Cambodia Signs Free Trade Agreement With China Months After EU Sanctions

Cambodia signed a free-trade deal with China on Monday it hopes will help offset the loss of a tariff-free scheme for exports to the European Union and secured U.S. $140 million in funding from Beijing for several of the country’s “top priority projects.”

Cambodia’s Prime Minister Hun Sen and Chinese Foreign Minister Wang Yi oversaw the signing of the Cambodia-China Free Trade Agreement (CCFTA), negotiated in less than a year, and agreements for loans and grants at the Peace Palace in Phnom Penh as Wang wrapped up a two-day visit to the country.

Speaking at the signing ceremony, Cambodian Minister of Commerce Pan Soraksak said the CCFTA “signifies an even stronger tie between the two countries and marks another key historical milestone for Cambodia-China relations.”

“The agreement will provide a more robust economic partnership through a higher degree of market access, liberalization for goods, services, and investments,” he said.

“The timing implementation of this agreement will provide economic and social benefits to people of the two countries in a mutually advantageous manner.”

Pan Sorasak said he expects the two sides to complete ratification of the agreement and begin implementing it by “early 2021.”

Chinese Minister of Commerce Zhong Shan noted in remarks delivered by video feed that negotiations had proceeded “expeditiously” for the CCFTA, which he called “a new milestone in the development of bilateral economic and trade relations.”

“China is ready to keep in close communication with Cambodia to push for the early entry into force of the agreement,” he said.

While the details of Cambodia’s first FTA with a foreign nation have not been made public, it is expected to focus on cutting duties related to Cambodia’s agricultural, tourism, and trade sectors.

In July, after wrapping negotiations on the agreement, Sok Sopheak, secretary of state at the Ministry of Commerce told reporters that when the CCFTA comes into effect, some 340 Cambodian products, including pepper, fruits, fishery products, and meat will be exported to China with tariff reductions of up to 95 percent.

After the EU imposed tariffs in May last year, Cambodian rice exports to China surged, but a source with knowledge of the situation who spoke to RFA’s Khmer Service on condition of anonymity because he was not authorized the discuss the deal, said the CCFTA will not include tariff reductions on the grain.

The Cambodian government has said it expects to increase exports to China by 20 percent or more every year and for bilateral trade between the two allies to reach U.S. $10 billion in 2023. UN trade data show that in 2018, Cambodia exported U.S. $1.3 billion worth of goods to China, while importing U.S. $6.1 billion worth of Chinese goods.

Chinese Foreign Ministry spokesperson Wang Wenbin has said that the deal focuses on China’s Belt and Road Initiative (BRI) cooperation, trade in goods and services, investment, economic and technical cooperation, and e-commerce.

The U.S. $1.3 trillion BRI is Chinese President Xi Jinping’s signature geopolitical policy, which features major investments to build infrastructure supporting trade between China and countries across Asia, Europe and Africa. It has been dogged by controversy after countries in Asia and Africa piled up unsustainable debts.

In addition to the CCFTA, China pledged to deliver U.S. $140 million in loans and grants for infrastructure projects Cambodia has identified as “top priority,” including linking Cambodia’s coastal city of Sihanoukville with Hong Kong by undersea fiber-optic cable, building a power plant, and constructing roads. Other deals included projects to improve a hospital and build a sewage system in Sihanoukville—a city that has seen significant Chinese investment in recent years.

Loss of EBA

The signing of the CCFTA came exactly two months after the EU suspended tariff-free access to its market under the “Everything But Arms” (EBA) scheme for around one-fifth of Cambodia’s exports, citing rollbacks on democracy and human rights.

The suspension is expected to result in a loss of around U.S. $1.1 billion of the country’s annual U.S. $5.8 billion in exports to the EU, some 75 percent of which are made up of clothing and textiles—a crucial industry in Cambodia that employs one million people.

Hun Sen has shrugged off the move, but unions have warned that the reinstatement of tariffs on Cambodian exports to the EU could leave 80,000 workers from more than 1,000 garment factories in Cambodia jobless if buyers from the bloc stop placing orders because of increased costs.

On Monday, Eang Sophalleth, secretary of state of Cambodia’s Ministry of Environment and assistant to Hun Sen quoted the prime minister saying that the EBA was “always going to end” when the country’s economy developed, but the CCFTA will “exist forever.”

“China continues to provide strong support for Cambodia to defend its own sovereignty and dignity,” he added.

In July, Cambodian Ministry of Commerce spokesman Seang Thai claimed that the CCFTA is “not meant to substitute for the EBA,” but to bring additional benefits to the country.

But unions and analysts warned at the time that Cambodia’s bid to offset the partial loss of the EBA by pursuing an FTA with China would leave the country poorer and beholden to Beijing.

Growing influence

The EU launched the process to strip Cambodia of its preferential trade terms following the arrest of opposition Cambodia National Rescue Party (CNRP) President Kem Sokha in September 2017 and the Supreme Court’s decision to ban his party for its role in an alleged plot to topple the government two months later.

The ban, along with a wider crackdown on NGOs and the independent media, paved the way for Hun Sen’s CPP to win all 125 seats in parliament in the country’s July 2018 general election.

Hun Sen has said that EU demands to maintain the EBA, which include dropping charges of treason against Kem Sokha and reinstating the CNRP, are unreasonable and an encroachment on Cambodia’s internal affairs.

China has stepped in to wield significant influence in Cambodia as relations between Phnom Penh and Western governments have waned amid concerns over the country’s human rights situation and political environment.

Chinese investment has flowed into Cambodia in recent years, but Cambodians regularly chafe at what they call unscrupulous business practices and unbecoming behavior by Chinese businessmen and residents.

Sophal Ear, an associate professor of diplomacy and world affairs at Occidental College in California, told RFA in an emailed statement on Monday that Wang Yi’s visit was meant “to reassure Phnom Penh that Beijing’s got their back.”

He noted that Cambodia’s relationship with the U.S. is currently strained “because of Phnom Penh’s continued subservience to Beijing,” but said it isn’t too late for the two countries to mend ties.

“The Cambodian prime minister could decouple from China, but he won’t do it because he has too much to lose personally and politically,” Sophal Ear said.

“A lot of money and prestige is riding on the line. Regime survival is the reason, and China can help him survive.”

Over-reliance on China

Social and political analyst Seng Sary welcomed the CCFTA but cautioned that Cambodia should maintain a good relationship with the EU and the U.S., which also are major markets for the country’s exports.

“The EU and the U.S. have proposed few things to improve the political situation, to respect human rights and the fundamental freedom of expression,” he said.

“When the Cambodian government can comply with all of these requirements its relationship with the EU and U.S. can resume as normal.”

Duong Chentra, a CNRP activist who fled to Thailand to avoid arrest, told RFA that small and corrupt countries like Cambodia never benefit from bilateral trade with China, and instead end up mired in debt.

He warned that the CCFTA would lead to China harvesting all of Cambodia’s natural resources.

“I want to send a message to … Hun Sen that China has never considered the interest and welfare of the Cambodian people or respected the concept of human rights concept,” he said. “China has only its own interests in mind.”

Wang Yi is on a tour of Southeast Asia that also includes Malaysia, Laos, Thailand, and Singapore.

Reported by RFA’s Khmer Service. Translated by Ieng Neang and Sok Ry Sum. Written in English by Joshua Lipes.