Presenter: Ngov Penghuy Date: Feb. 13, 2015 Venue: RULE East Asia Integration and ASEAN Economic Integration: Implication for Cambodian Economy Presenter: Ngov Penghuy Date: Feb. 13, 2015 Venue: RULE

East Asia Integration East Asia: Economic integration: The definition of East Asia differs depending on the context. ASEAN plus 6 (China, Korea, Japan, India, Australia, New Zealand) are often used in the context of economic integration today. Economic integration: Unification of economic policies between different states through the partial or full abolition of tariff and non-tariff restrictions on trade taking place among them prior to their integration.

The tool of economic integration is Free Trade Agreements (FTAs)

Some key Concepts of FTA Free Trade Agreements (FTAs) is a legally binding agreement between two or more countries to reduce or eliminate barriers to trade, and facilitate the cross border movement of goods, services and people between the territories of the Parties. Three basic pillars of liberalization are included in almost all FTAs: trade in goods, trade in services, and investment. Other areas may include protection of property rights, competition policy, government procurement and dispute settlement.

Economic rationales of FTA: It increases trade, production and specialization; It improves efficiency (e.g. due to specialization, economy of scale, increasing competition); It attract more investments and foster technology and knowledge transfer; It enhance productivity; It stimulate economic growth

FTAs in Asia: State of Play Asia is a relatively late comer in FTAs; but over the last decade, the number of FTAs has increase dramatically creating the so-called ‘Asian noodle bowl’; Today global FTA involve Asia more than any other region. As of January 2013, there are 257 FTAs; of which 190 (or about 73 percent) are bilateral Figure 1: FTAs by scope—Asia (cumulative) Figure 2: FTAs by status—Asia, 2013

Salient Features of FTAs in Asia (1) The rise in FTAs has been driven by richer, large economies. ASEAN+6 countries—the 10 ASEAN members plus Australia, the People’s Republic of China (PRC), India, Japan, the Republic of Korea, and New Zealand— has engagement ratio of 70 percent of the total FTAs in Asia; Countries are opting for simple bilateral FTA configurations rather than the more complex plurilateral ones as they may be easier to negotiate; There is high degree of extra-regional FTAs with majority of them involving countries outside region;

Salient Features of FTAs in Asia (2) Many agreements frequently go beyond the WTO regulatory framework to include provisions on a host of issues (trade facilitation, investment, government procurement, competition, intellectual property, environment and labor among others); Majority of FTAs have adopted a combination of the three ROOs rather than applying a single rule.

Some Key Factors contributing the rise of FTAs (1) Greater economic linkage and interdependence influenced by market-driven forces of cross-border trade, FDI, and finance; A defensive response to the proliferation of trading blocs and FTAs in other major regions i.e. EU, NAFTA; Uncertainty over progress in global trade talks under the WTO framework. All countries in region have shifted its trade policy to a three-track approach based on global (WTO-based) cum trans-regional (APEC-based), regional (ASEAN+3 or ASEAN+6), and bilateral liberalization;

Some Key Factors contributing the rise of FTAs (2) The need to improve productivity in the face of the heightened competitive pressure from the economic emergence of the People’s Republic of China (PRC) and India, in particular with respect to economies of scale through market integration; The promotion of “beyond the border” structural reforms as part a competitive strategy (e.g. investment liberalization, promotion of domestic competition, harmonization of standards, and upgrading of technology development)

Some Key Plurilateral FTAs

Some Key Plurilateral FTAs ASEAN Economic Community (AEC) Adopted by the ASEAN leaders at the 2003 with agreed timeframe 2015 AEC unifies and extends various key existing frameworks such as ASEAN Free Trade Area (AFTA), the ASEAN Framework Agreement on Services (AFAS), and the ASEAN Investment Area (AIA) The AEC is characterised by four pillars: (1) single market and production base; (2) highly competitive economic region; (3) a region of equitable economic development; and (4) a region that is fully integrated with the global economy;

Some Key Plurilateral FTAs (2) ASEAN Plus One Frameworks ASEAN has concluded and completed the ratification of five FTAs with Australia and New Zealand, China, India, Japan, and Republic of Korea, making ASEAN a de facto FTA hub All the ASEAN+1 FTAs extend beyond trade liberalization in goods to include liberalization of trade in services and investment, trade and investment facilitation, government procurement, intellectual property rights, competition policy, and wide-ranging economic and technical cooperation. The bad side of it, though, is that the existence of several ASEAN+1 FTAs create a ‘noodle-bowl’ situation which potentially hampers the firms’ usage of preferential systems The level of tariff liberalization is not sufficiently high; Rules of Origin (ROOs) are not liberal and uniform enough; and services liberalization have only small “WTO Plus” components in most FTAs

