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Cambodian Apparel Exports May Be Up, But Challenges Continue to Threaten Trade

Cambodia’s economy continues to grow even as global economic prospects moderate and internal risks heighten.

According to the latest World Bank Cambodia Economic Update report released Wednesday, the country’s economic growth rate is expected to be slightly higher than last year, reaching 7.1 percent in 2018, driven mainly by domestic consumption and a continued strong export market, including a dynamic apparel sector.

Exports surged in the second half the year after a tepid first half, the report noted, supported by strong demand in the U.S. and European Union. Cambodia is among few countries in the East Asia and Pacific region expected to experience marginal improvements in growth, the World Bank said.

Exports of apparel and footwear products increased 16.1 percent year over year during the first half of 2018. For the year through September, the U.S. imported $2.49 billion worth of apparel and textiles from Cambodia, a 14.03 percent increase over the same period the prior year, according to the Commerce Department’s Office of Textiles and Apparel.

The World Bank said efforts by the government to attract Chinese tourists have also paid off, with tourist arrivals reaching 3 million during the first six months of 2018. Tourism is also strong from Vietnam, Lao and South Korea.

However, risks in the financial sector persist, with particular exposure in the construction and real estate sectors. External risks include the potential withdrawal of the EU’s Everything But Arms trade preferences for Cambodia and the unpredictable spill-over effects of U.S.-China trade disputes.

The EU said last month that it would conduct a six-month review of Cambodia’s duty-free eligibility for goods bound for the EU, over the Cambodian government’s apparent disregard for human rights, attacks against critics and opposition parties, and its crackdown on independent media and nongovernmental organizations. The EU said without clear and evident improvements, it will look to suspend Cambodia’s trade privileges.

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The EU market accounts for more than one-third of Cambodia’s key exports–apparel and footwear products. The World Bank said losing these benefits, which provide Cambodia full duty-free and quota-free access to the EU for all its exports with the exception of arms and armaments, “will likely slow Cambodia’s export growth, and negatively impact its labor market in the short term.”

U.S. apparel importers have taken some of their China business to other Asian nations including Cambodia, Vietnam and Bangladesh, but there is concern that if U.S.-China trade tensions increase, it could interrupt the flow of raw materials needed to manufacture and cause problems throughout the region.

The U.S. Generalized System of Preferences (GSP) program currently gives Cambodian-made travel products—such as luggage, backpacks, handbags and wallets—duty-free access. The report said as Cambodia’s economy advances, it will likely lose preferential trade access to the EU and U.S. markets in the next decade or so. This could make the country less attractive for foreign investment.

“Priorities for Cambodia include safeguarding the health of the financial sector, while building up reserves, strengthening competitiveness and preventing rapid real exchange rate appreciation, given the recent surge in imports,” said Sodeth Ly, World Bank senior economist for Cambodia.

While the long-term outlook remains positive, Cambodia also needs to develop its physical and human capital to attain higher income status.

“To achieve its upper middle-income country aspirations, Cambodia needs to increase its investment in human capital and infrastructure and adopt reforms that enable sustained and inclusive growth,” said Inguna Dobraja, World Bank country manager for Cambodia. “Mobilizing significant domestic savings to boost investment is critical to attain what high-performing Asian economies have achieved.”