% GDP) 23.6% 1.9% 9.6% 11.2% 13.5% 14.5% 17.5% Population (million) Labour Force (% Population) 43.9% 41.7% 42.5% 43.0% 43.4% 43.9% 44.4% Source: EIC, compiled from government and international organization primary data Cambodia is an agricultural country. This sector employs more than 70 percent of Cambodia s workers. The contribution of agriculture to GDP has a declining trend but its value in terms of US dollars has a slight up-down change. It contributed about 26 percent to GDP in 2004 down from about 30 percent in 2003 and 40 percent in The contribution of the industrial sector has an increasing trend while services seem to be stable. The industrial sector contributed about 16 percent in 1995 but, due to the quota system for the garment industry, this figure rose to about 27 percent in 2003 and 30 percent in 2004 and garments dominate more than 80 percent of industrial production. The service sector contributes about 45 percent since 1995, but its value increased dramatically by about 60 percent. 8

10 Table 2: GDP by Industry Origin at Constant 2000 Price (Million US$) Agriculture ,120 1,149 1,139 1,235 1,186 Paddy Other Crops Livestock Fishery Rubber & Forestry Industry ,031 1,130 1,291 Garment Food, Beverage & Tobacco Other Manufacturing Electricity, Gas & Water Construction & Mining Services 1, ,631 1,714 1,838 1,857 2,019 Transport & Communication Trade Hotel & Restaurants Other Private Services Public Administration Total GDP 2,910 1,701 3,591 3,797 4,008 4,222 4,497 Source: EIC, compiled from government and international organization primary data III. Overview of Cambodian Trade The overall trade balance of goods has been in deficit. In 2004, this deficit accounted for about 14 percent of GDP. The trade balance of textiles and garments is positive at 14.2 percent of GDP while import deficits of oil & gas and other goods account for about 13 percent and 18 percent respectively. However, the tourist industry contributed a surplus of about 10.5 percent of GDP. This surplus is decreased by deficits of other services, mainly transportation, by about 5.5 percent. As a result, the balance of services has remained in surplus by about 5 percent. 9

11 Table 3: Cambodia's Balance of Payments (% GDP) e 2004e Exports of Goods 43.9% 50.8% 53.7% Imports of Goods 58.1% 63.1% 67.7% Trade Balance -14.2% -12.4% -14.0% Agriculture 1.2% 3.4% 1.6% Textiles & Garments 10.6% 12.3% 14.2% Oil & Gas -10.1% -11.3% -13.1% Other Goods -15.9% -16.7% -16.8% Balance of Services 5.5% 3.7% 5.1% Transportation -3.1% -2.8% -3.6% Travel (Tourism) 10.4% 7.9% 10.5% Others -1.8% -1.5% -1.8% Balance of Incomes -4.2% -3.9% -4.4% Current Transfers (net) 11.2% 10.7% 9.7% Private Transfers 1 4.9% 4.9% 4.5% Government Transfers 2 6.3% 5.8% 5.2% Current Accounts -1.6% -1.9% -3.7% Capital & Financial Accounts 6.4% 7.0% 7.1% Official Loans 3 3.9% 3.6% 3.3% Foreign Direct Investment 1.3% 2.4% 2.7% Others (net) 1.2% 1.1% 1.0% Change in Foreign Reserves 4 4.8% 5.1% 3.4% At the National Bank 2.9% 1.8% 0.9% Outside the National Bank 1.9% 3.3% 2.5% Source: IMF Balance of Payments Statistics for 2002, EIC model projection for Money transferred by Cambodians overseas 2 Grants provided by donors to the government 3 Net of debt amortization 4 Overall balance reflects change in country's foreign reserves. As Cambodia is a dollarised economy, and private individuals and institutions can hold foreign currencies, the overall change of the balance of payments not only affects the foreign reserves of the National Bank, but also other economic agencies, such as private financial institutions, businesses and households. 1. Exports The total export of goods reaches about US$ 2.5 Billion, up from US$ 1.6 billion in Cambodian exports are limited in terms of products and destinations. The main export is garment industry products, accounting for about 90 percent of total merchandise exports (excluding service exports) in There are 238 garment factories operating in Cambodia.. The dominant exports of garments are due to the quota system granted by the US and quota 10

12 free access to EU and Canadian apparel markets. The elimination of the world wide quota system as of January 2005 is worrying for this industry but the export statistics from the Custom and Excise Department (CED) of Cambodia confirm that garment exports have been dominant for first three months of 2005 and account for about 90 percent of total merchandise exports. After garments, the main exports are agricultural products including rubber, fish and fish products, rice and paddy. These items represent about 6 percent of total goods exported. The main destination for Cambodian exports is the US, the primary customer for garments, followed by the EU, especially Germany, the UK, France and the Netherlands. Some products are exported to ASEAN countries and China. 