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Cambodia has made considerable progress in establishing a modern trade regime. During the 1960s, it was an exporter of agricultural products (mainly rice, rubber and corn) and the balance of payments was relatively stable. However, as the regional conflict spilled over into Cambodia in the 1970s, foreign trade virtually collapsed. Under the trading system adopted in the early 1980s the level and composition of trade was effectively controlled through quantitative restrictions and state owned trading bodies, and tariffs and trade taxes played little or no role other than as a means to collect revenue. This has changed with the move to a market economy and the wide range of reforms that have since been implemented. A process of market oriented liberalization began in the late 1980s. The state monopoly for foreign trade was abolished in 1987 and the foreign investment law was promulgated in 1989, enabling private companies to engage in foreign trade. In 1993, initiated as part of the UNTAC assisted transition, trade policies were greatly liberalized. Restrictions limiting the ability of firms and individuals to engage in international trade were largely removed. There are few binding quantitative restrictions and the rates of taxes on imports and exports are for the most part not prohibitive. Nevertheless, tariff rates and other trade taxes are still high and variable. This structure of duties taxes some activities and benefits others, creates obstacles to the growth of efficient industries, gives rise to pressures for exemptions, hurts revenue and compounds problems of Customs administration. The evidence from around the world is that dismantling obstacles to trade is good for growth and that benefits from this growth as much as anyone (see box 2.1 for a brief summary of this literature). These are core issues for this report on the Trade Policy component of this Integrated Framework Diagnostic Study. Other important issues cover conditions of restricted access to preferred markets and priorities for WTO accession. 2 .1 Trade, growth and poverty: assessments of the evidence Over the last thirty years or so the trade policies of many countries provide a wide range of experiences for countries such as Cambodia to learn from. In the 1960s and 1970s many countries adopted an industrialization strategy based on import-substitution. Tariffs were used to provide incentives (effective protection) for selected industries. In the early stages of this strategy, activities engaged in the manufacture of consumer goods were viewed as the easiest targets for industrial development and the tariffs for these goods were raised relative to those of other goods. The idea was that when these ‘infant’ industries matured other final good manufacturers would have their tariff protection raised followed by increased protection for the domestic production of intermediate goods, processed raw materials and capital goods in subsequent stages, thus, fostering industrial backward linkages. Experience in the 1970s and 1980s demonstrated this approach had serious flaws. The first stage of the strategy was implemented and high levels of protection were established for many types of consumer goods. But in doing this the seeds of failure were sown. Many of these firms remained uncompetitive, which made it politically difficult to proceed to the second stage where the tariffs for intermediate goods used by these firms would be increased. As a result a powerful constituency was created that was able to block further implementation of the import strategy. For many of these countries, the industrial base remained small in terms of contribution to value added and employment and relatively high-cost when measured against international competition. As world markets became more integrated those countries that adopted import-substitution strategies tended to grow slower than those countries that were more export-oriented. This experience led many countries to implement substantial trade policy reforms in the late 1970s and 1980s. Studies of the trade liberalization episodes in the 1970s support the conclusion that trade creates and sustains higher growth (Srinivasan and Bhagwati 1999). Similarly, studies of more recent experiences with liberalization reinforce this conclusion. The so-called list of post 1980 globalizers includes China, India, Indonesia, Thailand, Mexico, Argentina, Uganda, Vietnam, Bangladesh and Nepal. All these countries cut their tariffs and otherwise streamlined their trade regimes. All have had large increases in trade and most have had large increases in foreign investment as well. Growth rates have accelerated from an average of 1.7 per cent per year in the 1970s, to 2.6 per cent in the 1980s to 5.3 per cent in the 1990s (Dollar and Kray 2000). So if liberalization of policy and increases in trade are good for growth, is that growth good for the poor? The answer appears to be that growth in trade reduces poverty (Dollar and Kray 2000). Trade liberalization creates ‘winners’ and ‘losers’, but different ‘winners and ‘losers’ also arise when trade barriers are high. Thus, trade policy, whether it be open or closed cannot guarantee that nobody will lose. In either case poverty must be addressed by more direct measures such as targeted investments in education and health. However, some countries have done better out of trade liberalization than others. For example, the Asian economies have generally done better than comparable Latin American countries in terms of growth, employment generation, income increases, and poverty reduction. According to a recent Asian Development Bank (ADB) (2001) review, trade liberalization has been an important factor in Asia’s success in reducing poverty over the last decade. Why did many Asian countries do better than countries in other regions? Part of the answer lies in a combination of factors including stable macroeconomic policies, such as low inflation and prudent fiscal policies and the fact that product markets and factor markets (that is, labour and capital) are relatively more flexible than many Latin American and African countries. Unlike many Latin American countries, most Asian economies have far fewer domestic price controls and few interventions in the labour and capital markets, which allowed their economies to maximize