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461 Chapter 22 Foreign Trade 22.1. Trade Liberalization in Cambodia The principal goal of Cambodia’s foreign economic policy is to expand and strengthen economic ties and international cooperation through the integration of the Cambodian economy into the regional and world economy. This goal is designed to utilize the advantages of international division of labor to promote economic development and improve the welfare of the population. Since the late 1980s and especially in the early 1990s Cambodia has embarked on trade liberalization and integration. The private sector was enabled to establish trading companies with a maximum foreign participation of 49 percent. Since 1993, the general licensing for most goods has been eliminated when registered companies undertake such trade. 22.1.1. The Role of Tariff There are several arguments in favor of tariffs: • to maximize benefits from strategic application of tariffs. Tariffs could increase a country’s welfare by enabling excess profits to be shifted from foreign to domestic firms; • as instruments for temporary protection of a specific “infant” industry. It is argued that certain industries are initially uneconomic but they may become competitive (at world price) in the long run because costs may decrease over time through learning-by-doing effects; • to raise budget revenue. Trade taxes however are not optimal instruments for achieving a revenue objective because they distort production and consumption choices. Preferred instruments for raising revenue are taxes such as income taxes or commodity taxes (excise taxes, VAT), which are applied neutrally to domestically produced and imported goods; • to reduce imports as a remedy for balance of payment problems. 462 22.1.2. The Advantages of Uniform Tariffs The advantages of a uniform tariff is as follows: • Administrative convenience. If tariff is uniform, there is no incentive to misclassify goods. This enables customs authorities to concentrate on ensuring that the value of the imported goods is not understated and could reduce to corruption related to customs clearing. Thus, it will lower the administrative costs of trading. • Reduced smuggling. Diverse tariffs provide an incentive to smuggle products that are subject to high tariff. If the tariff is uniform, these strong incentives for smuggling are considerably reduced. Worldwide experience in the past 50 years demonstrates the benefits of open trade regimes. However, many developing countries initially attempted to promote industrialization behind high protective barriers of tariffs. But in the past decade, there is growing evidence that high rates of protection significantly depress economic development, and that open trade regimes are more conducive to growth (WB. 2002:526). Countries that have been successful have been based on strong growth of industrial exports. Exporters have been successful either because there were low barriers to imports or because regimes were developed to provide incentives to exporters. 22.1.3. The Rationale for Low, Uniform Tariffs The RGC’s economic goals include higher rates of industrial growth and development based on an expansion and diversification of exports and improved competitiveness of import competing industries. If these goals are to be achieved to any significant degree, resources must be employed in their most productive uses. The dominant role of the private sector in allocating resources means that it is essential that policy based incentives does not distort their assessment of the returns to alternative investments. In other words, the large differences in effective rates of protection noted above need to be substantially eliminated. This in turn implies moving away from a cascading tariff structure. The primary policy objective for the tariff system should be the adoption of a low, uniform tariff rate structure with only a few tariff bands. In other words, a few tariff bands that applies to all or virtually all imports would facilitate enforcement, discourage smuggling of imported goods and bureaucratic costs. The sole purpose of the tariff system would be as a source of revenue. The determination of the appropriate level of tariff rate would be set to 463 achieve the required revenue. The Integrated Framework suggested that a low uniform rate on (or virtually) all imported capital goods, raw materials and finished goods would ensure that local producers are not disadvantaged vis à vis competing imports. 22.2. Tariff Restructuring 22.2.1. Tariff Barriers An effective trade policy is crucial for Cambodia’s integration into the world economy. ‘Trade policy forms the transmission mechanism through which international trade affects domestic resource allocation, the efficient and competitive restructuring of industry and agriculture, access to new and diverse technologies, improved incentives to exporters, and reduction to smuggling, rent-seeking...


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