Cambodia’s potential loss of preferential trade access to the European Union (EU) could weaken the country’s economic growth and undermine the price competitiveness of the country’s garment exports, GlobalData wrote in a new analysis.
The European Commission has given the Cambodian government a one-month deadline to respond to its findings over alleged human rights violations in the country. It will then decide in February whether to temporarily withdraw the duty-free Everything But Arms (EBA) trade benefit.
“Cambodia’s economy depends heavily on its garment and textile industry, and the EU is its largest export market,” Michelle Russell, apparel correspondent at GlobalData, said. “The loss of trade benefits would be a big blow to the sector.”
EU imports from Cambodia totaled 5.3 billion euros ($5.88 billion) in 2018, and 95 percent took advantage of the EBA preferences, making Cambodia the second-largest beneficiary, according to GlobalData. Apparel and textiles account for around 4 billion euros ($4.44 billion) of the total.
If the EU decides to suspend Cambodia’s EBA eligibility, apparel imports from Cambodia would be subject to the World Trade Organization’s most-favored-nation (MFN) tariff rate, which averages around 12 percent.
“Cambodia’s garment industry has many strengths,” Russell said. “Its garment production is well-established, and despite rising wages it has relatively competitive labor costs.
Yet, ongoing tensions and the government’s refusal to address the country’s human rights issues will only add to the sector’s weaknesses,” Russell said. “Supporting industries, such as textile manufacturing, are still in their infancy, the sector is dependent on Chinese investment and infrastructure is poor.”
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If Cambodia loses its EU trade benefits, there is concern that higher tariffs could undermine the price competitiveness of Cambodia’s garments exports and reduce Cambodia’s attractiveness as a production base, Russell said, which has contributed to the country’s economic and financial stability.
Based on Cambodia’s strength as an apparel supplier to the U.S. without any trade benefits, there’s a chance the loss of EU benefits might not make a meaningful difference. In the first 10 months of the year, U.S. imports from Cambodia rose 10.84 percent to $2.29 billion.
However, in May, the American Apparel and Footwear Association and a coalition of top brands sent a letter to the Cambodian Prime Minister Hun Sen expressing concerned that the labor and human rights situation in Cambodia is posing a risk to trade preferences for Cambodia.
The letter noted that bills introduced in the U.S. Congress would require the U.S. government to review Cambodia’s Generalized System of Preferences (GSP)–which does not include apparel but does count many travel goods–benefits based on the “declining respect for labor standards, including freedom of association and other issues related to respect for human rights issues in Cambodia.”