As expected, the European Commission (EC) recommended to partially revoke preferential trade treatment under the Everything but Arms (EBA) trade deal last night.
The withdrawal of tariff preferences – and their replacement with the EU’s standard tariffs (most favoured nation [MFN]) – will affect selected garment and footwear products and all travel goods and sugar.
The withdrawal amounts to around one-fifth – about $1.09 billion – of Cambodia’s yearly exports to the EU. Unless the European Parliament and the Council object, this will take effect on Aug 12.
Cambodia is the second-largest beneficiary of EBA trade preferences. In 2018, Cambodia exported about $6 billion to the EU market under the EBA scheme. Clothing and textiles accounted for about three quarters of the total export.
The real economic impacts are manageable with resolute mindset and measures. The key issue that Cambodia is facing is psychological impact. Cambodian society is vulnerable to uncertainty and fake news.
The garment industry will be hit the hardest. The EBA has fuelled an export boom that has kept the economy growing at a steady 7 per cent a year and helped to lift millions of people out of poverty. Suspending the EBA partially, makes exports less competitive, putting probably tens of thousands of workers at risk of losing their jobs and dragging down economic growth overall.
Around two million Cambodians depend on the textile industry, including 750,000 employees. Social panic might lead to significant reduction in domestic consumption and investment. In trade with EU, the cost of production and the trade cost are two crucial factors that affect competitiveness and the sustainability of export growth for Cambodia.
The EC’s reasoning
The commission says its decision addresses the human rights violations that triggered the procedure, while at the same time preserving the development objective of the EU trade scheme.
It recognises the need to continue to support Cambodia’s economic development and diversification of its exports. All emerging industries in Cambodia will continue to enjoy duty-free, quota-free access to the EU market. High value-added garments and certain types of footwear will also continue to enjoy duty-free, quota-free access to the EU market.
The opposition movement has manipulated the situation by covertly stirring public discontent and protest across the country especially among the workers who are to be directly affected by the partial removal of the EBA.
Short-term economic and political turbulence is expected. For the medium and long term, the removal can generate momentum for reforms for both the public and private sectors.
The aftermath of loss in these benefits may be characterised by adverse domestic macroeconomic consequences.
Loss of the EBA, in this instance, is likely to be followed by declines in output and productivity in the medium term, as well as increases in unemployment and inequality, which in turns lead to social unrest. More importantly, it puts in jeopardy, the MFN status granted by the United States.
How to respond?
First, the Royal Government of Cambodia needs to inject financial resources into the sectors that will be affected by reducing production costs and providing subsidies if necessary.
Towards this end, around $3 billion is reserved for fiscal stimulus to cope with the potential slowdown. The government has plans to increase revenue raised from taxation, customs and excise by more than 20 per cent this year.
Second, the government must massively invest in skill development for the workers who will be affected by the closing down of some factories that could not compete in the EU market.
Third, the government needs to diversify and expand its export markets to other countries and regions.
To build economic resilience, Cambodia also needs to diversify its economic partners. Trade with China, Japan and South Korea has been on the rise and there is still room to grow. Cambodia and China are now discussing a free trade agreement. When signed and sealed, it will set a good precedent for bilateral free-trade agreements with other countries.
Catalysts for deep reforms
The partial removal of the EBA can be regarded as opportunities or catalysts for deep and comprehensive reforms and should not be viewed as one which could or would cripple the economy.
Informal fees in particular, significantly contribute to production costs for both foreign and domestic investment projects. Logistics and electricity fees are relatively high compared with neighbouring countries such as Thailand and Vietnam.
Therefore, it is urgent to reduce corruption and informal fees and enable an investment climate, while improving the services relating to logistics and electricity supply.
The rhetoric from some online media and even politicians should be curbed as this might fuel more resentment amongst the EU members and ambassadors here. No matter what, Cambodia still need to depend on the EU and the US for a bulk of their exports.
Thus, rhetoric must be curtailed, except the Prime Minister who has a bigger agenda and perspective of what needs to be done. His subordinates should not add fuel to fire by making uncouth comments which hurts instead of helping Cambodia’s cause.