Benefits of APTA: Case of Cambodia
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03_Study on APTA benefits for Cambodia_August 2009.doc DRAFT Benefits of APTA: Case of Cambodia BY RAJAN SUDESH RATNA1 PROFESSOR CENTRE FOR WTO STUDIES INDIAN INSTITUTE OF FOREIGN TRADE NEW DELHI [email protected] [email protected] 1 The views expressed by author are purely personal and does not reflect the views of the Institute where he is currently working. 1 03_Study on APTA benefits for Cambodia_August 2009.doc DRAFT Benefits of joining APTA: Case of Cambodia Introduction The Asia-Pacific Trade Agreement (APTA), previously known as the Bangkok Agreement (BA), was signed in 1975. It is the oldest preferential trade agreement between developing countries in the Asia-Pacific region that aims at promoting economic development through a continuous process of trade expansion and furthering international economic cooperation through the adoption of mutually beneficial trade liberalization measures. Current members include Bangladesh, China, India, Lao PDR, Republic of Korea and Sri Lanka. ESCAP Secretariat provides secretarial support to APTA. The text of the agreement was revised during the Third Round of negotiations and the list of items on which tariff concessions were exchanged expanded to more than 4,000 items. The Members also adopted common rules of origin with minimum local value content requirement of 45 per cent f.o.b. (35 per cent for LDCs) for availing the tariff concessions. The rules are simple and easy to operate. APTA allows any developing member country of UNESCAP to become a member. This agreement links three major economies of Asia namely China, India & Republic of Korea and thus provides preferential market access to one of the largest market in the world. The agreement also provides for more favourable treatments for the Least Developed Countries under the provision of special and differential treatment. At the Second Session of the Ministerial Council in October 2007, the Fourth Round negotiations were launched. The negotiations are scheduled to be concluded by the Third Ministerial Council in October 2009. This Round aims to widen the coverage of preferences to at least 50 per cent of the number of tariff lines of each member, and at least 20-25 per cent the value of bilateral trade. It also aims to provide a tariff concession of at least 50 per cent (on average). APTA members also decided that in order to make this Agreement a “Truely Asia Pacific" efforts to expand its membership would be necessary. ESCAP Secretariat is providing its technical support to the members as well as perspective members in this regard. Objective Cambodia, a member of ASEAN has a greater opportunity to explore its exports markets with APTA members due to its geographical proximity. This paper examines the likely benefits for Cambodia upon joining APTA as a member. 2 03_Study on APTA benefits for Cambodia_August 2009.doc DRAFT Methodology, Data Source and Limitations 1) Identification of products which are of interest to Cambodia: The data relating to Cambodia's exports to the World was examined. Principal items exported by Cambodia were identified at 2 – digit HS Level (Chapters) as per the description given in HS 2002 classification. This data has been obtained from UN- COMTRADE, WITS. 2) Revealed Comparative Advantage (RCA): RCA values for all the products of Cambodia (at HS 2 digit level) were calculated as given:- A / B C / D Where: A = Cambodia's exports to World in i’th sector B = Total exports of Cambodia to World C = World’s exports to World in i’th sector D = Total exports of World to the World. The index of revealed comparative advantage (RCA) has a relatively simple interpretation. If it takes a value greater than unity, the country has a revealed comparative advantage in that product. Thus, wherever RCA > 1, it can be concluded that the Cambodian product is export competitive in World market. The advantage of using the comparative advantage index is that it considers the intrinsic advantage of a particular export commodity and is consistent with changes in an economy’s relative factor endowment and productivity. The disadvantage, however, is that it cannot distinguish improvements in factor endowments and pursuit of appropriate trade policies by a country. This exercise again will reflect the rough estimates as it is done at the 2 digit chapter level and may not reflect the scenario at a disaggregated 6 digit product level. It only gives us a broad idea of items being produced in Cambodia which are export competitive in World market. Data was obtained from UN-COMTRADE database. Due to unavailability of export data of Cambodia, an indirect calculation was made. In this case, the data used was World's import from Cambodia on CIF basis (which is different than exports of Cambodia on FOB basis). Similarly, to keep the same parity for calculation of RCA; World's import value from World on CIF basis was also taken. 