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Cambodia stands ready to gain

Cambodia stands ready to gain

The long awaited signing of the bill granting MFN to Cambodia by U.S. President Bill

Clinton last Wednesday, Sept. 25, is a well-deserved triumph for Cambodia. The signing

comes at a key time for the Kingdom. Recent developments in ASEAN mean that MFN,

and later GSP, could substantially assist Cambodia to carve out a favorable niche

for itself in ASEAN's economic pecking order.

According to a visiting official from the Office of the U.S. Trade Representative

(USTR), Malaysia will be graduated (i.e. removed) from the GSP program in January

1997. A country is "graduated" from the GSP program when its economic development

has advanced to a certain level so that it no longer needs preferential treatment.

Malaysia's removal from the program, combined with other developments in the region,

present a very unique growth opportunity for Cambodia.

In economic terms, Malaysia's graduation from the GSP program means that exports

from Malaysia to the US will no longer be allowed into the US duty free. This will

encourage Malaysian exporters to relocate production to other countries that still

have GSP status. These exporters will probably relocate production to other ASEAN

countries that still benefit from special "rules of origin" that only apply

to ASEAN members.

Such exporters will have limited choices among ASEAN nations. Thailand, for example,

will probably be removed from the GSP program in the near future. Both Indonesia

and the Philippines will undoubtedly be removed from the GSP program before Cambodia.

Investors will think twice before building a factory in a country where GSP is not

a long term prospect. Moreover, such exporters cannot turn to Vietnam, Laos or Myanmar

because none of these countries have GSP from the US, and are unlikely to be granted

GSP in the next two to three years.

These regional developments create a unique "window of opportunity" for

Cambodia. If Cambodia plays its cards well, it could attract a substantial portion

of production in labor intensive, "low-tech" industries from Malaysia,

Thailand and other ASEAN countries - before its Mekong region neighbors jump into

the fray.

So when will Cambodia be granted GSP status? According to the USTR, it should take

about two to three months for GSP to be signed by executive order (not Congress!),

once Cambodia has met all conditions for GSP. The major condition is the promulgation

of the draft labor law, which awaits approval by the National Assembly.

However, before Cambodia can begin to reap the benefits of MFN, a trade agreement

between the US and Cambodia must be signed. This agreement has already been initialed

by representatives of both governments last year, and was scheduled to be signed

in Washington DC on October 4.

The trade agreement is officially titled the "Agreement between the Kingdom

of Cambodia and the United States of America on Trade Relations and Intellectual

Property Rights Protection." It is about 40 pages long, with over half dealing

with the protection of intellectual property rights.

The main trade provision of the treaty is the MFN obligation - ie, the requirement

that the US treat imports from Cambodia the same as it treats imports from other

countries, and vice versa. The treaty contains a number of other obligations and

"commitments" that reach far beyond the trade sector. In particular, the

treaty requires that each nation:

  • Grant equal "market access opportunities" to the companies from the

    other nation;

  • Permit the free transfer of convertible currencies abroad by nationals and companies

    of the other nation;

  • Make "all laws and regulations related to commercial activity" public

    on a timely basis;

  • Grant the opportunity to comment on the formulation of rules and regulations

    affecting business activities covered by the agreement to nationals of the other

    country;

  • Encourage the adoption of arbitration to resolve commercial disputes;
  • Ensure that effective means exist for the recognition and enforcement of arbitral

    awards.

It is important to remember that MFN only partially applies to the garment industry

under the treaty. The treaty allows for either county to impose quotas or "Quantitative

Restrictions" on textiles and textile imports (ie garments) imported from the

other county. The role of MFN and GSP and import quotas in building Cambodia's garment

industry will be the subject of a future column. The remaining portion of the Trade

Agreement deals with intellectual property protection - also a topic for a future

column.

MFN refers to the "most Favored Nation" status, and roughly means that

duties on imports from Cambodia to the US will be reduced from existing levels of

50 percent and above, to levels of around five percent.

GSP refers to the "General System of Preference" status, and means that

a wide range of goods from Cambodia could be imported into the US duty-free.

(David Doran is the resident managing partner of Dirksen Flipse Doran and Le's Phnom

Penh office. He has been writing and advising on Cambodian legal issues since 1992.)

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