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China: Not a foe, but a friend

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Prime Minister Hun Sen shakes hands with Chinese President Xi Jinping in Beijing while on a state visit to China in January. HUN SEN’S FACEBOOK PAGE

China: Not a foe, but a friend

Last Friday, the US Embassy in Cambodia posted on its Facebook page an opinion on Cambodia’s trade with both China and the US.

In the post, the US claimed: “China is Cambodia’s largest trade partner, but this relationship is heavily skewed in China’s favour.

“About 87 per cent of trade are Chinese imports, which do not support jobs or industry in the same way Cambodia’s trade relationship with the US or EU does.

“This is just one more way Cambodia has shifted from a more balanced and diverse economic approach to one more dependent on China”.

The post shortly drew a response from the Chinese embassy in Cambodia that “the US is trying to stir things up again with the so-called trade deficit issue.

“It is common sense that in a globalised world, trade goes far beyond the bilateral.

“In the case of Cambodia, it imports large amounts of textile raw materials and machinery from China for the garment industry, while it exports the final products all over the world, the US and EU included”.

The issue made Monday’s news articles, including in The Phnom Penh Post.

For Cambodians – what do the majority think?

Not all can fully comprehend how world trade is conducted and how trade liberalisation has helped the world economy.

Not all can understand the long and complex supply chain of the production of various products, starting from raw materials, design, sourcing of parts and components, production and assembly, up to export, marketing, distribution and retailing.

Meanwhile, trade in services is even more difficult to understand due to its quite abstract form and limited data capture.

Reaction or judgement, therefore, may just be based on perceptions formed by their limited knowledge and available presented data, if not by prejudice.

Capital investment

Cambodia does have a huge trade deficit with China. Is this by design and purpose?

The answer lies in the reality of Cambodia’s economic structure.

At the first stage of its economic development, Cambodia can only perform light and low-value manufacturing or manufacturing services, such as producing garments, footwear, bags, hats and caps, umbrellas, lightbulbs, plastic products, etc.

While Cambodia has an abundant workforce with relatively low labour costs, materials for production in these sectors are not available locally, nor abundantly available in the US and EU, but mainly from China.

Cambodia would love to buy materials from anywhere in the world provided they are competitive in terms of price, quality, delivery and labour, as well as environmental compliance.

China’s trade surplus with Cambodia also comes with significant amounts of capital investment of which Cambodia is in dire need.

However, foreign direct investment (FDI) in the above sectors is not all Chinese-owned.

About half is from other countries [and area and special administrative region], namely South Korea, Taiwan, Hong Kong, Singapore, Malaysia, Japan, Thailand and others, including a few from the US and the EU.

Investment from these countries – combined with preferential market access granted by the US and EU (Canada and Japan counted) – has indeed helped the Cambodian economy, in terms of job creation and export earnings.

Spillover effects from the growth of these sectors have been significant.

China, the US and the EU have all positively contributed to Cambodian economic development as a result of their investment and trade.

While China is Cambodia’s biggest FDI, the US remains Cambodia’s largest trading partner and export market.

Cambodia is currently the US’s 66th largest goods trading partner with $4.3 billion in total (two way) goods trade during 2018.

The US goods trade deficit with Cambodia was $3.4 billion in 2018, according to the USTR.

When we look at trade from a rule-based WTO perspective, all parties benefit from free trade considering the concept of absolute and comparative advantages.

For the issue we are looking at, China benefits from the sale of the raw materials it specialises in, while Cambodia benefits from job creation, export earnings and economic growth.

US consumers also benefit from cheaper products it can no longer produce competitively or stopped producing for the reason of opportunity cost.

The US makes more money from manufacturing Boeing aeroplanes and other high tech-machinery and equipment than manufacturing garments and shoes.

Also, the US is a service economy (over 80 per cent of GDP).

And if we look at trade from a complex production supply chain and value added point of view, trade deficit data doesn’t reflect an accurate picture of the trade in terms of gain and loss.

When Cambodians buy the made-in-China iPhone and either the phone comes directly from China or via Singapore or Thailand, the trade data is recorded as imported from China or Singapore or Thailand.

Of the estimated $1,000 price of the phone, just about five per cent goes to China, while half goes to parts and components suppliers like Japan, South Korea and Taiwan – and about half goes to Apple, a US Company.

Mutual trade relationship

While we are not buying directly from the US, we are actually buying quite a lot from American companies located outside the US.

When we buy Ford cars assembled in Thailand, when we buy Procter & Gamble (P&G) products also produced in Thailand, such as babycare, haircare, personal healthcare, skincare and oral care products, etc, and those from other companies like 3M or GE with production bases in Vietnam, to name just a few, we actually benefit US companies.

Unfortunately, this is not shown in US trade data.

And even though we never buy Boeing, we indeed fly on Boeing aeroplanes, which indirectly supports the US.

The US is a high value service economy. Data on trade in services between the US and Cambodia is not available.

However, we can see that we are paying directly or indirectly into the US for different types of services such as the internet (Facebook, Google and email providers . . .) and financial services (intermediary bank charges, Visa card, insurance and re-insurance . . .).

Other services include logistics, healthcare, engineering, education, consulting, management and professional, franchises, etc.

Local Cambodians, whose incomes are on the rise, also eat burgers, KFC and pizza, and drink Coke and Starbucks coffee.

They also fill their vehicles with Chevron diesel and petrol.

Some even buy life insurance from AIA and Prudential.

Finally, whatever people perceive, Cambodia and US are indeed having a truly mutual trade relationship. This has to be maintained and valued.

And investment and trade in general under the WTO frame-work need to be preserved and promoted.

Kaing Monika is the Deputy Secretary-General of the Garment Manufacturers Association in Cambodia (GMAC).

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