Trade in Services

Multinational Trade Agreements

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1. Cambodia is a member of the Association of South East Asian Nations (ASEAN), alongside Brunei Darussalam, Indonesia, Laos, Myanmar, the Philippines, Singapore, Malaysia, Thailand and Vietnam. The ASEAN Free Trade Area was signed on January 28, 1992, and entered into force on January 1, 1993. In 2018, the ASEAN accounted for 39.4% of Cambodia's imports and 7.5% of Cambodia's exports (latest data available), making the group Cambodia's key trading partner. A number of  FTAs have been signed by the ASEAN. 
    
2. ASEAN-Mainland China: The ASEAN-Mainland China FTA covers goods and services. The FTA for goods came into force on January 1, 2005, and the FTA for services came into force on July 1, 2007. The agreement aims to eliminate tariffs, encourage investment and address the barriers that impede the flow of goods and services. The ASEAN-Mainland China FTA was amended in August 2019, simplifying trade and investment.  In 2018, the ASEAN was the recipient of 12.9% of Mainland China's exports and the source of 12.3% of imports. Total merchandise trade between the ASEAN and Mainland China hit a record high of USD587.9 billion in 2018.
    
3. AASEAN-India: The ASEAN-India FTA came into force on January 1, 2010 for goods and on July 1, 2015 for services, with the aim of minimising barriers and deepening the economic links between the parties. Cambodia joined the agreement in July 2011. The agreement will lead to the progressive elimination of tariffs on all goods. The ASEAN accounted for 12% of India's imports and 10.6% of India's total exports in 2019.  
    
4. ASEAN-South Korea: The ASEAN-South Korea FTA came into force in January and October 2010 for goods and services respectively. The investment agreement entered into force on September 1, 2009. The agreements aim to create more liberal, facilitative market access and investment regimes between South Korea and the ASEAN. A business council was set up in December 2014 to enhance economic cooperation between the parties and boost total trade to USD200 billion by 2020. ASEAN was the recipient of 17.5% of South Korea's exports in 2019 and the source for 11.2% of imports. Total trade between the ASEAN and South Korea  has more than doubled between 2007 and 2019.
    
5. ASEAN-Japan: The ASEAN-Japan FTA is for goods only and came into force on December 1, 2008. Cambodia joined the agreement in December 2009. This will lead to the progressive elimination of tariffs on all goods. 
    
6. ASEAN-Australia-New Zealand: The ASEAN-Australia-New Zealand FTA and Economic Integration Agreement for goods and services came into force on January 1, 2010. Cambodia joined the agreement on January 4, 2011.
    
7. United States-Cambodia: A bilateral Trade and Investment Framework Agreement (TIFA) between the United States and Cambodia was signed and entered into force on July 14, 2006. The TIFA allows favourable trade terms with the United States, which is Cambodia's largest exporting partner, accounting for 21.3% of Cambodia's exports in 2016 (latest data available). The TIFA provides a forum to address bilateral trade issues and allows Cambodia and the United States to coordinate on regional and multilateral issues. As Cambodia forms part of the United States' Generalized System of Preferences (GSP), many of its exports to the United States are exempt from tariffs.
    
8. EU-Cambodia: Cambodia has been a major beneficiary of the EU's GSP, which grants virtually all products – except arms and ammunition from less-developed countries – duty-free and quota-free access to the EU market. EU trade accounts for approximately 42% overall of Cambodia's footwear and garments exports. In October 2018, the EU notified Cambodia that it would start the process for the withdrawal of their Everything but Arms preferential trade scheme. In February 2019 the EU launched the process that could lead to the suspension of Cambodia's preferential access to the EU market. On February 12 2020, the EU announced the suspension of some of the trade preferences Cambodia enjoys with the EU under the Everything But Arms programme. Cambodia will lose about 20% of its preferential trade rights which amounts to roughly USD1.1 billion.
    
9. ASEAN-Hong Kong FTA (AHKFTA): Hong Kong and the ASEAN began negotiating an FTA and an Investment Agreement in July 2014. After 10 rounds of negotiations, Hong Kong and the ASEAN announced the conclusion of the negotiations in September 2017 and forged the agreements on November 12, 2017. The agreements are comprehensive in scope, encompassing trade in goods, trade in services, investment, economic and technical cooperation, a dispute-settlement mechanism and other related areas. The agreements will bring legal certainty, better market access and fair and equitable treatment in trade and investment, thus creating new business opportunities and further enhancing trade and investment flows between Hong Kong and ASEAN. The agreements will also extend Hong Kong's FTA and Investment Agreement network to cover all major economies in South East Asia. The agreement came into force on January 1, 2019, but will take time for all members of ASEAN to comply because implementation is subject to completion of the necessary procedures. Hong Kong is a key export market and the reduction of tariffs will ease the trading process; Hong Kong's potential as a key export market increases the importance of AHKFTA.

Under Negotiation

Negotiations for an EU-ASEAN region-to-region FTA were launched in 2007. Talks were put on hold in 2009 to allow for bilateral FTA negotiations as building blocks towards a region-to-region agreement. ASEAN as a whole represents the EU's third-largest trading partner outside Europe.