the gains from greater trade as well as allow their economies to adjust faster to external shocks. While these general conclusions are widely endorsed by professional economists and by the preponderance of political leaders who have opted for liberalization – often unilaterally – in recent years, there is not universal agreement. Some commentators have criticized the use of cross-country comparisons to draw such conclusions (Rodriquez and Rodrik 1997, Rodrick 1998). Skepticism about the pay off to open trade is also sometimes based on theoretical possibilities whereby in some circumstances trade opening can hurt efficiency and output (Rodrick 1999). But reviews of these issues generally conclude that while cross-country models do oversimplify the relationships between openness and growth, the relationship is adequately demonstrated by the in-depth studies of country experiences (Srinivasan and Bhagwati 1999). On the question of circumstances where trade could theoretically hurt efficiency most proponents of the benefits of open trade have come to that position, fully aware of the theoretical exceptions and have, after careful consideration judged them to be insignificant. Finally, lessons from the recent Asian financial crisis also tells us that in addition to trade and regulatory reforms other supporting institutional reforms promoting open access to economic opportunities are fundamentally important for achieving high quality economic growth and therefore poverty alleviation in the long term. These include good governance practices, and better laws and judicial system to ensure proper, transparent and predictable administration. Measures
affecting imports The Cambodian government continues to reform its tariff rate system. In April 2001 the number of tariff bands was reduced from 12 to 4 with the maximum tariff rate falling from 120 to 35 per cent (see table 2.2). Tariff rate reductions covered several major finished goods as well as some intermediate goods and raw materials. One of the major tariff decreases under this reform package covered completely built up passenger cars (from 40 to 120 per cent to 35 per cent) and spare parts (from 50 to 35 per cent); tobacco products (from 50 to 35 per cent); and alcoholic beverages such as wines and distilled beverages (from 50 to 35 per cent). However, these changes have had a minor impact on the overall tariff structure since only a small percentage (3.8 per cent) of tariff lines had rates above 35 per cent in 2000. For example, the percentage of tariff lines duty free or subject to the minimum 7 per cent tariff rate only increased from 44.3 per cent in 2000, to 44.8 per cent in 2001 and the percentage of tariff lines with tariff rates 15 per cent or less only increased from 71.6 per cent to 73.2 per cent. Consequently, the average tariff rate fell only slightly from 17.3 per cent to 16.5 per cent indicating that tariffs, on average, still remain high. A standard deviation of 11.9 per cent indicates that there is still a large dispersion of tariff rates. Under a program agreed with the IMF, the Government intends to reduce the unweighted average tariff rate to 14 per cent by 2002. While achieving a low average tariff is a useful indicator of progress with tariff reform, it is an incomplete one. Indeed it would be possible to reduce the average rate yet leave pockets of highly protected industries. As a rule of thumb, a the fewer the number of rates, the narrower the range of rates, and the lower the average rate, the less costly the tariff structure will be to the economy in terms of misallocation of resources. Almost half tax revenue is from border taxes. Tariff rate reductions on the many high revenue yielding imported excisable (petroleum and petroleum products, autos, motorcycles, beverages and cigarettes) raised concerns that the tariff changes would have resulted in a drop in government fiscal revenues. As a revenue compensatory measure for the tariff changes, the government increased excise tax rates on these major products (see annex B for details of changes). As result of these tax increases, the average applied rate of taxes on imports (import duty plus excise tax) virtually remained unchanged at 18 per cent between 2000 and 2001. The advantage of shifting away from tariffs to excise taxes as a revenue raising measure is that it avoids the negative effects of high tariffs on domestic resource allocation, as an excise tax applies equally to domestically produced goods and imports. 2.2 Cambodia’s tariff rate structure
a Figures in parenthesis are standard deviations, which measure the dispersion of tariff rates. Effective tariff rate is the ratio of revenue from tariffs over the value of imports. Import weighted average tariff rate for 2001 calculated using year 2000 import data. Sources: Customs Department and Ministry of Economy and Finance. Additional information about the structure of tariffs is revealed when we examine the distribution of imports by tariff lines. Imports by tariff band are presented in table 2.3. First semester 2001 import data was not available and so we calculate import weighted average tariff for 2001 using 2000 import data. Some caution should be taken with these figures, as many believe the data on imports are not complete due to several factors such as smuggling activities, weaknesses in data compilation and customs valuation procedures, which we discuss later. Bearing this in mind, one striking feature is that the shares of imports by tariff band are similar to the distribution of tariff lines. Still, a fifth of all imports are subject to the highest tariff rate of 35 per cent. The tariff peaks (tariff rate of 35 per cent) protect several semi processed goods and consumer goods such as processed meat and dairy sectors, processed vegetables and fruits, wheat flour; beverages and tobacco; garments and footwear; plywood and jewelry. All major ‘excisable goods’ are included in this band for revenue raising purposes. Based on import data for 2000, the import weighted average tariff rate fell from 15.4 per cent in 2000 to 14.2 per cent in 2001. These statistics do not take into account the extensive use of tariff concessions in connection with investment and export incentive schemes. These exemptions are discussed below.
Source: Calculated from customs data. |
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