Cambodia is in a stand-off with the European Union (EU), a close friend and development partner for decades, but there are signs this fight may have wider implications for Cambodia and for the Southeast Asian (SEA) region.
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Cambodia is not alone facing the EBA axe. The EU is going after Myanmar too, indicating a policy shift in the EU’s play in the region. But the key to the policy shift is that the EU is not targeting Laos, which is the third country in SEA benefiting from the Everything-but-arms (EBA) scheme.
After the EBA, the EU is now considering imposing tariffs on rice coming from Cambodia and Myanmar starting next year.
While the EU said the EBA and the rice tariff issues are not linked, and the rice issue is not a political one, the fact that they are targeting both Myanmar and Cambodia again raises more questions.
We can’t ignore the fact that both Cambodia and Myanmar have one close ally, China, and there is also an ongoing trade war between the United States and China.
Chinese enterprises were targeting Cambodia and Myanmar with major investment drives, and with an influx of foreign direct investment (FDI) to take advantage of the EBA. They were planning to open up more factories in Cambodia’s Special Economic Zones (SEZ).
Hence, is the EU targeting Cambodia and Myanmar alone in what could be a widening of the global push against China?
Nevertheless, the stand-off is not a win-win fight for Cambodia or for the EU, since both will have to walk away with their own losses. Yet, Cambodia is to pay a heavier price.
We already know what will be the cost to Cambodia. Loss of jobs, factory closures, and a potential slowdown in FDI, coupled with the already rising cost of production in the country. These would hurt the economy.
For the EU, it risks losing a long-time partner, a country that it helped transform into an economic growth champion. It is also risking the lifeline for several EU enterprises that have established their businesses here.
There are many foreign factories producing under the EBA licence. They chose Cambodia to start their operations or relocated their factories to benefit from the EBA. They would close shop without the EBA.
What we are not aware of is the spill over effects of the removal of the EBA. Will it impact Cambodian productivity to the point of stalling its manufacturing sector?
Or will the EBA removal have such an effect that it will shake the Asean as a whole? There could be a series of ripple effects on neighbouring markets too. Vietnam is set to benefit from the cancellation of the EBA in Cambodia, for example.
Experts said the country has to reconfigure its industrial base to start new production processes in order to limit the impact of EBA losses.
But to replace a loss of 40 percent of the export market and $700 million generated from it is a monumental task.
Another question is whether the EBA removal will impact the ease of doing business in Cambodia and whether it will cause a deterioration of the investment environment in the country.
Cambodia depends largely on FDI and with the EBA gone, there is the risk of a dry spell in FDI.
While the EU might seek solace in finding less contentious countries to outsource its garments and footwear in particular, we cannot deny that the EBA removal threats are more than economic.
The pertinent question is whether the EBA removal has anything to do with the overall Western strategy to curb China’s rise in the region.
Lately, China came under constant attack from the US. The EU is also under pressure to revise its stance on China.
A move by China to grow a strategic relationship with the EU at the EU-China summit in July did not bear fruit. The US pressured the Europeans over tariffs, prompting the European Commission to make a hasty visit to Washington to get sanctions lifted.
Beijing has grown into a major FDI source for Cambodia but China is already feeling the full brunt of the American squeeze on its exportation drive.
It is also hit by the scalability of the trade war in the technological arena. Translated into economic terms, it means there is a risk of less FDI coming from China in the long run.
As a matter of fact, the trade war is linked to the Chinese push in the technological sector, and this is where the Americans want to hurt Beijing the most amid accusations it stole intellectual property rights.
All these are powerful and disruptive elements that could unearth some harsh realities for a certain number of countries, in particular those that are putting all their eggs in the Chinese basket.
In the eventuality the EBA and the rice tariffs are moves to put political pressure on both Myanmar and Cambodia, forcing them to adhere to the EU’s rights agenda, the corrective measures recently announced in Cambodia should be given some consideration by the EU.
However, a change of the political atmosphere in Cambodia may not add to the goodwill of the country in the eyes of the EU.
The EBA is all but gone, experts say. If this is the case, coupled with the rice axe, the EU and the West are not giving much room to Cambodia to adopt a balanced foreign policy.
Unless the EU has other plans for Cambodia in terms of future economic cooperation, it appears the EU is punishing Cambodia for its close ties with China.