2. Imports Total imports of goods reached about US$ 3.1 billion in 2004 up from about US$ 2 billion in Oil, gas, materials and garment accessories are the main imports to Cambodia, accounting for about 40 percent of total goods imported. Other main imports include vehicles, construction materials, pharmaceutical products, food products and cigarettes and all of these items represent about another 40 percent. Cambodia s imports come mainly from East Asian countries, accounting for about 57 percent and China (including Hong Kong and Macau) dominates at 36 percent. The main imports from China are materials (fibres and fabrics) and accessories for the garment industry. In this region, Taiwan follows China. After East Asian countries, ASEAN countries are the second main suppliers at about 34 percent of total merchandise exports to Cambodia, of which Thailand, Singapore and Vietnam are dominant. 3. Informal Trade Informal imports and exports with neighbouring countries are still significant activities especially with Vietnam and Thailand. Traditionally, trade was mainly carried out between peoples within neighbouring nations as neighbours and friends rather than as citizens of separate nations with a strong sense of national identity. In the decade of civil war, Cambodia s infrastructure such as roads, telecommunication, and transportation were almost fully destroyed. It took about 2 days to travel from the capital to a border district while currently it takes only 6 hours by car. In this regard, farmers and middlemen along borders spent more on transportation costs to sell their crops to other provinces than to sell to Thailand. Likewise, it was easier to buy products and equipment from Thailand than other Cambodian provinces. This circumstance plus time-consuming bureaucratic procedures at check points created a de facto informal trade. Border agencies still benefit from these activities in terms of informal fees. It occurs in the same way with Vietnam. Middlemen benefit from these long time experiences and know very well how to proceed through the many different channels. These traditional activities result in the current informal trade. Moreover, there are some goods being currently smuggled in large amounts (but difficult to quantify) such as petroleum, from Thailand and Vietnam, which are subject to high import duties. Petroleum smugglers still gain a moderate profit after paying unofficial fees. Agricultural products are also unofficially traded openly. It is estimated that about ½ million tons of paddy were smuggled to Thailand and Vietnam. Fish are smuggled to both countries in unprocessed form. This huge unofficial trade hurts Cambodian traders by making it difficult for them to obtain fair market prices, due to a lack of bargaining power and market information. 11

13 IV. Common Non-Tariff Barriers to Cambodian Exports Cambodian exporters face both internal and external barriers. Internally, exporters meet a wide range of obstacles from the factory base to the exit points of the country. The integration of the country into regional and global trading systems such as ASEAN and the World Trade Organisation, along with technical barriers from some specific importing countries, increases costs. It means increased effort to meet those additional requirements inside their own factories- for instance technological development- and to comply with requirements of other agencies. Those external requirements may encourage corruption. 1. Internal Barriers There are a number of main internal constraints facing exporters and are as follows: The high cost of transport from factory gate to exit point: Exporters pay relatively higher transport costs due to inadequate infrastructure and high fuel costs. Long delays for clearance procedures 5 : Export processing involves a multiplicity of steps, introducing substantial delays, uncertainty, and confusion into the process of trading goods. Among the major hurdles reported by trading firms are customs clearance, Ministry of Transportation border authorization or border police, veterinary and phytosanitary inspection, and CamControl (Cambodia Import Export Inspection and Fraud Repression Department) under the Ministry of Commerce. Each step involves delays, formal costs and informal payments. Custom regulations and tax administration were cited as the most serious constraints to exporters. Custom clearance imposes substantial delays and great uncertainty and hence unpredictability. It takes 4.5 days on average for exporters to clear customs. Documentation accounts for 41 percent of problems for exporters. Relatively higher cost of shipment: Shipping costs out from the port of Sihanoukville are higher than similar costs from other countries such as Vietnam. The number of shipping companies is still limited which prevents competition and keeps prices high. It is also one of the most expensive in the region when unofficial charges for container handling are included. 6 Unofficial fees and inefficient bureaucracy: Corruption is the largest constraint to business in Cambodia. 7 Exporters pay unofficial fees to all relevant agencies involved in inspection of export consignments. Export procedures involve overlapping responsibilities and duplications of activities among agencies involved in export clearance. This generates much confusion. 5 Source: World Bank, Seizing Global Opportunity: Investment Climate Assessment and Reform Strategy for Cambodia, August Available at: 6 Ibid 7 Source: survey with 100 companies conducted by EIC and Global Economic Forum,

