Cambodia could add an additional $320 million to the economy over the next 10 years while increasing tax revenue by $24 million if it dropped its tariffs on information and communication technology (ICT), according to new research published yesterday.
According to a study by the Washington-based think tank Information Technology and Innovation Foundation (ITIF), Cambodia could grow its GDP by nearly 1 percent over the next decade, adding $320 million to the economy, if it adopted the Information Technology Agreement (ITA).
The global World Trade Organization (WTO) accord calls on signatories to drop all tariffs on ICT goods and services – everything from electronics components and hardware to software and app development – as well as the business process outsourcing (BPO) sector.
Stephan Ezell, ITIF’s vice president and lead author of the report, said Cambodia’s adoption of the ITA would create a “win-win economic policy.”
“Increasing the use of technology in all sectors of the economy is one of the most important drivers of economic growth in developing countries because it enhances productivity, spurs innovation, and bolsters living standards,” he said.
He added that despite tariff losses, joining the ITA, which has 82 signatory members and represents 97 percent of a global industry valued at $1.3 trillion a year, would benefit both the economy and the end consumer while positioning the country to tap into global value chains.
“If Cambodia joins the Information Technology Agreement, its businesses and consumers will use more technology products because of lower prices, while becoming more deeply integrated in global value chains for ICT production,” he explained. “This will spur significant economic growth for the country while generating new tax revenues that help offset tariff losses.
“Overall, the growth from joining this agreement matters much more to Cambodia’s economic future than any tariff revenue it loses.”
According to the report, Cambodia currently has a general effective tariff rate of 3.3 percent on ICT products, well below the weighted average of the WTO-bound tariff rate for the Kingdom that sits at 13.8 percent.
The discrepancy in the percentages, the report said, was primarily due to the fact that ICT trade with Cambodia is dominated by inter-Asean trade that has its own reduced tariffs, as well as securing technology components from China.
While the report admitted that Cambodia would suffer huge governmental budgetary losses over the next decade if it joined the ITA, capturing only $153 million of a projected $720 million under the current tariff schedule, the country could offset this by a tax overhaul to reap the rewards of a digital economy.
“To maximise the economic gains from joining the ITA, Cambodia would have to restructure its tax system,” the report said. “As countries develop economically, their tax burdens tend to shift away from direct taxes such as tariffs to indirect taxes such as goods and services taxes.”
With the argument for joining the ITA hinging on short-term costs versus long-term gains, Anthony Galliano, CEO of Cambodian Investment Management, said the benefits were clear.
“With Cambodia’s membership to the World Trade Organization in 2004, it is sensible for the Kingdom to become a signatory country of the ITA and take advantage of the tariff elimination on hundreds of ICT goods and services,” he said.
“Although Cambodian consumers embrace tech products, the Kingdom is yet to establish an iota of a manufacturing base, save the low-tech and labour-intensive garment industry.”
He added that the ITA could allow Cambodia to keep up with the growth of IT productivity, not just regional but globally.
“Participating in the IT global value chain will be essential for Cambodia to remain a competing economic force,” he said. “Otherwise the Kingdom may not emerge from its developing nation status.”
Galliano also shrugged off concerns that the ITA would have a negative impact on tariff and tax revenue, adding that the General Department of Taxation has already proved effective in growing state coffers by widening the Kingdom’s narrow tax base through stricter enforcement.
“Continuing these initiatives will continue to create exponential gains in tax revenues and offset the minor downside consequences of ITA membership,” he said.