Cambodia is about to graduate from least developed country status. It should accelerate trade reforms to address the challenges its new status will bring.
Two decades after its inclusion on the list of least developed countries, Cambodia met the graduation criteria for the first time in 2021, with plans to graduate as early as 2027.
This is a major achievement, as graduation from least developed country status means that a country has achieved significant economic and social development goals. However, least developed country graduation also presents challenges.
In the case of Cambodia, graduation means the loss of trade benefits enjoyed by least developed countries, including duty-free status and favorable "rules of origin.”
Cambodia is one of the few least developed countries that has dramatically increased its exports to the European Union through preferential treatment and lenient rules of origin, allowing its products to enter Europe duty-free. If not carefully managed, the loss of these preferences may hurt Cambodia's export performance.
Cambodia must work to ensure that alternative market access is available after graduation and further improve its competitiveness. To this end, we recommend the following concrete actions:
Expand participation in free trade agreements: Cambodia has benefited from increasing export flows and a trend towards diversification over the years. However, these gains are under threat as more trade agreements continue to unfold in the region. Cambodia may consider strengthening its trade policy by negotiating trade agreements to maintain and enhance its market access.
A movement in this direction is Cambodia's entry into separate bilateral agreements with the People's Republic of China and the Republic of Korea in 2022, in addition to its participation in the Regional Comprehensive Economic Partnership (RCEP) Agreement. Building on this momentum, Cambodia should consider forging new agreements with its major partners while improving the implementation and utilization of existing ones.
A free trade agreement with the European Union would avoid falling back on the generalized system of preferences by 2031 while expanding "extended cumulation" would facilitate compliance with rules of origin. Maintaining market access in Japan is also critical. Consultations for a free trade agreement with business-friendly rules of origin should start as soon as possible.
At the regional level, discussions within the RCEP Secretariat, RCEP Joint Committee, ASEAN, and ASEAN+1 dialogue partners should focus on deepening RCEP tariff cuts, clarifying the functioning of RCEP tariff differentials, and achieving convergence on product-specific rules of origin in Asia and the Pacific.
Effective implementation of new and existing free trade agreements will require tackling non-tariff barriers. The region should consider adopting best practices such as self-certification of origin to facilitate the cross-border movement of goods among global value chains. Cambodia should also use the WTO "specific trade concerns" mechanism to raise critical sanitary and phytosanitary measures imposed by its trading partners on agricultural exports.
Undertake domestic reforms and regulation changes to make it easier to participate in international trade: Newer free trade agreements increasingly cover beyond-the-border disciplines such as trade facilitation, e-commerce, government procurement, and intellectual property rights, among others. Mega-regional trade agreements also push for broader, deeper, and more non-traditional trade commitments at a broader scale of participation. However, compliance with these ambitious commitments may be daunting for least-developed countries.
International partners such as the ADB and UNCTAD should stand ready to provide Aid for Trade support to increase Cambodia's compliance in areas where domestic policy and regulatory reforms are needed. For example, under the RCEP, gap analysis, and targeted assistance are needed to support Cambodia in adopting a negative list approach towards greater services trade liberalization, regulatory coherence, and transparency.
Use digitalization to take advantage of wider cross-border market opportunities: The trade scenario is becoming increasingly complex, given the expansion of the trade agenda to new areas such as e-commerce and digital services.
For decades, cross-border services dominated Cambodia's imports and proved to be a strategic trade area. Cambodia may consider entering digital economy agreements and negotiating free trade agreements with enabling provisions on e-commerce and digital trade to increase its digital trade participation further.
Cambodia may also adopt multilateral initiatives such as the World Trade Organization's Information Technology Agreements that eliminate tariffs on information and communication technology products, and mutual recognition agreements to facilitate the certification of electrical products.
Nevertheless, the lack of digital skills and affordability, which inhibit using digital tools and platforms, remain major obstacles limiting Cambodia's digital trade prospects. Structural and policy reforms are needed to better align domestic regulations to international standards and to reinforce a more secure and inclusive approach to digital transformation.
The absence of cybercrime and data protection laws remains a legal impediment to facilitating digital trade in Cambodia. Domestic e-commerce licensing and permit requirements place local businesses at a disadvantage compared to foreign operators. Aid for trade can help Cambodia to navigate the complexities of digitalization, identify and pursue measures to improve the enabling environment for e-commerce, and enable its accession to digital agreements and initiatives.
The impending graduation from least developed country status is reason for Cambodia to celebrate. It is a remarkable achievement. However, it brings another level of challenges, particularly in the complex area of international trade, that the country needs to address.