Some Key Plurilateral FTAs (3) Regional Comprehensive Economic Partnership (RCEP) RCEP was launched by ASEAN+6 leaders during the 21st ASEAN Summit at Phnom Penh in November 2012 The creation of RCEP was also driven by intention to ease the ‘noodle-bowl’ situation; ); potential increase in participating in production chains via ‘accumulation’; and a political economy argument that ASEAN needs to up its stakes in mega FTA in order to compete with other agreements such as the Trans-Pacific Partnership (TPP) and the China-Japan-Korea FTA so that it can maintain its “centrality” Negotiation starts in 2013 and aims at concluding in 2015

Some Key Plurilateral FTAs (4) Tran-Pacific Partnership (TPP) TPP is originally known as the Trans-Pacific Strategic Economic Partnership signed in 2005 by Brunei, Chile, New Zealand, and Singapore and now extended to twelve countries including Australia, Canada, Malaysia, Mexico, Peru, the United States, Vietnam and Japan. The modality of TPP is “WTO-plus” covering wide range of areas including trade liberalization in goods, services, investment, intellectual property rights (IPRs), environmental protection, labour, financial services, technical barriers to trade and other regulatory issues TPP is seen as a US-led process to advance its economic and strategic interest in Asia including counter-balance China’s influence in the region Given that China is an active member in East Asia-wide FTAs especially RCEP, TPP is seen as a direct competition.

TPP Country/Region Status Date Brunei Original Signatory 2005 June Chile New Zealand Singapore USA 2008 February Australia 2008 November Peru Vietnam Malaysia 2010 October Mexico Negotiating 2012 October Canada Japan 2013 March South Korea Announced Interest 2013 November China 2013 September

Opportunities arising from FTAs Promote physical connectivity, bring greater access to regional markets, resources and investments, and involve in regional production network; Enhance exports, diversification and competitiveness; Accelerate domestic reforms, improve business and investment climate, all contributing to accelerating productivity, employment generation and economic growth; Simulation results in Itakura (2013) : FTA all region-wide FTAs have positive impact on Cambodia’s economy; AEC is expected to increase real GDP by 4.4 percentage points from baseline scenario; Bigger region-wide FTAs like ASEAN+3 and ASEAN+6 have larger impacts leading to increase in real GDP by 6.42 percent and 6.44 percent, respectively; Among ASEAN+1 FTAs, ASEAN-China FTA has the largest impact on Cambodia’s economy increasing real GDP by 8.3 percentage point; The results also suggests that economic gains arise from increase in volume of international trade due to lower barrier in trade in goods and services, and increase in investment from both domestic and foreign investors

How much Cambodia harness the opportunities arising from FTAs Cambodia has not fully reaped the benefits of regional integration Intra-regional trade volume is meagre compared to other countries in the region; Out of 60 surveyed firms, 20 percent of them apply for certificate of origin under ATIGA scheme, 16.7 percent under ASEAN China FTA, and 3.3 percent under ASEAN Korea FTA; The vast majority of business perceives that lack of information as the main reason for not using FTAs.

Challenges facing Cambodia ASEAN could lose its ‘relevance and centrality’  it could make Cambodia less relevant in a fast-growing and dynamic regional economic integration; The complex set of FTAs is likely to cause greater coordination problems for public institutions which can lead to less effective management of regional cooperation; For business, there is a lack of awareness of the benefits and opportunities of region-wide FTAs and of regional integration. Also, the complex set of rules and procedures create burden and confusion for businesses.

SEZ in Cambodia

Some key policy priorities to maximize the benefits from FTAs (1) Synchronize regional cooperation frameworks Investment in long-term institutional capacity development Ensure effective coordination and communication among public institutions and between public and private institutions Raise awareness among private sector about FTAs and latter motivate them to actively engage in regional cooperation processes.

Some key policy priorities to maximize the benefits from FTAs (2) Effectively address trade policy constraints through Improve logistics efficiency Simplify customs procedures Improve export market information services Improve standards compliance

Some key policy priorities to maximize the benefits from FTAs (3) Make fundamental policies right Maintain sound macroeconomic management Improve investment climate Invest in human capital Invest in hard and soft infrastructure

Conclusion Global experiences indicate that no country can sustain high growth without integrating into the world economy; Albeit regional cooperation is a necessary condition for Cambodia’s growth trajectory, it is not sufficient. Integration into the regional and world economy can strengthen a smart growth strategy, but they cannot ensure its success; Other elements that loosen binding constraints to growth need to be in place, including sound macroeconomic management, an enabling business and investment climate, competent institutions, and thoughtful investment in human capital and infrastructure, and effective trade policy.

ASEAN Economic Integration

Historical Evolution of ASEAN

ASEAN 2010 Baseline Data

ASEAN GDP Growth

ASEAN Aspiration

ASEAN Economies: Indicators of Vulnerabilities

Questions How ASEAN integration affect Cambodian economy? How East Asia economic integration affect Cambodia economy?