Cambodia’s Options: Trade Liberalisation at the Expense of Government’s Revenues
KHOV Ea Hai
The objective of this paper is to bring greater awareness to the challenges of Least-Developed Countries, in particular Cambodia, in addressing tariff losses which is one of the key governemnt’s revenue sources during the process of trade liberalisation.
Joining Free Trade Agreements (FTAs), Cambodia has to liberalise for deeper and broader market access to comply with the terms of free trade agreements. Cambodia would not only bear with the adjustment costs coming from fierce competition with foreign firms or foreign products in the private sector but indispensably also confront the revenue squeeze challenges as a country.
Typically, more liberalised FTAs Cambodia committed for deeper trade liberalisation would eventually lead to almost eliminate tariff imposed within those member economies under the free trade agreements. Consequently, more trade liberalisation implies smaller revenues for Cambodia to allocate the national budget in supporting its key priority development sectors, including education, both soft and hard infrastructure, health care, and other public services.
Hence, a core challenge for Cambodia is to design an optimal balance of tax regime for both business and investment-friendly and for public service delivery to enhance the attractiveness of the economy.
A good strategy for Cambodia responding to the tariff reduction/elimination is to undertake domestic taxes reform ahead of the peak of the tariff reduction/elimination by introducing and strengthening consumption taxes or value-added tax, both individual and/or corporate income tax, and other forms of taxes to boost the fiscal revenue.