VZCZCXRO7585
PP RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHPF #1081/01 2330841
ZNR UUUUU ZZH
P 210841Z AUG 07 ZDK
FM AMEMBASSY PHNOM PENH
TO RUEHC/SECSTATE WASHDC PRIORITY 8858
INFO RUCNASE/ASEAN MEMBER COLLECTIVE PRIORITY
RUEHBJ/AMEMBASSY BEIJING PRIORITY 2475
RUEHKT/AMEMBASSY KATHMANDU PRIORITY 0077
RUEHGV/USMISSION GENEVA PRIORITY 1620
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY

UNCLAS SECTION 01 OF 04 PHNOM PENH 001081 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
BANGKOK FOR FCS--ANN BACHER, JIM GOLSEN 
 FAS--GARY MEYER AND COREY PICKELSIMER 
 AND USAID/RDMA--SKIP KISSINGER 
COMMERCE FOR OTEXA--MARIA D'ANDREA 
GENEVA FOR ESA AND USTR 
STATE FOR EAP/MLS, EEB/TPP/ABT--GARY CLEMENTS, AND 
EEB/TPP/MTA 
STATE PLEASE PASS TO USTR FOR DAVID BISBEE 
 
E.O. 12958: N/A 
TAGS: ETRD PGOV KTEX EAGR ELAB CB
SUBJECT: IS CAMBODIA'S REPUTATION AS A TRADE LIBERALIZER 
LOSING ITS LUSTER? 
 
 
PHNOM PENH 00001081  001.2 OF 004 
 
 
¶1.  (SBU) Summary.  Seen as a trade liberalization leader 
among least developed countries (LDCs) due to its WTO 
membership, pilot participation in the Integrated Framework, 
and charismatic trade liberalization guru, Cambodia's initial 
progress in committing to and implementing trade reforms has 
slowed, due to staffing gaps, shortages of human and 
technical capacity, and difficulty generating sustained 
political will.  Nonetheless, Cambodia has made significant 
progress in several areas, and Commerce Minister Cham Prasidh 
and a new trade reform coordinator are committed to 
accelerating the country's progress.  With assistance from 
the World Bank and IMF, Cambodia is reforming its customs 
operations, making the process more efficient and reducing 
opportunities for corruption.  Cambodian leaders are 
concerned that the country's chief exports--garments and 
agriculture--may not benefit from trade liberalization under 
the Doha Round's proposed Hong Kong "Development Package" 
promise of duty free access for 97% of LDCs' exports to rich 
countries.  The garment industry--which is facing renewed 
pressure from Vietnam and China--must increase 
competitiveness and productivity if it is to survive.  End 
Summary. 
 
Cambodia:  Once Seen as a Trade Liberalization Leader... 
--------------------------------------------- ----------- 
 
¶2.  (U) Since its creation in 1995, just two of the world's 
fifty least developed countries have acceded to the World 
Trade Organization (WTO):  Cambodia and Nepal.  Cambodia's 
status as the first LDC to join the WTO and its comparatively 
quick negotiation process were the start of its reputation as 
a leader among developing countries in global trade 
liberalization, according to global trade experts who 
convened in Phnom Penh for a recent trade policy workshop. 
 
¶3.  (U) Other factors also contributed to Cambodia's glowing 
reputation.  Cambodia's WTO membership came on the heels of 
its 2001 selection as one of three pilot countries to 
participate in the Integrated Framework for Trade-Related 
Technical Assistance (IF), a multi-donor program that helps 
LDCs participate in the multilateral trading system.  In 
addition, Cambodia's charismatic WTO accession team leader, 
former Ministry of Commerce Secretary of State Sok Siphana, 
left the Cambodian government in 2004 for a senior position 
at the International Trade Center, a joint UNCTAD/WTO 
technical cooperation agency, and has served as an informal 
icon of Cambodian trade openness to the international 
community.  Dr. Esperanza Duran, director of the Agency for 
International Trade Information and Cooperation (AITIC), 
contrasted Cambodia's progress with that of African LDCs, and 
noted that Cambodia is the "best example of an LDC that has 
moved its trading regime forward." 
 
...Now Losing the Limelight? 
---------------------------- 
 
¶4.  (SBU) Nonetheless, some claim Cambodia's moment in the 
sun may be fading.  Cambodia immediately fell behind on 
implementing its WTO accession commitments, beginning with a 
year-long political stalemate after the 2003 elections and 
continuing with lackluster progress once the government was 
formed.  Some of this slowness was predictable:  it is far 
easier to commit to reforms than to actually make them. 
Staffing changes also contributed to the slowdown.  The 
departure of Sok Siphana, temporarily left Cambodia without a 
trade liberalization champion.  His successor, Pan Sorasak, 
is a smart and able interlocutor who, like Sok Siphana, is a 
US-educated dual citizen.  However, some worry that Pan 
Sorasak lacks the charisma and political savvy that made Sok 
Siphana so successful. 
 
