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GSP - weighing the pros and cons

GSP - weighing the pros and cons

WHILE investors in Cambodia eagerly await the potential trade benefits that would

accompany the granting of the US Generalized System of Preferences (GSP), critics

charge that it could worsen Cambodian's labor and environmental conditions.

Cambodia was awarded Most Favored Nation (MFN) trade status by the US on Sep 26,

1996. MFN provides trading partners reduced tariff rates and lifting of quotas for

US-bound exports. Following MFN, additional tariff reductions are issued to countries

that are granted GSP status.

GSP was created by the US in 1974 to foster a stronger economic order among less-developed

countries through a "trade not aid" platform. Nations that receive GSP

status are allowed duty-free exports to the US for roughly 4,300 products, including

raw materials and manufactured goods. This gives them a comparative advantage over

nations that only receive the reduced tariff rates of MFN, increasing their competitiveness

and attracting investors. Trade analysts regard GSP as one of the most important

trade benefits that a developing country can receive.

The US Government recommends GSP status for developing countries - if they meet trade,

intellectual property and labor rights and practices - which then have to be approved

by Congress. GSP for Cambodia was supposed to be announced by May 31 but may be delayed

for legislative technical reasons, according to the US Trade Representative's office.

Many consultants believe that if GSP is granted to Cambodia, investors from countries

that have lost their GSP status may move here.

As Peter Steel, trade development advisor to the Ministry of Commerce, states, "I

think that there's a possibility that [GSP] will attract some industries that are

currently based in ... other countries in ASEAN that are likely to lose their GSP

status as they become more developed."

Steel and other trade advisors point to Malaysia as an example of a country that

has recently lost GSP status due to reaching a comparatively mature level of economic

development. This is likely to encourage more investors to move to Cambodia to duplicate

the light, labor-intensive industrial strategy that has been used in their domestic

production - especially if GSP is granted. Observers add that Chinese-Malaysian investors

are drawn to Cambodia due a web of business relationships throughout the region whereby

they reciprocate support to family and friends investing in Cambodia.

The chief advisor of the World Bank's Cambodian office, Mr R. Natarajan, confirms

that GSP will probably assist Asian investors who seek to reproduce the types of

industries they have established within their domestic sphere.

"People who have the experience and are creating markets would like to have

an investment opportunity here to benefit from [GSP] on the one hand, and also benefit

from the extraordinarily liberalized environment with deregulation ... and all the

other investment opportunities that exist here," he said.

But what kinds of labor-intensive industries are investors likely to establish in

Cambodia? Many analysts believe that they will probably consist of various kinds

of assembly work in the mechanical, electronic, garment and food processing industries.

However, despite the tariff reductions offered by GSP, critics cite the challenges

that businesses face in Cambodia's poor infrastructure, including: high shipping

costs, deficiencies in power and water supplies, and problematic telecommunications.

Effects of violations of intellectual property rights are, however, anticipated to

be relatively minor.

But the most significant factor affecting investment may be the recent political

unrest. Investors may be increasingly apprehensive about sinking roots in Cambodia

- another reason why short term labor-intensive industries are more likely to emerge

than long term capital-intensive ones.

According to trade analysts and labor researchers alike, labor-intensive light industries

traditionally seek out cheap, low-skilled labor sources. In explaining the pursuit

of foreign, low-skilled labor markets by Malaysian investors, Kamal Ismaun, Malaysian

ambassador to Cambodia, states that, "Given the tight labor markets in Malaysia,

we have to move out and expand into other countries."

While many observers note that Cambodia's cheap workforce might provide incentives

to potential investors, they are quick to point out that these "gains"

are off-set by labors' low productivity.

"Although the labor costs are very low, in fact labor productivity is low which

means that the true cost of labor is not really a comparative advantage," said

Steel. "The introduction of labor regulations... is perhaps really not justified

given the present development of this economy. This makes people more reluctant to

come here because they might not be able to pay the minimum wages to meet the terms

of conditions ... of work."

Natarajan argues that there are other hidden advantages to Cambodia's labor market

which will come into fruition, especially with added trade benefits such as GSP.

"One of Cambodia's comparative advantages is discipline within the workforce,

which is not common and which one can no longer take for granted. What is [currently]

against Cambodia is that it is a highly agrarian society. Agrarian activity has a

different kind of individual discipline," he said.

