Opinion : is a Cambodia-India Free Trade Agreement feasible ?
Cambodia Investment Review - 16 July 2024
Opinion : is a Cambodia-India Free Trade Agreement feasible ?
By Khath Bunthorn and Ngin Chanrith
Cambodia has actively sought to establish bilateral and multilateral free trade agreements (FTAs) with major trading partners as part of its market and investment diversification strategy. India can be a potential candidate for this strategy. However, despite their strong bond, the feasibility of a Cambodia-India FTA (CIFTA) is in question, mainly due to the China factor in Cambodia-India relations.
There is a close connection between Cambodia and India. A strong bond between Jawaharlal Nehru and Norodom Sihanouk existed between the two nations throughout the 1960s. Both nations have a long-standing connection to the Khmer civilization.
In the 1990s, India played a crucial role in the peacebuilding process in Cambodia by sending thousands of its military personnel to join the United Nations Transitional Authority in Cambodia, which organised the first free elections in 1993. Subsequently, India has provided significant development aid in culture, education, health, sciences and information technology.
Both countries marked the 70th anniversary of their diplomatic ties last year and reaffirmed their resolve to strengthening the relationship by focusing on better physical, governmental, and people-to-people connections.
Recent events are an example of this strengthening of bilateral ties. Then General Hun Manet and King Norodom Sihamoni paid official visits to India last year. These were the first high-level trips since the 1960s.
The opening of the direct Phnom Penh-New Delhi flight route in June this year is anticipated to increase trade and tourism between the two countries. To this end, a memorandum of understanding on Fintech digital connectivity was also signed. The next priority is an FTA to boost bilateral trade and investment.
Market and Investment Diversification
Cambodia is a small but very liberalised economy in the region. Amid global economic uncertainty, Cambodia thrives on increasing bilateral and multilateral FTAs with key trading partners to diversify its export market and attract more investment. This is reflected in its Economic Diplomacy Strategy 2021-2023, which aims to increase trade exchange, attract foreign direct investment, and promote tourism, as well as cultural and sports exchanges.
This strategy responds to the economic challenges from the uncertainty of the Generalised System of Preference and the partial withdrawal of Everything but Arms, which provide duty-free access to the U.S. and EU markets, respectively. The loss of these preferences will critically affect Cambodia’s investment and trade environment.
Additionally, Cambodia’s expected graduation from the least developed country status by 2029 will see the country losing more preferential trade privileges and, thus, a competitive advantage. Since Cambodia is an export-dependent economy, having diverse FTAs with key trading partners helps mitigate these challenges.
So far, Cambodia has an FTA with China, along with the Regional Comprehensive Economic Partnership (RCEP), and an FTA with South Korea, among other trading partners. Yet, having an FTA with India will be a game changer for Cambodia.
India as a Potential FTA Candidate and the China Factor
India is an emerging power and the world’s biggest market (1.44 billion people) and is projected to bypass Japan to become the third-largest world economy by 2030. Thus, enhancing trade relations with India will enable Cambodia to reduce its dependence on other partners, particularly China.
There can be an enormous potential for an FTA between the two countries.
At the moment, India is Cambodia’s 19th largest trading partner in the first five months of 2024, reflecting a trade relationship that needs further strengthening. Total bilateral trade volume was only US$403.78 million in 2023-24, and this minimal trade is further concentrated in sectors outside Cambodia’s key growth areas.
Indian investment (US$115 million) in Cambodia primarily focuses on pharmaceuticals, automobiles and mining, which aligns with this trend.
Cambodia exports mainly agricultural produce, garments, and footwear to India, valued at US$197 million in 2022. India would benefit more by investing in the promising sectors of agriculture, light manufacturing and information technology – where it has a niche.
However, since 2020, when Cambodia expressed its interest in an FTA with India, such an agreement has yet to materialise. In 2022, Cambodia asked India to accelerate the internal technical work and study the potential and possibility of a bilateral FTA. During the second meeting of the India-Cambodia Joint Working Group on Trade & Investment held in New Delhi in June 2024, Cambodia requested India to begin procedures for negotiating the preferential trade agreement. Yet, India appears to remain lukewarm about it.
Besides Cambodia being a small market with a population of about 17 million, the China factor may primarily thwart the Indian enthusiasm for an FTA with Cambodia.
