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What impact will RCEP rules of origin have on Cambodia?

Brian Badzmierowski

The Rules of Origin (ROO) contained in the recently enacted Regional Comprehensive Economic Partnership (RCEP) have the potential to boost industries in Cambodia, but untangling the procedures to earn certificates of origin will create headaches for some businesses. 

The Economic Research Institute for ASEAN and East Asia (ERIA) held its second-panel discussion on the implementation of RCEP and focused on potential avenues available to Cambodian businesses hoping to cash in on the new free trade agreement (FTA).

While ROO procedures in previous ASEAN FTAs typically required companies to prove that at least 40 percent of the raw material contained in a product originated within a member country, RCEP allows for more flexibility. 

The RCEP framework allows for a certificate of origin to be awarded to the RCEP-member country where the last substantial change to the product occurred.

RCEP

This will be good news for the garment industry, Executive Director at Asian Trade Centre Deborah Elms said, that fabric that is transformed into a piece of clothing constitutes a substantial enough change to consider the clothing to have originated in Cambodia, rendering it eligible for RCEP preferential tariffs.

“For a textile producer, this is extremely helpful because Cambodia on its own doesn’t make the full gamut of textiles [when creating a piece of clothing],” she said.

Many textile tariffs within RCEP-member countries are high she said, but RCEP removes some of them. For example, she said swimsuits exported to Australia are now tariff-free whereas the non-RCEP rate is 9.5 percent.

The type of product being considered for RCEP preferential treatment is key, as different rules pertain to different products. 

Using sweet biscuits and cookies as an example, Helms pointed out that these products have two separate guidelines for obtaining a certificate of origin. Either 40 percent of the ingredients within the biscuits need to originate in RCEP-member countries or a substantial change that causes a change in tariff classification needs to occur to be eligible to receive a certificate of origin.

For example, a fruit that originates from a non-RCEP country that is turned into a juice in Cambodia would be eligible to receive RCEP benefits.

Early movers will hold the upper hand

Understanding the fine details of these stipulations will often require collaboration with government officials and customs officers to ensure compliance.

Although RCEP has been enforced for over a month, Un Chantha, the director of the Export-Import Department at the Ministry of Commerce, said no firms have yet come forward to apply for certificates of origin, likely because most companies already utilize benefits from previous FTAs. 

Some RCEP tariffs are also implemented over a gradual period — making a switch to the new FTA less urgent — with some decreasing one percent for 15 years. 

“For some firms, that could be significant, but for many the real benefits bight be better felt in 5 years or so, when 15 percent [tariffs] becomes 10 percent,” Elms said.

Early movers will have an advantage if they can present themselves as RCEP-compliant companies, Elms added, and the effects of COVID will only increase the chances of Cambodia being able to find solid footing on the regional supply chain.

“I think that [complying quickly with RCEP] could give a real advantage to many Cambodian companies that otherwise might not be on the radar,” she said.

Elms believes companies that have long been staples in the Cambodian market, such as those in the food and handicraft sectors, can capitalize by forming partnerships that weren’t readily available before the FTA was enacted. This will also open new doors for investment, she noted.

Jeremy Gross, ERIA’s director of capacity building, said the crisis in Myanmar could also lead to further investments in Cambodia, as investments destined for Myanmar are diverted elsewhere.

Where does Cambodia fit into RCEP?

The panel agreed that there could be potential for Cambodia to re-brand itself in a post-COVID RCEP framework.

Robin Flint, the first secretary at the Australian Embassy of Cambodia, said: “The biggest benefit for me is really the regional integration component of the RCEP supply and production chain that it produces. I think through the accumulation model that RCEP has there’s a real benefit for countries like Cambodia to really analyze how they fit into an RCEP regional production and supply chain,” Flint said.

Cambodia could push to become a production base for input materials for the auto industry or a distribution hub for electronic goods throughout the region, he added.

That said, the panel agreed RCEP will include some drawbacks initially for Cambodia as well, according to a study published by the United Nations Conference on Trade and Development. The Kingdom’s exports will likely decline as RCEP countries shift trading partners to take advantage of higher tariff concessions elsewhere.

However, the study noted that this trade diversion would have occurred even without RCEP, and the expected trade creation resulting from the FTA outweighs the negative impacts.

Elms said the first to benefit will be those who take the initiative to engage in the process and that Cambodia is in a good position to take advantage of RCEP and the new ROO guidelines.

One of the main obstacles remains spreading knowledge of RCEP’s terms to private companies to ensure compliance. 

According to Sok Siphana, an international legal expert and managing partner at Sok Siphana & Associates, most companies should hire or consult trade specialists to help them comply with ROO guidelines.

“Just make your product, leave the Rules of Origin to the experts, to the freight-forwarders, to the customs brokers, let them handle that. This is the best way to capitalize on the Rules of Origin in RCEP,” he said.

“In general, Cambodia should do well, particularly given government enthusiasm and efforts at outreach,” she said.  

“Firms are going to be looking for new partners and Cambodia has companies that should be available.”

Cambodia Investment Review has previously reported on RCEPs free trade agreement is light on e-commerce rules and guidelines.

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