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Cambodia’s trade deficit to worsen to $2.3B per year with RCEP, says UNCTAD expert

Content image - Phnom Penh Post
This trade tariff revenue loss of about $334.6 million per year is equivalent to 1.24 per cent of gross domestic product (GDP) in 2019, nearly the size of the Kingdom’s entire public health expenditure, which stands around 1.3 per cent of GDP. Photo supplied

Cambodia’s trade deficit to worsen to $2.3B per year with RCEP, says UNCTAD expert

CAMBODIA’S trade balance is expected to worsen by $2.3 billion per annum or around 17 per cent due to the recently-signed Regional Comprehensive Economic Partnership (RCEP), startling data from a joint study led by Dr Rashmi Banga of the UN Conference on Trade and Development (UNCTAD) revealed.

This trade tariff revenue loss of about $334.6 million per year is equivalent to 1.24 per cent of gross domestic product (GDP) in 2019, nearly the size of the Kingdom’s entire public health expenditure, which stands around 1.3 per cent of GDP.

Calculations from the International Labour Organisation revealed that this estimated loss is significantly higher than the entire wage bill at national average wage rates of the total number of nurses in Cambodia.

“The lost revenue could have paid for around 150,000 nurses in Cambodia,” said Dr Banga, a senior economic affairs officer in UNCTAD’s Unit on Economic Cooperation and Integration among Developing Countries.

Similarly, Cambodia’s imports are likely to expand 13.4 per cent to $2.3 billion, which ranks second among RCEP signatories, only behind Malaysia at $3.7 billion.

Among the imports from RCEP partner countries after the agreement, goods from China into Cambodia is projected to surge by $11.9 million, far ahead of its peers at 79 per cent.

The study showed that increases in product level imports of textiles and clothing would be the “greatest” for Cambodia, Brunei and Indonesia.

At the same time, Cambodia, Laos, Philippines, Malaysia and Vietnam could face “large increases” of electrical machinery and mechanical appliances imports.

As for exports, while Cambodia is likely to register a 0.2 per cent dip to $3.8 billion post-RCEP with sensitive lists and tariff rate quotas (TRQs), it could also experience an export drop because of trade diversion in favour of more efficient exporters within the RCEP region.

Seen as the largest multilateral trade agreement in the world, the RCEP was signed virtually between 15 countries, comprising the 10 ASEAN member states and China, Japan, South Korea, Australia and New Zealand in November. India pulled out of the pact after learning that its trade tariff losses would outstrip benefits.

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The RCEP was signed virtually between the 10 ASEAN member states, China, Japan, South Korea, Australia and New Zealand in November. ASEAN SECRETARIAT

Cambodia has not ratified the agreement yet.

For over two decades, Cambodia has posted a year-on-year trade deficit.

In the fourth fiscal quarter of 2020, National Bank of Cambodia recorded a deficit of 7.6 trillion riel ($1.9 billion) after an unusual upturn of 2.8 trillion riel in the third quarter.

Total imports, including construction materials and equipment, garment materials and vehicles, rose 22 per cent to 24.1 trillion riel in the fourth quarter from the previous quarter. Total exports fell 27 per cent to 16.5 trillion riel in the same period.

The situation is made grimmer by Covid-19, having extended development challenges facing the region, and which meant that countries would need to revive their industrial sectors and create jobs.

In doing so, it would require generating additional financial resources.

“Tariffs are simple and effective tools in the hands of the government, not only to generate revenues but also limit imports of luxury items that affect a country’s balance of trade,” Dr Banga said.

Thus, it is important for countries to make an informed decision with respect to signing or ratifying free trade agreements (FTAs).

In contrast, most of the non-ASEAN partners stand to make gains in the goods trade as tariff liberalisation under RCEP worsens ASEAN trade balance by six per cent per year.

Seemingly, Japan, which is one of the main drivers of RCEP, is likely to emerge as the biggest winner, followed by New Zealand and Australia, Dr Banga told an online media conference on March 25.

“Japan’s goods trade balance will improve by 99 per cent, rising to $24 billion from $12.1 billion while Australia’s, and probably New Zealand’s increased exports in future might be mainly due to the ongoing implementation of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership [CPTPP] rather than from RCEP.

“Of the non-ASEAN members, China and South Korea will both see deterioration of their trade balance by 3.5 per cent and eight per cent, respectively,” she said.

FTAs are signed by developing nations in the hope of raising their market access, improving balance of trade and reviving economic by generating additional output and employment.

“However, if FTAs worsen the trade balance or net exports, they can adversely impact GDP growth and employment in the country,” Dr Banga added.

The study, which highlighted unconventional data, was conducted with Dr Kevin P Gallagher, professor of Global Development Policy at Boston University’s Pardee School of Global Studies and Director of the Global Development Policy Center and Prerna Sharma, an Australia-based consultant with UNCTAD.

Only focussing on the goods chapter, the paper undertakes a detailed disaggregated product-level impact analysis of tariff liberalisation to estimate the additional market access that developing countries can achieve through the RCEP.

From there, they noticed that RCEP might be undermining ASEAN integration as intra-regional trade is increasingly diverted to China, and away from other member states, as a result of RCEP.

Save for Laos and Vietnam, imports from China – the largest contributor to rising imports – to all ASEAN countries would rise significantly.

However, China’s imports will decline from all ASEAN countries but increase on the whole, mainly from Japan and South Korea, thus effecting an increase in net trade deficit in ASEAN’s overall trade with China.

Unlike the use of computable general equilibrium, which is based on aggregate sector-level data and “unrealistic assumption”, this study employs SMART simulations available on World Bank’s World Integrated Trade Solutions (WITS) to estimate the impact of tariff liberalisation under RCEP on exports and imports of RCEP member countries.

It gives an accurate picture by looking at actual tariff commitments in RCEP including sensitive lists and TRQs, and uses detailed Harmonised System (HS) six-digit codes product-level data.

The use of sensitive lists and TRQs is critical because the RCEP countries already have or are negotiating existing FTAs among themselves.

Therefore, any benefit gained from market access for ASEAN via RCEP is only possible if deeper tariff liberalisation is undertaken, to make the deal worthwhile.

The only way is to cut through the existing sensitive lists of member countries, which also includes tariff lines where the country has not decided to reduce tariffs or will gradually reduce tariffs, though not to zero-level, or have used TRQs.

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