14 Weak governmental capacity to respond to new trade regulations: The lack of expertise and funding leaves the government incapable of responding to new requirements from trading partners. Institutional mechanisms are still weak and underdeveloped and have problems harmonising and disseminating standard relevant information. Lack of test laboratory investments: A number of new trade regulations, mainly related to TBT and SPS, require internationally recognised test laboratories. Cambodia is very limited in this respect. Some laboratories are out-of-date and do not comply with the requisite standards. Noticeably, there are no significant investments in this area. In Cambodia, representative offices will take samples and send these samples out for laboratory testing in their head offices in Singapore, Thailand, and Malaysia etc. 2. External Barriers The three main non-tariff barriers which exporters face are: Standards: Standards and technical regulations are essential for trade, commerce and diffusion of technology. Standards contribute to the efficient development, manufacturing and supply of products and services. However, it is very costly for Cambodia where local and international standards are often incompatible. Often, standards vary when importing countries have higher requirements than local Cambodian standards. Some countries which have stringent standards already ban imports of several products from Cambodia such as the fish product import ban to the EU. Conformity assessment: It is crucial to have export goods accepted by importing countries. Cambodia has to prove that its exported products are compliant with the standards of importing countries. Those countries should have full confidence that test data and inspections from Cambodia are reliable and any certification of safety made in Cambodia can be trusted. Acceptance of Cambodia s assessments by importing countries is most important. The accrediting laboratories and inspection bodies, the Mutual Recognition Agreement (MRA) and a network of established testing laboratories can gain this acceptance by demonstrating technical competence, reliability and honesty. However, Cambodia lacks some of the means to attain these standards and some products are suffering such as the price discount of rubber. Sanitary and Phytosanitary (SPS) measures: Sanitary (human and animal health) and phytosanitary measures are increasingly used to ensure food safety and to prevent the spread of pests and diseases. Products can be required to come from disease free areas, be inspected, and undergo specific treatment to set maximum allowable levels of pesticide residues or additives in foods. Cambodia has problems complying with these measures due to lack of expertise, laboratories and an adequate system in place. An unfortunate result is the rice export ban from Cambodia to China. 13

15 V. Specific Non-Tariff Barriers by Products In this section, five products are selected for analysis of non-tariff barriers imposed by importing countries. These products comprise more than 90 percent of total recorded merchandise exports. Other products and barriers, including potential export products emerging from informal research of the relevant literature and consultations with stakeholders, are also discussed. 1. Garments Garments are the major export. All garments are sold for export and account for US$ 1.6 billion in 2004, about 80 percent of the country s merchandise exports. The garment sector employs about one-quarter million Cambodians, which also leads to many jobs in supporting sectors. Workers are mainly women from rural areas and their remittances back home support directly and indirectly about one million people. Among garment exports, the US absorbs about 75 percent due to quota free access and the EU absorbs another 20 percent also through duty free access. The elimination of the worldwide quota system greatly concerns this sector as it is still less competitive compared to China, Thailand, and Vietnam. What could beneficiaries do if the garment sector were to die? It would cause great economic and social problems. The garment industry is internally constrained. Besides general