India as a Potential FTA Candidate and the China Factor
India is an emerging power and the world’s biggest market (1.44 billion people) and is projected to bypass Japan to become the third-largest world economy by 2030. Thus, enhancing trade relations with India will enable Cambodia to reduce its dependence on other partners, particularly China.
There can be an enormous potential for an FTA between the two countries.
At the moment, India is Cambodia’s 19th largest trading partner in the first five months of 2024, reflecting a trade relationship that needs further strengthening. Total bilateral trade volume was only US$403.78 million in 2023-24, and this minimal trade is further concentrated in sectors outside Cambodia’s key growth areas.
Indian investment (US$115 million) in Cambodia primarily focuses on pharmaceuticals, automobiles and mining, which aligns with this trend.
Cambodia exports mainly agricultural produce, garments, and footwear to India, valued at US$197 million in 2022. India would benefit more by investing in the promising sectors of agriculture, light manufacturing and information technology – where it has a niche.
However, since 2020, when Cambodia expressed its interest in an FTA with India, such an agreement has yet to materialise. In 2022, Cambodia asked India to accelerate the internal technical work and study the potential and possibility of a bilateral FTA. During the second meeting of the India-Cambodia Joint Working Group on Trade & Investment held in New Delhi in June 2024, Cambodia requested India to begin procedures for negotiating the preferential trade agreement. Yet, India appears to remain lukewarm about it.
Besides Cambodia being a small market with a population of about 17 million, the China factor may primarily thwart the Indian enthusiasm for an FTA with Cambodia.
Huge Trade Imbalance With China And Other RCEP Nations
First, India’s massive trade deficit with China is another concern that adds to the ongoing downturn in relations between the two Asian rivals. In November 2019, India exited the China-led RCEP. As India refused to accede to the mega trade bloc, it has instead attempted to establish bilateral FTAs with other countries, such as the E.U. and the U.S., where India maintains a positive trade balance. So far, India has signed FTAs with thirteen countries, including Japan, South Korea, Australia, and ASEAN. In March 2024, India signed four more FTAs with European nations that are not members of the E.U.
India’s decision to withdraw from RCEP was influenced by local pressure (industry segments and bodies) as well as a huge trade imbalance with China and other RCEP nations ; the latter being the most important element contributing to India’s decision.
The Indian government feared that the RCEP would open the door for a further influx of Chinese goods into India, exacerbating the considerable trade imbalance of US$85 billion. At the same time, China has become India’s top trading partner, with US$118.4 billion in two-way commerce in 2023-24, surpassing the U.S.
Notwithstanding their strong trade relations, the Chinese aggression in Galwan Valley in Ladakh and the ongoing military standoff have endured India’s economic decoupling from Beijing while pushing it into the orbit of the U.S.-led Indo-Pacific strategy and the Quad. More critically, India will only normalise political and economic relations with China once the border issues are resolved.
Second, Cambodia has been regarded as China’s closest ally in Southeast Asia.
Beijing strongly influences the Cambodian economy as a top trading partner, foreign investor, and creditor. Cambodia-China bilateral trade reached US$12.26 billion in 2023. In the same year, China invested US$3 billion in Cambodia.
As Cambodia’s external public debt reached US$11 billion in the first quarter of 2024, China held approximately US$4 billion, accounting for 36 percent of the total debt.
Under the Belt and Road Initiative, China has financed around 70 percent of Cambodia’s crucial infrastructure projects. Further, a recent study shows that Chinese investors own 90 percent of the country’s clothing manufacturing companies. Therefore, India’s tepid response to the proposed CIFTA may have been influenced by concerns about using Cambodia as a channel for exporting Chinese goods to India.
In short, both countries acknowledge the significance of deeper bilateral relations and the mutual benefits of a potential FTA.
As a result of the ongoing tensions between New Delhi and Beijing about the border issues, the difficult economic decoupling, and China’s growing economic dominance in Cambodia, it is possible that the Comprehensive and Integrated Free Trade Area between India and Cambodia may not be realized for some time.
India’s hesitancy stems mostly from the worry of Chinese goods entering Cambodia and then being exported to India. Ensuring that Cambodia does not become a channel for Chinese goods to reach the South Asian market is very vital for the viability of the CIFTA.