Natarajan also cites the rising skills of Cambodian workers as another developing

advantage. "One of the things that the garment manufacturers keep on saying

here is ... that productivity vis-a-vis similar workers in nearby countries is still

very low because they are still learning on the job ... [but] this pattern of growth

is also bringing about an inevitable up-gradation of skills," he said.

In addition to improving workers' skills, both Ministry of Commerce officials and

development analysts propose that this model of growth will also yield more jobs

and a robust Cambodian economy.

Given the prospective investment and growth opportunities that would be increased

by Cambodia getting GSP, what is all the controversy about?

"There is always a downside to fast economic growth," contends Natarajan.

"There is a social cost people pay. I suppose one has to factor it as a cost

for growth. Growth is not without its pains and without its downside. You lose something

of your past, you lose something of your lifestyle to upgrade your lifestyle."

However not all are willing to incur those costs for the sake of growth. Last month

Sam Rainsy and several hundred garment workers staged several demonstrations at the

US embassy and the National Assembly protesting against GSP. Workers displayed signs

reading "No GSP for exploiters" as they demanded that the US pressure Cambodian

government officials and investors to couple stronger workers rights with the prospective

trade status.

"I don't want to see the factory owners and managers reap all the benefits derived

from GSP," explained Rainsy. "I think everybody would like to see workers

in poor countries being treated fairly, not being treated as slaves as they are treated


While GSP will not affect garment production due to its classification as an "import-sensitive

good" which is not assigned duty-free status, Rainsy argues that GSP will provide

trade advantages to other potential investors who seek to take advantage of Cambodia's

"exploitable" workforce and poor regulatory conditions.

"The granting of GSP will improve the economic situation of Cambodia in general

... provided that certain conditions are met. Those conditions are: the effective

implementation of the labor law, the fair treatment of the workers, and the fair

profit-sharing scheme between the factory owners and managers on the one hand and

the workers on the other hand ... and I'm sure that countries that are willing and

prepared to grant GSP status to Cambodia share the same concerns as me," Rainsy


In fact, labor advocates realize the investment potential that GSP will yield. By

protesting against GSP they hope that investors in Cambodia will collectively and

legitimately recognize and implement the "internationally recognized worker

rights" specified as a precondition in GSP rules to be eligible for benefits.

Labor advocates claim that if labor-intensive industrial development is not linked

with strong educational reform, Khmer workers will remain a low-skilled, exploitable


According to Seng Phally, president of the Cambodian Labor Organization, "Cambodia

still has forced labor, child labor, poor wages that cannot support [workers'] basic

needs. GSP gives labor organizations an opportunity to pressure government officials

and [investors] to improve labor conditions. If we do not provide [investors] with

GSP, things will change. If we do provide them with GSP, nothing will change. But

we should provide them with an opportunity to negotiate."

Kem Sokha, Buddhist Liberal Democratic Party MP, echoes this concern while also claiming

that delaying GSP status would provide leverage for those legislators who are taking

steps to address corruption. According to Sokha, given the lack of laws safeguarding

against corruption and the eight-year tax exempt status for foreign businesses, investors

provide government officials with pay-offs in an effort to mutually secure each other's

self interest.

"[Investors] can produce something in Cambodia without taxes, but they still

don't give Cambodian workers a good salary. [Instead] they pass on the benefits to

government officials... Every political party needs money from the investors. If

investors come to Cambodia to produce something... and they have good contacts with

government officials, they give them money [so that] they can do anything. The benefits

don't go to the state or to the people," he said.

Critics charge that, due to the Kingdom's problematic legal system, granting Cambodia

trade benefits like GSP would cause increased damage to consumers and the environment

by exacerbating problems of corruption, and poor or non-existent enforcement of business


Given this situation and the lack of environmental provisions in GSP, environmentalists

assert there will be adverse consequences if stronger environmental regulations are

not used as a precondition to trade benefits. They say GSP status may lead to more

factories, and more pollution and plundering of natural resources, if there is not

adequate regulation.

Other analysts note that increasing industrial development - especially within the

garment industry - has led to a demographic shift in Cambodia's countryside, with

agricultural workers moving off their farms. This, too, poses future social and economic


Therefore the question remains whether GSP will bring about positive economic growth

and job opportunities hoped for by trade analysts and investors, or if this course

of development will be off-set by the socio-economic and environmental costs of a

downward spiral of competition of labor standards and deregulation as Asian countries

compete among themselves for investment.


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