internal barriers mentioned above, the sector is lacking a supporting industry. The textile industry is nearly absent and the sector is strongly dependent on imported materials from competitive countries. Cambodia is unable to build this supporting industry in the short term. Thus, it is most advantageous to seek Generalized System of Preference (GSP) for duty free market access while the Cambodia is still regarded as a least developed country (LDC) and highly compliant with labour law. Actually, Cambodia has been granted GSP status by Australia, Belarus, Canada, Japan, New Zealand, Norway, the Russian Federation, Switzerland and Turkey. But the benefit from GSP of those countries is very little. More recently, Cambodian exports to the EU have been covered by the Everything But Arms initiative which provides duty-free and quota free access to almost all imports of least developed countries. This preference boosts garment exports significantly. But this benefit is conditional upon the rule of origin. Exporters have to request a certificate of Rule of Origin from the Ministry of Commerce as evidence to prove garments originated in Cambodia. Certificates of Origin take two forms (Form A and Form N). Form A means the exporter enjoys duty - free to access to the EU markets while Form N requires exporters to pay an import duty of percent 8. Two ways are possible for garment exports to be classified form A. A garment can be completely originated and locally produced starting from yarn or, at least 40 percent of the cumulative value added must come from within ASEAN. These requirements place Cambodia at a disadvantage as the Cambodian textile industry is nearly absent. The country has limited production of fabrics and accessories and it is fully dependent on imported inputs for garment exports. Moreover, buyers dictate the specifications and sourcing of fabrics. Most of required fabric supplies are imported from China, Taiwan, Korea and Hong Kong, which are not in the regions qualified by the EU as pertaining to Cambodia. The imports of fabrics 8 Based on interview with government official in Trade Preferences Department, MOC 14

16 and accessories from four countries account for about 88 percent and 96 percent respectively of total imports. 9 In this regard, Cambodia would have a large advantage if the EU were to change its origin rule criterion or if Cambodian itself could increase the cumulative value added from ASEAN. Currently, Cambodia is in the process of GSP negotiation to get duty-free and quota-free access to the US markets. This preference would probably be conditional upon several requirements such as rule of origin. Cambodia will not benefit if the US rule of origin restricts regions sourcing most of garment inputs. 2. Rubber The rubber sector currently amounts to 4 percent of agricultural sector and is about 3 percent of total exports in dollar terms and was about 45, 000 tons in If the export value of clothing and shoes is not counted, that figure should increase to 20 percent. The sector comprises three categories: state companies and associated categories, industrial plantations, and small holders and private plantations. The state companies occupy about 60 percent of surface areas planted and production per year, while small holders and private plantations account for about 30 percent of surface areas planted and 26 percent of production per year and the rest is occupied by industrial plantations. State owned companies are undergoing privatisation as promised during WTO accession negotiations and would leave public ownership by 2006; being either closed, sold to private parties, or turned into joint ventures with majority private ownership. Most rubber plants and their factories are situated in Kampong Cham province bordering Vietnam and 124 kilometres from Phnom Penh. This is due to the historically geographic focus by French colonial rubber companies in 1920s. This specific location enables easy Cambodian rubber exports into Vietnam. There are also other potentially arable areas along the border with Vietnam such as the provinces of Ratanakiri, Kratie and Mondulkiri. It is crucial now to reduce all barriers and to access all potential markets since Cambodian rubber production is on an increasing trend. In traditional areas (Kampong Cham), the small holders and private plantations are currently expanding at the rate about 1,000 to 1,500 hectares per year. The new growing areas could be expanded at the rate of about 1,500 hectares per year after Unfortunately, Cambodian rubber is suffering a 20 percent discount price compared with global prices due to several factors. These factors include hidden margins and costs linked to the trade channel through Vietnam, irregularity of shipments and lack of technical standards of exported products. 