Cambodia unperturbed by EU-Vietnam FTA

Sok Chan

The free trade deal and investment protection agreement signed between the European Union and Vietnam, by itself, is not worrying Cambodia which had anticipated it for awhile now.

The free trade deal and investment protection agreement signed between the European Union and Vietnam, by itself, is not worrying Cambodia which had anticipated it for awhile now. But the trade deal, which is set to be ratified by Vietnam by next year, poses an uncertainty for the Kingdom with the impending loss of the Everything but Arms (EBA) special preference.

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Cambodia expects to see an impact on its export market especially, the bicycle industry, which is its third largest export to the European Union.

Bicycle exports to the EU amounted to 1.52 million units, valued at $331 million last year. It grew 7.02 percent from 1.42 million in 2017. In 2016, the Kingdom exported 1.29 million bicycles, which saw the Kingdom surpassing Taiwan.

Once the EU-Vietnam (EV-FTA), and EU-Singapore free trade agreements are ratified, these two Asean countries, namely Vietnam, would become direct competitors with Cambodia. Investors are expected to seek duty-free access to the European market, according to the Cambodia Trade Integration Strategy (2019-2023).

Following the materialisation of the FTAs, Asean countries would no longer enjoy the privileges under the generalised system of preferences (GSP).

On top of that, the exclusion of Vietnam from Asean cumulaton as a result of the FTA with the EU would cause an impact on Cambodia’s bicycle manufacturing sector since Vietnamese parts input is a key element to the viability of the industry.Once the FTAs with the EU, including the Asean-EU FTA, are concluded, Asean countries would eventually cumulate with each other but this could be a setback for Cambodia and other Asean least developed countries (LDC), possibly due to the clauses of those agreements. (According to the European Commission, cumulation is a system that allows contracting parties to use originating products from each other). It is believed that the terms of the agreements could be prejudicial towards Cambodia.

In the EU, China’s trade role has diminished slightly after the imposition of a 48.5 percent anti-dumping duty starting in 1993 and renewed several times until March 2019. EU is currently reviewing extending the duty for another five years.

Under the EBA, Cambodia benefits from the “duty free, quota free” provision. It must also meet the 30 to 40 percent domestic content input in its products that are exported to the EU. A 2015 EU investigation determined that most bicycles exported from Cambodia originated from the country and were not transhipped from China.

Commerce Ministry says that regional cumulation from Vietnam would be lost once EV-FTA enters into force. (Regional cumulation is a form of diagonal cumulation – operates between two countries with an FTA, which only exists under the GSP and operates between members of a regional group of beneficiary countries, like Asean). Assuming a normal graduation from EBA and GSP, Cambodia would be subjected to a 10.5 percent duty imposed by the EU. It would also have to meet with a 50 percent domestic content requirement. This would make Cambodia far less competitive than Vietnam, which would benefit greatly from EV-FTA because of the drop in duty to zero percent within eight years of the deal’s ratification.

At present, Cambodia benefits from zero tariff and a 35 percent domestic content, with some regional cumulation with other Asean countries. Following its graduation from LDC, its tariff would rise between zero percent and 11 percent.

“The EV-FTA is not a big surprise to us as we have been anticipating it. There will certainly be an impact but the government is not waiting to see what will happen,” Commerce Ministry spokesperson Long Kemvichet tells Capital Cambodia. Until now, there has been no drop in bicycle exports. The ministry has been actively promoting the bicycle manufacturing sector in Cambodia.

The government recently implemented measures to strengthen Cambodia’s competitiveness.

“We have outlined a plan to develop backward linkage industry and improve supply chain for this sector by working with our Indonesian counterpart and importing gears and (bicycle) parts to Cambodia,” he adds.

Bicycles need to be made from at least 40 percent locally-produced components to qualify for the duty-free status in the EU.

Meanwhile, observers say Cambodia could lose a bit of its competitive edge due to the trade agreements as investors move to Vietnam.

One of the world’s leading bicycle makers, A&J Enterprise Co Ltd (Worldwide) chief executive officer Jon Edwards was quoted by Nikkei Asian Review, as saying that keeping the EBA was “hugely important” for the industry’s health. The group’s success and continued investment were largely due to EBA.

“(However) if the duty reverts to [the regular] rate of 14 percent (without EBA), then many countries would have an advantage over Cambodia. It is also because they have lower logistical costs and bigger local supply chains with better shipping facilities.

“It will be very hard to compete with traditional bicycle producing countries like Taiwan, Thailand, the Philippines and Indonesia,” he was quoted as saying.

American bicycle maker Kent International Inc with 49 percent shareholding by Shanghai General Sports Co Ltd, remains optimistic with the Cambodian market as its manufacturing base. It has no plans to set up shop in Vietnam.

“We import 85 percent of bicycles into the US,” says Kent International chairman Arnold Kamler.

The company has been importing bicycles since 1958. It has been a bicycle manufacturer from 1979. Last year, Shanghai General Sports purchased a large piece of land outside Phnom Penh where it plans to build a 40,000 square metre factory to supply bicycles and some bicycle parts to Kent International.

“We work with Shanghai General Sports very closely,” Kamler tells Capital Cambodia. “Our business is quite large. We sell 2.7 million bicycles in the US, 200,000 in Canada, 150,000 in Australia, 50,000 in Japan, and 100,000 to other countries,” he adds. He finds that Cambodia has good workers and a reasonable minimum wage policy.

According to the Commerce Ministry, a critical liberalising factor of the reformed EU rules of origin was the changes in accumulation rules. The new cumulation rule relaxed the value-added principle in the allocation of origin when two or more Asean countries are involved in the process of manufacturing.

The new cumulation rule allows bicycle manufacturers based in Cambodia to use Asean parts like bicycle frames made in Vietnam and ‘Shimano’ gears made in Malaysia. At the same time, the origin of the finished bicycle would remain in Cambodia. This means products are entitled to a duty-free treatment in the EU so long as the working or processing in Cambodia involves manufacturing.

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