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As Asean Moves Toward Integration, How Will Cambodia Fare?

Leaders of Association of Southeast Asian Nations (ASEAN) from left, Malaysian Prime Minister Najib Razak, Sultan of Brunei Hassanal Bolkiah, Cambodian Prime Minister Hun Sen, and Indonesian President Joko Widodo walk back to their seats after posing for a group photo during the opening ceremony of the 25th ASEAN summit at Myanmar International Convention Center in Naypyitaw, Myanmar, file photo.

Experts fear that Cambodia will not be competitive with its Southeast Asian neighbors, as a free flow of goods and services between the 10 Asean members ensues.

[Editor’s note: Pek Koon Heng-Blackburn is an assistant professor of international studies and director of the Asean Studies Center at American University, in Washington. She recently sat with VOA Khmer to discuss new initiatives in Asean, as its members seek to become more economically integrated. Under that integration, experts fear that Cambodia will not be competitive with its Southeast Asian neighbors, as a free flow of goods and services between the 10 Asean members ensues. In her interview, Heng-Blackburn explained the ideas behind the economic community and the challenges Cambodia faces as it joins in.]

What is the Asean Economic Community?

The Asean Economic Community that will be realized this year under Malaysia’s chairmanship of Asean is actually one of the three communities of Asean. Asean is based on three communities: the political security community; the economic community; and social cultural community. The Asean Economic Community is really the most important one for Asean. It will create a single market and production base, it will create a competitive economic region, it will create a more equitable economic development within Asean, and it will integrate Asean into the greater global economy.

Now, when we are talking about this creation of a single market, we are talking about 633 million consumers, based on the 10 Asean countries. And these countries have a total GDP of $2.3 trillion and one of the highest regional growth rates in the last several years since the financial crisis.

In 2014, it registered 5.6 percent growth rate, which is a reason why there’s a lot of interest, international interests, American interests, and Chinese interests, as well, in the attainment of this single market and single production base. Also Asean wants to create a competitive economic region by having a competition policy, by doing IPR (Intellectual Property Rights), by doing consumer protection, so that we can be more competitive, and we will pull in more investors because of a better IPR rules.

Pek Koon Heng-Blackburn is an assistant professor of international studies and director of the Asean Studies Center at American University, in Washington. (Courtesy photo of Pek Koon Heng-Blackburn)
Pek Koon Heng-Blackburn is an assistant professor of international studies and director of the Asean Studies Center at American University, in Washington. (Courtesy photo of Pek Koon Heng-Blackburn)

And then thirdly, it will try to narrow the income divide within Asean to equitable economic development, and it sets up an Asean infrastructure fund with a hope for a paid-up capital of $13 billion to promote infrastructure in the less developed countries like Laos, Cambodia and Myanmar. And then finally it will integrate Asean into the global economy to the Regional Comprehensive Economic Partnership. It is an Asean free trade agreement with dialogue partners, so there will be 16 members, including India and China. That is a very, very ambitious objective and this will be realized at the end of this year.

There are two types of countries: the six former Asean, which are more developed, and the four new Asean nations, which are less developed. How would the single market element benefit those countries and what’s the cost to those countries?

You have to look at both single market and production base because it’s about consumers buying the products and also about production being based in the countries. Hopefully more investment will come to the less-developed Asean countries, which is why this is a benefit, if it’s able to pull in more investment. The benefit is that the Asean Economic Community will create what we call a similar market in that it’s a free trade area. A free trade area is where you can locate production in any country in Asean. Once you get production, let’s say in Laos, you have access not just to that tiny population of Laos, but you also have access to 633 million consumers. Once you invest in any of the 10 countries you have access to all 10.

In order for the countries to attract investment, they have to lower tariff barriers, lower non-tariff barriers, and regulatory barriers. They lower tariff barriers to pull in the investment. It is actually more important that single market is a single production base. There will be more freedom of movement of goods, services, investments, capital, and skilled labor. Let’s say an American multinational wants to produce an automobile in one of the countries, let’s say, it’s in Cambodia. The customs, procedures, and the forms are the same. Once you are in Cambodia, there will be a single standard of customs and other cross-border regulations. It makes it easier for people to do businesses in Asean, no matter where you are. So the point for Cambodia, Laos and Myanmar, is to create a more business-friendly environment so that they can attract FDI (Foreign Direct Investment).

The Asean countries have got to lower their barriers to trade, and in terms of tariffs it has gone down more than 90 percent. They’ve pulled down 90 percent of tariff barriers across the Asean countries. But the non-tariff barrier remains high, if you look at non-tariff barriers and regulations. If you look at Singapore, it is the most liberal. Singapore has almost zero non-tariff barriers, but Cambodia, Laos, Indonesia, and Myanmar, they have much higher barriers. That is where a lot of work has to be done.

What type of reforms are you talking about for less-developed countries?

We are talking about lowering protectionism. Let’s say Cambodia still protects the rice industry or they protect some essential industries, maybe like construction. In the case of Vietnam, they have state-owned enterprises, and they give privileges to them. So they have got to lower those barriers. In other words, you can’t have this protection measure. They have to lower government regulations, taxation policy, and they have to do away with all of non-tariff barriers. For tariff barriers it is easy, it costs about 2 percent to bring the goods in. But once you are in there, like for example in Malaysia, the movement of Malaysian cars coming to Malaysia, the barriers have gone down to about 5 percent. But Malaysia puts in permits, licensing, or other costs, and after paying the government duty, permit, and licensing fee, the actual cost of the car will be 30 percent more to just bring it in. So this is what we mean by non-tariff barriers.

Likewise, non-tariff barriers are still a problem for Asean. The establishment of the Asean Economic Community is just the beginning of lowering this, and the non-tariff barriers are a big challenge for Asean countries to do so. Laos and Cambodia are still protectionist in many ways. Vietnam will lower their barriers through the TPP (Trans-Pacific Partnership) so Vietnam will be ahead. Malaysia and Vietnam will have liberalized the economy to a greater extent than those that are not in the TPP.

What can Cambodia do to prepare? What can the government do? What can the people do to really compete in this market?

Cambodia is one of the countries, like Laos and Indonesia, that are more protectionist because they are concerned about their indigenous companies not being strong enough. Cambodia’s economy is dominated by Chinese companies in garments, energy, construction, and retail. There’s a lot of Chinese capital. Because these Chinese companies are based in Cambodia, they can then have access to a bigger market, although there is a concern about the rule of origin. In other words, if the garments are produced in Cambodia, then they can be exported from Cambodia at zero tariff, with all the privileges of a single production base and single market. But if those materials came from China, then it can’t. There is this rule of origin that protects indigenous productions. It is there to protect indigenous productions and it looks after the interests of the producer.

There is no alternative of not joining or of not liberalizing the AEC. You will be left behind. If you don’t do it and Laos does it, then it means that more capital will go to Laos and more businesses will come to Laos. What Cambodia is going to do is to make sure that it has more transparency. It needs to have financial regulation. It has got to cut down on corruption, cut down on protectionism, monopoly and cronies. All of that has to be done. It will be very difficult, which is why, as I said before, non-tariff barriers are where the reform has to be done, and there are not enough political will to accomplish this yet. Ultimately, the important thing is that all 10 Asean countries, including Cambodia, are committed to long-term liberalization because there is no alternative but to liberalize. If you don’t do it, the business and investment will go to other countries.