AITIC Official Claims Cambodia Got a Raw Deal 
--------------------------------------------- - 
 
¶5.  (SBU) Part of the problem with Cambodia's lagging 
accession progress, Dr. Duran told Econoff, is that Cambodia 
was a poor negotiator during WTO membership talks. 
Negotiations proceeded quickly because Cambodia gave away too 
 
PHNOM PENH 00001081  002.2 OF 004 
 
 
much:  voluntarily giving up transition time to begin 
implementing trade-related investment measures (TRIMS) and 
trade-related aspects of intellectual property rights 
(TRIPS), and not reducing tariffs more gradually in 
conjunction with fiscal reform--perhaps under an IMF 
technical assistance program.  Dr. Duran noted that Nepal's 
accession package allowed higher bound tariffs and minimal 
rates than Cambodia's package.  An AITIC brief states that 
the working parties involved in LDC accession are not 
utilizing the special treatment that LDCs should be afforded 
according to WTO guidelines.  The report concludes that 
accession commitments "sometimes go far beyond what is 
commensurate with (the LDC's) level of development." 
 
Cambodian Concerns about the Doha Round 
--------------------------------------- 
 
¶6.  (U) Thay Bunthon, First Secretary at Cambodia's Mission 
to the WTO, made a sophisticated presentation about what 
Cambodia stood to gain and lose in Doha Round agriculture 
negotiations.  Bunthon noted that rules of origin must be 
simple and transparent if Cambodia is to benefit from 
duty-free, quota-free access.  Tuot Saravuth, Deputy Director 
at the Ministry of Agriculture, Forestry, and Fisheries, also 
noted that WTO agricultural standards, such as sanitary and 
phytosanitary standards, could prevent Cambodia from 
effectively exporting its agricultural goods. 
 
¶7.  (U) Cambodian government officials also raised concerns 
about the Hong Kong "Development Package," noting that 
countries could use the 3% of tariff line items they are 
allowed to exclude from duty-free, quota-free access to 
Cambodia's detriment.  Saravuth asserted that Japan plans to 
exclude tariff lines encompassing almost all of Cambodia's 
agricultural exports, while Bunthon worried that the US and 
European countries might exclude garments.  As Cambodian 
officials are quick to point out, because Cambodia exports 
mainly high-tariff apparel, Cambodia paid the same amount of 
duty to the US Treasury (USD 367 million) on its USD 2.2 
billion in 2006 exports as did France, which exported over 
USD 36 billion to the US.  (Note:  Commerce Minister Cham 
Prasidh traveled to Washington July 17-20 to meet with USG 
officials, congressional leaders, and the US private sector 
to raise these same concerns and to make the case for the 
broadest possible coverage under any possible duty-free, 
quota-free preferences for LDCs.  End Note.) 
 
Government Officials Tout Customs Reforms 
----------------------------------------- 
 
¶8.  (SBU) Speakers from the Ministry of Commerce and the 
Customs and Excise Department highlighted Cambodia's 
achievements in customs reform, including a 370% increase in 
revenue collection over the past nine years (albeit starting 
from a low base) and the recently passed Law on Customs. 
Several other reforms are in the works, including a strategic 
review of the role of safety regulator CamControl and 
harmonizing filing procedures for VAT, income tax, and 
company registration.  Cham Prasidh has pushed aggressively 
for several of these changes, and customs reform is an 
on-going discussion item in the US-Cambodia Trade and 
Investment Framework Agreement (TIFA) dialogue.  (Comment: 
Customs reforms are sorely needed.  Not only is the current 
process cumbersome, the Customs and Excise Department is seen 
as Cambodia's most corrupt government institution according 
to USAID-funded surveys.  End comment.) 
 
¶9.  (U) A new single window approach to trade facilitation 
will be piloted in Sihanoukville in 2008.  The single window 
system, which is designed to make clearing customs quicker 
and less susceptible to bribery, will include several 
elements:  a flat fee for customs services, a single 
administrative document (slated to become mandatory in 
September 2007), and a computerized ASYCUDA customs system 
(to be piloted in Sihanoukville in December 2007).  Both the 
World Bank and USAID support the single window process:  the 
World Bank funds ASYCUDA and Cambodia's single window is 
supported by regional USAID efforts to facilitate an 
 
PHNOM PENH 00001081  003.2 OF 004 
 
 
ASEAN-wide single window. 
 
