FTA impacts: Revenue shift, job growth

WHILE Cambodia has been implementing bilateral and multilateral free trade agreements (FTAs) within the region and globally, the country has seen a reduction in revenue collections for customs excise due to the decrease in tariffs for partner nations.

With the materialisation of the Cambodia-China FTA (CCFTA), approximately 98% of the country’s exports to China and 90% of imports from China are exempt from tariffs. The agreement was implemented on January 1, 2022.

The Regional Comprehensive Economic Partnership (RCEP), a multilateral agreement, has also been in effect since early 2022, boosting exports but reducing some import tax revenue.

The Kingdom will soon implement the CambodiaSouth Korea FTA (CKFTA).

According to data from the General Department of Customs and Excise (GDCE), the authority collected $2.8 billion in the first 11 months of 2023, representing a loss of $400 million compared to the corresponding period of 2022.

Kun Nhem, director-general of GDCE, said at a December 25 workshop that the decline in customs collection was primarily due to the implementation of the FTAs, where tariffs are cut to zero.

“Our revenue collection continues to decline. In fact, in 2023, customs revenue lost due to the implementation of [FTAs] will be nearly $400 million. Secondly, the economic development of Cambodia’s manufacturing industry has enabled the country to produce some goods to replace imports,” he said.

He emphasised that over the last 15 years, the country imported a significant amount of goods, leading to increased customs clearance. However, he said it has recently reduced the import of some products, resulting in a decline in revenue.

He believes the establishment of car assembly plants has also impacted revenue collection.

Ministry of Economy and Finance spokesperson Meas Soksensan told The Post previously that the implementation of FTAs between the Kingdom and its partners had cost the government tax revenue but also provided an opportunity for the country to expand competitive markets, create jobs and attract more investment in the manufacturing sector.

“Usually, when we engage in free trade, it involves reducing taxes on both sides. This reduction leads to an increase in market share as we lower import barriers and our trade partners do the same, fostering mutual competition. As a result, we gain market share, increase exports and enhance our domestic production chain,” he explained.

He said that as the economy strengthens, customs revenue will gradually disappear, so the government will increase income by strengthening local tax administrations.

“The loss of customs revenue, though seemingly large, needs to be seen in light of the increase in the local production chain, which creates job opportunities for our people, and local taxes will increase accordingly,” he said.

Ky Sereyvath, an economics researcher at the Royal Academy of Cambodia, attributed the loss of customs income to the large number of products imported from China under the CCFTA.

“The loss of customs revenue will be replaced by tax revenue, so Cambodia-China trade will also boost domestic production for export to China,” he said.

Despite the imbalance in imports and exports, he noted that the country’s exports to China have significantly increased, generating income from domestic production, creating jobs and boosting domestic production.

“The loss in customs revenue, I believe, contributes to the reduction of government revenue. However, the compensatory increase in tax revenue and the creation of jobs for the populace are more significant and beneficial than relying on imports,” he said.

Nhim explained the structural changes in fiscal revenue for the country.

He noted that historically, the department was a major collector of tax revenue, with a peak of collections seen in 2019. He said that revenue collection experienced a significant decrease following the outbreak of Covid-19, with the subsequent years of 2020-2022 yielding revenues below expectations.

“In 2023, we collected more than 82% of the budget law for 2023,” he said.

Despite the decline in tariffs, Nhim suggested that it was not entirely negative.

He acknowledged the challenges associated with collecting customs revenue but emphasised the growth of domestic production, which he said boosts the economy, increases job opportunities for Cambodians and enhances income from domestic taxes.