10 The lack of certification by an internationally recognized accredited laboratory prevents Cambodian rubber from broad market access. Cambodia can not sell directly to end users and can find export markets only in Vietnam. The limited markets decrease bargaining power and force producers to sell below international prices. Cambodian companies receives an average of $US 1,150 per ton for rubber at the Vietnamese border compared to $US 1,343 per ton producers get in Malaysia. 11 It is the 9 Based on survey by EIC, Werner International and AIRD with 70 garment factories in February 2005 available at: 10 SOFRECO & CEDAC: Study on the evolution of the Cambodian Rubber Sector, Draft report, The Cambodia Daily, 24 June 2005 p.18, based on interview with French Development Agency rubber expert. 15

17 major obstacle cited by all consulted rubber stakeholders. The certificate is an attestation that a product conforms to pre-established standards and specifications. Specification is the definition of essential characteristics including threshold values by which natural rubber must be processed before it can be employed in accordance with the needs of users. This situation requires the creation of an internationally recognised certification body to guarantee the rubber quality for all buyers. To achieve this, Cambodia needs to be a member of the International Rubber Association (IRA) which requires a number of conditions. These are: the formation of a Cambodian Rubber Trade Association representing all stakeholders in the commodity chain, a laboratory equipped with qualified personnel and requisite equipment, and test participation in compliance with international standards. It is necessary for Cambodia to define its own specification scheme which generally is quite similar to the ISO 2000 specification guide. 3. Rice Rice is a major agricultural product of Cambodia. More than 70 percent of the population is employed in the agricultural sector and among them about 80 percent are farmers. The destinations for Cambodian rice exports include EU, China, USA and Australia. There are also unofficial exports of paddy rice to neighbouring countries. Generally Cambodian exporters do not have representative sales offices in importing countries and they do not intend to set up offices there as low sales do not justify the high cost of setting up. They do not understand clearly the procedures and how to distribute their products in those countries. Normally, they connect to brokers in the importing countries and sell their products on an f.o.b or c.i.f. basis through shipping companies. Thus, brokers and importers facilitate some procedures and requirements. After identifying markets, brokers and importers deal with the remaining requirements of their respective importing countries. Those requirements include phytosanitary certificates from MAFF and Cambodian custom export documents. Before issuing phytosanitary certificates, MAFF must send their skilled staff to inspect and test products to ensure they are free from the pests specified by the importing contracting party and to conform with current phytosanitary standards of the importing contracting party including those for regulated non-quarantined pests. For initial exports, buyers send their representatives to Cambodia to inspect fields, processing and to take samples for testing to ensure quality standards. With good results, this measure would be no longer taken for further exports and importers can test products when cargo arrives in their countries. In December 2004, China added additional requirements for several plants, including rice, imported from Cambodia. With the new regulations, Cambodia has to provide the required documents to the General Administration of Quality Supervision, Inspection and Quarantine of China (AQSIQ) for risk analysis and assessment. China has also required the right to request further documents and to dispatch a group of experts to conduct field inspections in Cambodia. Cambodia agreed to provide the information required for facilitating any risk assessment concerning plants from Cambodia. Prior to this notification, Cambodian rice exports to China were based on agreements between buyers and sellers. This new measure is difficult for Cambodia and official rice exports to China have been suspended. This complicated procedure places a burden on exporters and importers and will be time consuming and increase costs. 16