¶10.  (SBU) Beyond the high-ranking speakers, other customs 
officials seem to be aware of the reform process, but are not 
necessarily pro-active champions of change.  One customs 
official told Econoff informally about the current method of 
customs valuation and the new methods the agency would need 
to employ to become consistent with WTO standards, but said 
that there was no rush to begin looking at this in earnest 
until the implementation deadline.  (Note:  Under its WTO 
accession agreement, Cambodia is to implement the Customs 
Valuation Agreement in phases during a set transition period. 
 End Note.) 
 
Making the Garment Industry More Competitive 
-------------------------------------------- 
 
¶11.  (U) Dr. Duran noted that two pillars of the Cambodian 
economy, agriculture and garments, were slow to be subject to 
global trade liberalization.  Exceptions permitting the use 
of non-tariff barriers, particularly export subsidies, 
watered down agricultural free trade until this issue was 
addressed during the Uruguay Round.  The Multifiber 
Agreement, in place until January 2005, protected domestic 
textile production in wealthy countries, she asserted. 
(Comment:  The quotas in place under the Multifiber Agreement 
also protected Cambodia from competition with more efficient 
neighbors.  End Comment.)  She suggested that Cambodia 
strengthen its garment industry by building vertical supply 
chains which include more efficient sales and distribution 
and reducing shipping time--both of fabric and other supplies 
into Cambodia and of finished garments out to their 
destinations.  (Note:  Shipping costs are also a major 
obstacle:  it costs USD 750 to ship a container from Vietnam 
but USD 2400 to ship from Cambodia.  End Note.) 
 
¶12.  (U) Garment Manufacturers Association of Cambodia (GMAC) 
Chairman Van Sou Ieng emphasized the need for Cambodia to 
move beyond its reputation for good labor conditions and to 
make its industry more competitive.  Van noted that buyers 
care most about price, then about delivery time, and finally 
about quality and labor compliance.  Describing labor law 
compliance as a "gimmick," the Chairman said that Cambodia 
had been trying to create a niche market for itself by 
focusing on the least important criteria for buyers (labor 
conditions), which has had the paradoxical affect of raising 
costs--the buyers' top concern.  (Comment: 
Socially-conscious garment buyers give us a more nuanced view 
of the value of Cambodia's reputation for excellent working 
conditions.  They say that labor compliance is now a 
prerequisite for even considering sourcing from a factory, 
rather than a competitive advantage which distinguishes one 
factory or country from another.  Cambodia will still need to 
compete with the growing number of factories worldwide who 
have acceptable labor conditions.  End Comment.) 
 
¶13.  (U) Striking an optimistic note, Van said that Cambodia 
may edge out competition from Vietnam and China due to tight 
labor markets and rising costs in those countries, 
particularly as garment factories relocate from traditional 
Vietnamese and Chinese production centers to lower cost areas 
in those countries further away from ports and efficient 
transportation.  In order to survive, Van urged the industry 
to increase its productivity by tying production directly to 
wages via piece rates (i.e. pay per piece sewn) rather than 
hourly or daily wages subject to government minimum wage 
rules.  Cambodia also needs to improve its infrastructure to 
provide cheaper electricity, better roads, and more water and 
telephone connections, he said. 
 
Comment 
------- 
 
¶14.  (SBU) While the views expressed by Dr. Duran and the 
AITIC brief express a not uncommon sentiment that LDCs are 
losing out from global trade liberalization, they also fail 
to highlight the real credit that Cambodia deserves for its 
role in driving its own WTO accession process and undertaking 
 
PHNOM PENH 00001081  004.2 OF 004 
 
 
an economic reform agenda under very challenging 
circumstances.  While Cambodia could have pressed for less 
demanding accession requirements, the RGC realized that such 
an approach would be less effective in supporting the 
country's long-term economic goals.  Moreover, longer 
transition times for TRIMS and other rules would serve little 
purpose in protecting Cambodia's relatively unindustrialized 
economy.  Commerce Minister Cham Prasidh is proud of 
Cambodia's openness to foreign investors and service 
providers, and he clearly recognizes the imperatives of 
global trade.  Cambodia's remarkable economic growth 
rates--13 percent in 2005 and 10 percent in 2006--and rapidly 
increasingly levels of FDI attest to its success. 
 
¶15.  (SBU) Cambodia's progress in implementing economic 
reforms--which include but are not limited to WTO accession 
commitments--has been uneven.  While Cambodia has a long way 
to go before its trading regime is fully in line with WTO 
rules, this is due to a variety of factors including the 
relatively recent arrival of peace and security and shortages 
of financial resources, human and technical capacity, and 
sustained political will.  Cambodia is working to address 
these challenges in increasingly sophisticated ways.  As the 
World Bank/IMF-supported improvements in trade facilitation 
and the impressive rise and survival of the garment industry 
show, successes can happen here, but they are hard won. 
Continued USG engagement with Cambodia on economic 
issues--such as via the TIFA dialogue--is essential to 
ensuring that reforms are supported and accelerated. 
CAMPBELL