Sources: WTO Regional Trade Agreements database, ASEAN, UNCTAD, ASEAN, European Commission, Fitch Solutions

Foreign Direct Investment Policy

1. Cambodia's Law on Investment (1994) established an open and liberal foreign investment regime. All sectors of the economy are open to foreign investment and 100% foreign ownership is permitted in most sectors. In a few sectors, foreign investment is subject to conditions, local equity participation, or prior authorisation from authorities. The Cambodian government has prioritised foreign investment in the export sector and has a relatively pro-investor policy and legal framework.
    
2. Cambodia has no restriction on foreign ownership of companies and boasts a number of incentives such as a corporate tax holiday of up to eight years, a 20% corporate tax rate after the incentive period ends, duty-free imports of capital goods and no restrictions on capital repatriation.
    
3. Under the Law on Investment (1994), foreigners are restricted from owning land, but are allowed to hold long-term leases for up to 50 years, renewable for another 50 years, as well as freehold ownership of specified condominiums.
    
4. The most popular sectors for foreign investment include garment manufacturing, agriculture, the services industry and tourism (which is one of Cambodia's key growth areas). The country's biggest investors tend to come from within the Asia region, with Mainland China, Malaysia, Vietnam and Thailand being major sources of foreign investment, together with the United States.
    
5. Cigarette manufacturing, movie production, rice milling, gemstone mining and processing, publishing and printing, radio and television, wood and stone-carving production and silk-weaving are some of the sectors that are subject to conditions such as local equity participation, or prior authorisation from authorities.
    
6. FDI plays a critical role in the Cambodian economy. Based on 2018 data (the latest available), FDI stocks are equivalent to 96.6% of the country's GDP, with only three other countries in the region having higher ratios.

Sources: WTO – Trade Policy Review, Council for the Development of Cambodia, United States Department of Commerce, Fitch Solutions

Localisation Requirements

The percentage of foreign workers is capped at 10% of all the staff working for an enterprise. The Ministry of Labour may approve a request for an exemption to the 10% limit, particularly if the business is in need of specific skills currently unavailable in Cambodia.

The application for a 'foreign quota approval' from the Ministry of Labour must be submitted between September 1 and November 30 every year if the 10% limit is exceeded.

Failure to comply with the foreign employee quota and work permit requirements could (among other things) result in the imposition of fines of up to USD180 and retroactive penalties in the amount of USD100 for each year that a foreigner has worked in Cambodia without a valid work permit.

Obtaining Foreign Worker Permits for Skilled Workers

No foreigner is allowed to work in Cambodia without a valid work permit and an employment card issued by the Ministry of Labour. Under current practice, foreign nationals working or doing business in Cambodia and holding either an e-Visa (also known as a 'business visa' or 'ordinary visa') or a K visa (also known as a 'permanent visa') are required to have a work permit and an employment card.

There are two types of work permits in Cambodia: a temporary work permit (which lasts for the duration of the individual's visa) and a permanent work permit (which is reserved for major investors). A work permit usually costs USD100.

Furthermore, foreign nationals wishing to work in Cambodia must also meet additional conditions, such as not having communicable diseases.

In October 2019, the Cambodian Labour Ministry reversed its previous ban on foreign nationals working as taxi drivers, street vendors and a handful of other jobs in the informal sector.

Visa/Travel Restrictions

Nationals of most countries can be issued with a visa on arrival – except citizens of Brunei Darussalam, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam, who do not require a visa before travelling to Cambodia for a stay of between 14 and 30 days (two weeks for citizens from the Seychelles). All foreign nationals are legally required to have a work permit if intending to work in Cambodia.

Sources: Council for the Development of Cambodia, Kingdom of Cambodia Ministry of Foreign Affairs and International Cooperation, Fitch Solutions

Fitch Solutions Risk Summary

ECONOMIC RISK

Cambodia continues to rely on external financing, through robust growth momentum in the tourism and construction sectors. The long-term economic risk is weighed down by an undeveloped capital market, concerns over central bank independence and wide current account deficits. The currency peg with the US dollar affords some stability in monetary policy but acts as a restriction in terms of policymakers' ability to respond to economic shocks. The risks to economic growth will rise considerably in 2020  as the EU has partially suspended  its Everything But Arms trade concessions for Cambodia. The global shock triggered by the Covid-19 pandemic has also significantly impacted Cambodia's economy, and the outbreak has caused a sharp deceleration in most of Cambodia's main engines of growth in the first quarter of 2020, including weakened tourism and construction activity. The Covid-19 outbreak and slow recovery in global economic activity alongside prolonged financial market turmoil therefore pose risks to Cambodia's growth outlook.

OPERATIONAL RISK

Cambodia has emerged as one of the fastest-growing markets in the East and South East Asia region after decades of internal conflict and international isolation. Investors stand to benefit from the large labour pool, low wages and openness to foreign direct investment, which help to make the country an attractive investment destination. That said, there are considerable risks posed by a lack of adequate education, the underdeveloped transport network, legal risks and limited property rights.

Source: Fitch Solutions
Date last reviewed: April 20, 2020

Fitch Solutions Political and Economic Risk Indices

Exchange rate HK$/US$, average
7.75 (2015)
7.76 (2016)
7.79 (2017)
7.83 (2018)
7.77 (2019)