18 Box 1: New regulation for imports of plant products from Cambodia to China In December 2004, China notified Cambodia that all plant products including rice and paddy imported from Cambodia shall be tested according to Chinese inspection and quarantine requirements. The concern was possible pests and diseases to be introduced into China. The new regulations require the official Quarantine Department of Cambodia to present a formal application and supply required documents to the General Administration of Quality Supervision, Inspection and Quarantine of China (AQSIQ) for risk analysis and assessment. The documents required are: 1. Information about the plant and/or the product being tested including general name, scientific name, variety and class. 2. Information about the producing area of the product indicating the province, city and area, showing the product location on the national map with associated acreage. 3. Information about field management, growing and harvest times. 4. Information about pests and diseases involved including the general and scientific names, distribution, plants with parasites, harm-stricken parts of the plant, harm season, the supervision and inspection system, an impact statement on economy and biology. 5. Information of plant protection such as the method and effect of protection adopted, the description and frequency of chemicals used for protection. 6. Risk management measures for harmful plants including import & export inspection and quarantine law, processes and standards. 7. Information of the organization system of Inspection and Quarantine Bureau from central administration to local government, as well as its responsibility; the institution which is used as the inspection and quarantine lab is included. 8. Information of ongoing procedures, organisation relating to the Issuance of Certificate of Inspection and Quarantine, and a copy of the Certificate. Moreover, the AQSIQ, if necessary, can request the official Quarantine Department of Cambodia to complement the other documents needed, or will dispatch an expert group to conduct field inspections in Cambodia. According to the result of the analysis and assessment mentioned above, the AQSIQ will determine if it is desirable to sign a bilateral Inspection & Quarantine agreement with Cambodia for market access. Source: authors, compiled from government sources and interviews The global and regional rice market is protected and subsidised. Even in ASEAN, rice is covered by stringent product AFTA terms. This concerns Cambodian rice, particularly while informal trade is significant with Vietnam and Thailand which use subsidies and government purchases to support prices of their rice farmers. Rice stakeholders stated that it is impossible to formally export rice to Thailand and Vietnam owing to unclear constraints including tariffs, subsidies and government purchases while the Cambodian government does not supply the last two. However, paddy can be informally sold into neighbouring countries; about ½ million tones of paddy rice were smuggled into Thailand and Vietnam in The transactions occur through buyers coming from these countries who have been seeking increasingly large quantities. These buyers collect products, transport them and pay all informal costs necessary to get the products into their countries. 17

19 These measures are major obstacles for the Cambodian rice sector based on the following analysis. In the harvest season there are rice surpluses in these three countries and the price decreases. The governments of Thailand and Vietnam apply subsidies and government purchases to keep prices stable and stockpile paddy and rice in their countries. The Vietnamese government through the Export Assistance Fund applies low interest rates to encourage Vietnamese traders to buy and hold paddy and rice for certain months to export later in the high price season. These measures give competitive advantages and affect Cambodia. Vietnamese and Thai traders compete with local traders and informally buy paddy from Cambodian farmers at the peak harvest time, especially areas along borders. It is hard for local traders to compete with them while Cambodia does not have this kind of benefit. Thus paddy stocks are less handled in the country while some paddy is smuggled to neighbouring countries. Fewer paddy stocks in the country mean less rice production, thus less rice for exports. It leads also to the reduction of value added in the rice sector while Vietnam and Thailand buy paddy from Cambodia for processing then export it to the third countries. 4. Fish and Fish Products Fisheries are one of the most important sectors in generating food and contributing to the national economy. The country is rich in fishery resources, especially freshwater fish due to the presence of the Tonle Sap Lake which is a natural aquatic system in Southeast Asia. The fish and fishery products are exported to a number of countries including Australia, Malaysia, Hong Kong, the US, Singapore, Taiwan. Many inland and marine fishes are legally and illegally exported into Thailand and Vietnam. In 2003, fish products exported included fresh fish and processed products and were calculated at about 54,160 tons. 12 However, Cambodian fish and fish products are not allowed to be imported into EU