3) Analysis of Trade Gains: In order to identify potential for exports of Cambodia to APTA members, the following was examined:- A) Cambodia's exports to individual APTA member. B) Global imports of APTA member. C) Cambodia's global exports. 3 03_Study on APTA benefits for Cambodia_August 2009.doc DRAFT D) Present Margin of Preference (MoP) available for exports to APTA members' market. Wherever Cambodia’s global exports in any product are greater than the total imports of importing individual APTA member (i.e. C > B) in the same product, the extent to which Cambodia’s exports of the product to that APTA member’s market can grow is given as the difference in APTA member’s total imports of the product and Cambodia's export to APTA in that product. In other words, the scope for increasing Cambodia's exports of these products (potential trade gain) to given APTA member can maximum be the value ‘B – A’. This value is assumed to be the potential market share that can be captured by Cambodia by increasing exports to the APTA member. Similarly, wherever Cambodia’s global export in any product is lesser than the total imports of importing partner APTA member (i.e. C < B) in the same product, the extent to which Cambodia’s exports of the product to a particular APTA member can grow (potential trade gain) will be by the difference in Cambodia's global exports in that product and Cambodia’s export to partner APTA member in the same product. In other words, the scope for increasing Cambodia’s exports of these products to given APTA member can maximum be the value ‘C – A’. This value is assumed to be the potential market share that can be captured by Cambodia by increasing exports to that APTA member. The data for the above exercise was obtained from WITS (World Integrated Trade Solution). Trade data is obtained from UN COMTRADE database. The above data has a limitation, as the latest data of Cambodia's exports at 6-digit HS is not available. An indirect method was thus used by which World's imports from Cambodia was taken as Cambodia's global exports, individual APTA members' imports were also taken as Cambodia's exports to them. The latest data available was used which is as follows:- (i) World's imports from World & Cambodia – 2007 (ii) Bangladesh – 2007 (iii)China – 2008 (iv) India – 2008 (v) Korea – 2007 (vi) Sri Lanka – 2008 The exercise for Lao PDR was not done as it does not extend any tariff concession to any APTA member. Economy & Trade Structure of Cambodia The economy of Cambodia grew about 10% per year from 2004 to 2007, largely due to expansion in the garment sector, construction, agriculture, and tourism. Growth however, dropped below 7% in 2008 as a result of the global economic slowdown. The garment industry currently employs more than 320,000 people and contributes more than 85% of Cambodia's exports. In 2005, exploitable oil deposits were found beneath Cambodia's territorial waters. Mining is also attracting significant investor interest, particularly in the 4 03_Study on APTA benefits for Cambodia_August 2009.doc DRAFT northern parts of the country, and the government has said opportunities exist for mining bauxite, gold, iron and gems. The tourism industry of Cambodia has continued to grow rapidly, with foreign arrivals exceeding 2 million per year in 2007-08, however, economic troubles abroad will dampen growth in 2009. Table: 1 Cambodia: Key Economic Factors (2007) External debt stocks, total (DOD, current US$ Billions) 3.7 Foreign direct investment, net inflows (BoP, current US$ 0.87 Billions) GDP (current US$) (billions) 8.3 GDP growth (annual %) 10 Population, total (millions) 14.4 Population growth (annual %) 1.7 Imports of goods and services (% of GDP) 73 Industry, value added (% of GDP) 27 Merchandise trade (% of GDP) 115 (Source: World Bank) Cambodia's trade has been seeing a positive growth both in terms of its exports and imports to the World. It may be observed from the following table that during 2005-2007 Cambodia has maintained a favourable balance of trade, though the value is declining. This is due to the fact that during the period 2005-2007; the imports grew at a higher Compound Annual Growth Rate (CAGR) of 27.80% whereas the exports grew only by 20.49%. Table: 2 Cambodia's Trade with World (in US $ ’000) 2005 2006 2007 Cambodia’s exports 3,919,078 4,845,889 5,525,735 Cambodia’s imports 3,475,738 4,621,947 5,408,935 Balance of Trade 4,43,340 2,23,942 1,16,800 An examination of the principal commodities in its trade was done for the years 2003-2007. The principal items of exports & imports are at Annexes – I & II respectively.