Impacts of Cambodia's Tariff Elimination on Household Welfare and Labor Market: A CGE Approach

Abstract

This study builds Cambodia’s social accounting matrix. Using a CGE-based simulation, it then assesses the impacts of Cambodia’s tariff elimination on household welfare and the labour market. Our results show that tariff elimination leads to an expansion in production output and an increase in export/import volumes. Government policy for indirect tax-led revenue compensation results in a structural change of output, favoring manufacturing over the agriculture and services sectors. Those manufacturing industries include textiles, raw metals, fabricated metals, machinery, and office and computing machinery. Tariff removal’s effect favours the textiles industry as it is presently less protected and consumes a large proportion of now cheaper intermediate inputs. This industry will continue to be the backbone for growth and employment over the short and medium term. In terms of effects on labor market, low-skilled labourers see relatively less benefit from tariff elimination. At the household level, the impacts on their incomes and consumption are almost the same. Phnom Penh households are less affected by the indirect tax increase. Overall, welfare gains for the whole country and most representative households are positive but small. The exceptions are households in Kratie, Preah Vihear, Rattanakiri, and Stung Treng; these remote provinces experience a negative welfare effect from the simulations of tariff removal.