markets. In 1997, the European Community (EC) Council Directives on fish products and live shellfish established required sanitary conditions and procedures to be followed by both EC member states and third countries, which aim at protecting the health of European consumers. Since then, all third countries intending to export fish products to the EC must be authorised by the European Commission and be included in two lists of commission decision 97/296/EC. Countries are included in list I when their results of evaluation by European Commission service are satisfactory and they are allowed to export fish products to EC. List II is a temporary list and countries on this list had provisional authorisation to export solely to those EC member states which accepted their products. However, list II expired as of 31 December 2000 and only list I exporters have been allowed to export to EC. Cambodia has not been included in either list and its fish and fish products have been banned since A number of conditions must been met to obtain approval. They include compliance with EC legislation; sanitary conditions in the production of fish products/live shellfish, hygienic conditions in production areas and in product handling, and controls such as physical inspection, inspection of HACCP systems and laboratory checks carried out by competent authorities. 13 For Cambodia, these conditions require establishing and amending legislation according to EC requirements. Moreover, existing laboratory capacity does not meet EU requirements. Thus, these measures would be prohibitive. Additionally, since 2004, 12 According to statistics of MAFF. 13 Extracted from Europa: 18

20 the EU has banned the import of tuna and swordfish from a number of countries including Cambodia. 14 The reason is Cambodia often failed to respect international conservation rules. However, this situation does not have a large impact because imports of fish products into the EU had already been banned since But it is an additional barrier. 5. Pharmaceutical Products There were 100 pharmaceutical companies operating in Cambodia in early Only 7 companies have their own factories and the others import from abroad. French pharmaceutical products are the most satisfying to Cambodian people. This is based on historical French colonial ties and older generation perceptions of the more effectiveness of French medicines. However, there are also imports from other sources such as India, Singapore, Vietnam and Thailand. Currently, there is only one company that both manufactures and exports pharmaceutical products namely Pharma Product Manufacturing (PPM). PPM exports account for 30 percent of its activities and are destined for a number of countries in Africa: Mali, Togo, Guinea, Burkina-Faso, Mauritania, Gabon, Benin, and Cameroon. The company offers a wide range of specialties and generics. Almost all raw materials are imported from France and Europe. It uses the Origin Europe label even for domestic sales of medications. Some pharmaceutical manufacturers are planning exports and are negotiating with their trading partners such as Cambodian Pharmaceutical Enterprise (CPE). The current trade of pharmaceutical products is fundamentally based on negotiations between buyers and sellers. Cambodian pharmaceutical products could access markets of other LDCs and developing countries whose requirements are not high. Those countries want the benefits of relatively lower prices. Cambodian pharmaceutical products are not yet able to move into international markets and to join in international bidding since capacities of both company level and public level do not meet the standard requirements. The two most difficult requirements for traders are GMP (Good Manufacturing Practises), standards compliant with WHO requirements and bioequivalence studies for pharmaceutical products. Producers are currently operating their businesses with local GMP standards certified by the Ministry of Health whose requirements are lower than that of WHO. The lack of expertise and lack of modern laboratories and equipment are the serious obstacles to satisfying international standards. Moreover, producers have to make a huge investment in the bioequivalence study compliance for admission to international markets. 15 Cambodian pharmaceutical products can be exported to countries which have low or no requirements. These conditions are also subject to Cambodia s commitments to ASEAN s standards by end Given the current situation, Cambodia will fail to implement these measures and market access to ASEAN will still be restrictive to Cambodian pharmaceuticals. Thus it is clear that this country needs both financial and technical assistances in this area. 14 Available at : 15 According to interview with exporter, bioequivalent study of a pharmaceutical product costs up to US$ 30,000 in China. 19