If nothing else happens, a dismal outlook looms ahead as Cambodia’s trade preferences under the Everything But Arms (EBA) agreement granted in 2011 by the European Union (EU) risk termination in 18 months.
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Unlike initially reported, the entire process would actually take 18 months to complete but the EU is keeping the doors open for Cambodia to cooperate while it gathers the necessary information.
The Oct 5 statement by EU Trade Commissioner Cecilia Malmstrom has sent shivers down the spine of businesses particularly among garment manufacturers, who made up 64 percent of exports valued at $6 billion last year.
The sector exported 46 percent of textile to Europe followed by the United States (24 percent), Japan (16 percent) and Canada (9 percent). The EBA removal would incur a cost of $676 million in taxes based on last year’s export revenue.
Shivers on falling revenue aside, the fate of 800,000 workers employed in the sector also hangs on the balance, distilling a nervous disposition that could result in unease in the labour landscape.
Last week, following a warning in July over Cambodia’s election results that rendered a hands-down win to the ruling Cambodian National Party, Malmstrom informed Cambodia the EU has begun the process of withdrawing the EBA status with the start of a six-months review of Cambodia’s duty-free access deal to the bloc.
George Edgar, EU Ambassador in Cambodia, said the impact of the suspension of preference treatments are one of the factors considered by the bloc in coming to an eventual decision.
“However, in this context I would reiterate that benefitting from EBA preferences is based on respect by beneficiary countries of the principles enshrined in the 15 United Nations (UN) and International Labour Organisation (ILO) fundamental Conventions on human rights and labour rights.
“These are issues that are taken very seriously by the EU. The launch of preparations for a withdrawal procedure reflects serious concerns over developments in Cambodia in relation to respect of rights and freedoms embodied in these Conventions,” Edgar told Khmer Times via email.
He said preparations have been launched for a European Commission (EC) decision that would set in motion the formal procedure for the temporary withdrawal of the EBA.
“Once the EC decision is taken, the temporary withdrawal procedure begins with a six months official monitoring period during which the EC provides the country concerned with every opportunity to cooperate, and gathers all necessary information,” Edgar added.
It is followed by another period of six months to produce a report on the findings, and if the decision is taken to suspend some or all of Cambodia’s preferences, a further six months’ grace period is provided before tariffs come into operation on the goods concerned.
“Thus, the whole process from the initial EC decision to the suspension of preferences would last 18 months (but) the EU has emphasised that it will keep the channels of dialogue with Cambodia open throughout the process,” he said.
Stephen Higgins, managing partner of investment management and advisor services Mekong Strategic Partners, said although losing the EBA would clearly have adverse impacts for Cambodia’s garment exports, it would only happen early next decade.
“So this will just hasten the structural adjustment that will need to occur anyway. Cambodia is still an attractive destination for investment but (EBA) is clearly a negative for investor sentiment when the largest trading bloc removes your concessional status for the reasons the EU have raised,” he said via text messages.
Higgins conceded there was not a lot Cambodia could do but if it wants to keep the privilege of concessional trading terms from the EU, the government needs to recognise that it will always be on the terms of the EU.
David Van, managing director for Deewee Management Consultants, opines the final decision still requires the consensus of 27 EU member states sans United Kingdom (that would have exited the bloc).
Having said that, if somehow Cambodia loses her EBA benefits, foreign buyers in the garment sector might switch to other Least Developed Countries (LDCs) production base bring with them an exodus of factories.
But Kaing Monika, Garment Manufacturers Asscociation of Cambodia deputy secretary general, is confident the policies introduced by the government, namely the minimum wage rise to $182 per month from January 2019, the retroactive seniority payments, and twice monthly salaries, would not go unnoticed by EU.
“We have a level of confidence as (the policies introduced) are (in) compliance with international standards. The removal of EBA is just a speculation. It creates lots of fear and affects the confidence of foreign buyers,” he said over the phone.
Van thinks the threat of EBA’s eventual revocation could instill urgency for the Cambodian government to speed up diversification and enhancement of the nation’s competitiveness stated in the rectangular strategy phase IV.
“Cambodia could also seek to be part of other bilateral or multilateral trade agreements rapidly. Perhaps there could be a bilateral or multilateral agreement with the EU,” Van told Khmer Times in an interview.
Two days ago, the European Chamber of Commerce (EuroCham) warned of long-term negative effects in Cambodia while undermining years of advocacy work.
Echoing this, Higgins said the removal of EBA status seemed an ‘excessively blunt tool’ adding that, “If the EU wants to make a statement, they (should) have more targeted tools that they could use that would do much less harm to the broader community.”
Cindy Cao, associate researcher of European Institute of Asian Studies, said although economic sanctions are viewed as more humane than military intervention, they can seem like ‘double-edge swords’.
In a report titled `EU trade sanctions on Cambodia: An ethical debate – recommendations on the EU democratisation policy’ published this week, Cao said the sanction would harm the 13.5 percent of the Cambodian population that are underneath national poverty line and those vulnerable to economic shock.
EuroCham in its letter to Malmstrom also expressed fear the EBA status removal could diminish the competitive advantage of European businesses in a context where China is increasing its presence in Cambodia and the region.
Data by global research firm BMI Research up to February this year showed that Cambodia owned 20 China-backed projects in South East Asia compared to two from Japan.
Noting this, Anthony Galliano, group chief executive officer of Cambodian Investment Management, advised Prime Minister Hun Sen to get strategically important not just to China but with the US.
“You are putting all your bets on China (but) there is a whole big world out there. (One) cannot ignore EU and US because US is still the super power. He (Hun Sen) should see the big picture instead of going along with just China. He should engage the US.
“Cambodia is getting deeper and deeper into that relationship. It is financially (engaging) and (its citizens) are populating or (it could seem like it is) colonising Cambodia.
“This is more powerful than having ships 30 miles offshore. They (China) are not only financially embedded but are also people-embedded, it is whole new strategy. As an American (investor), I am not worried but I think Cambodia should be worried of China. The failure is hedging all bets on one country,” he said.