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ILO Highlights Vulnerabilities in Cambodia’s Apparel Industry

Cambodia’s garment and footwear industries accounted for 11 percent of the economy in 2015. And 80 percent of its merchandise exports were apparel and shoes. Together the industries were valued at $6.8 billion that year. And the sector experienced 10.8 percent growth in the first half of 2016, according to Cambodia’s Department of Customs and Excise.

The EU and the U.S. are its biggest export markets (43 percent and 29 percent, respectively).

Sales to the EU were facilitated by the “Everything But Arms” agreement, which gives all countries identified by the UN as Least Developed Countries (LDC) full duty-free and quota-free access to the EU. Of EU countries, the UK is the top importer, receiving nearly one third of total exports to the EU. Given its importance to the sector, Cambodia could be particularly vulnerable to the fallout of Brexit.

In fact, the ILO report states the country is already feeling some effects. According to the IMF, the pound was 20 percent weaker against the dollar through September 2016 than it was the previous year. The weak pound means imports are more expensive, which makes goods from Cambodia less attractive. Depreciation of the currencies of other apparel-producing countries like China, Vietnam and Bangladesh also makes Cambodia less competitive.

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Post Brexit, the question becomes what will the trade relationship between the two countries look like. The UK could decide to maintain the status for LDCs or revert to WTO rules, which would mean the countries would need to pursue a new free-trade agreement.

Further complicating matters is a change in status for Cambodia. As a result of the country’s growing economy, the World Bank changed its rating to lower-middle income in July 2016. The upgrade from a low income country is positive, except it could threaten the country’s status as an LDC. If the UN similarly decides to upgrade the country, it would mean Cambodia would no longer enjoy its duty-free status after a three-year grace period ends.

On a positive note, the U.S. granted travel goods from Cambodia Generalized System of Preferences status in July 2016, which removes the 3.4 to 20 percent tariffs these items used to incur. In 2015, Cambodia exported $50.4 million in suitcases, handbags, wallets and similar products to the U.S, a 60 percent increase over the previous year.

The fledgling category only accounts for 1.3% of the total apparel and footwear industry for the country. But the U.S. represents 55 percent of all goods exported in that category so the improved trade status should help accelerate growth.