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The EBA decision is another headwind for Cambodia’s economic outlook

Harrison White / Khmer Times Share:
European Commission President Jose Manuel Barroso (L) and Cambodian Prime Minister Hun Sen in Brussels. AFP

The announcement by the European Commission on Wednesday that it will be partially removing tariff preferences granted to Cambodia under the European Union’s Everything but Arms (EBA) trade scheme has confirmed what many commentators had been speculating for quite some time.

Changes will affect selected garments and footwear products, all travel goods and sugar. Sectors that account for $1.91 billion – approximately 20 percent of Cambodia’s annual exports. The decision will take effect on Aug12 this year, unless the European union parliament objects.

The announcement follows a year-long review by the Commission and the European External Action Service after in-depth engagement with the Cambodian government and stakeholders, fact-finding missions to Cambodia and several meetings with the Cambodian authorities at both technical and political levels.

According to the Commission, they concluded that Cambodia had not upheld its EBA requirements, “due to the serious and systematic violations of the human rights principles enshrined in the International Covenant on Civil and Political Rights”.

The High Representative for Foreign Affairs and Security Policy and Vice-President of the European Commission Josep Borrell said: “The duration, scale and impact of Cambodia’s violations of the rights to political participation and to the freedoms of expression and association left the European Union with no other choice than to partially withdraw trade preferences. The European Union will not stand and watch as democracy is eroded, human rights curtailed and free debate silenced.”

The Commission did recognise the steps taken by Cambodian authorities, notably in the areas of labour rights and land rights.

Established in 2001, the EBA deal gives 47 of the world’s poorest countries duty-free and quota-free access to European Union markets. As the name suggests, it applies to all of their exports except for arms and ammunition.

The EBA is one of the preferential trade arrangements under the EU Generalised Scheme of Preferences (GSP). With prerequisites stating that access to these preferences comes with the obligation to respect human rights and labour laws.

The EU is one of Cambodia’s largest trading partners, comprised of a 27 nation bloc after the UK’s exit. Exports to the EU from Cambodia reached $5.8 billion in 2018, more than double the $2.7 billion recorded in 2013.

This resulted in $5.6 billion out of $5.8 billion of trade exports entering the EU market under EBA tariff preferences, representing 95.7 percent of the market.

The announcement is, without doubt, a major setback for a country that relies so heavily on a strong export market and has created greater market instability at a time of already strong global economic headwinds.

For many businesses, diplomats, journalists and government officials the decision, however, has come as no surprise with many factoring into their economic outlook a full removal from the EBA. Speculation has been rife for years now that Cambodia would be losing, either fully or partially, it’s much-lauded EBA trade deal.

This was most evident when the European Commission launched a procedure to temporarily withdraw tariff preferences granted under the EBA arrangement over concerns related to serious human and labour rights violations in February 2019.

Prime Minister Hun Sen was quoted during a graduation ceremony in Phnom Penh just one day before the government needed to respond to a preliminary report by the European Union. “If they want to cut it, let them cut it. It is your right to do so. We have no choice. We cannot follow your concerns. Sorry.”

In the same year the Commission added tariffs on Cambodian (and Myanmar’s) rice exports in a bid to protect rice producers within the EU bloc, resulting in exports from the Kingdom to the EU falling by 30 percent  in that same year.

The economic benefits that the EBA has brought to Cambodia cannot be understated. According to the “Everything but Arms: The case of Cambodia” report, duty-free Cambodian textile and footwear exports are between 11 percent and 17 percent cheaper than they would be under standard EU tariffs.

This allowed Cambodia a competitive edge over similar countries in the Asian region such as China, India, Thailand, Vietnam, Indonesia and the Philippines, all with a large textile export market, but none receiving the EBA trade deal.

According to the same report, this competitive advantage has fuelled an export boom for the nation, with Cambodia’s exports into the EU (in dollar value) growing by more than 630 percent from 2013 to 2019. This market has grown to such a point that it now represents 39 percent of the country’s total exports.

In turn, this provides the backbone for the nation’s domestic workforce and allows the economy to maintain its 7 percent target for economic growth, lifting one-third of the Kingdom’s population out of poverty between 2007 and 2014.

While the real economic fallout from this announcement may not be known for months or even years, the EU has removed preferential trade deals with similar nations before. The most relevant precedent is Sri Lanka, which is also highly dependent on textile exports to the EU and, because of  human rights and labour conditions, had its preferential trade deal suspended from 2010 to 2017.

A briefing from the human rights in EU trade policy group stated: “The impact of the trade preferences deal was ultimately likely smaller than initially feared. Certain estimates put this at approximately minus 1 percent of GDP and resulted in around 10,000 workers losing their jobs, representing 4 percent of the total labour force.”

The report summarises, that the economic and social impact of EU sanctions was therefore limited, although probably most harmful for unskilled and therefore more vulnerable garment workers.

However, while Sri Lanka may have remained relatively unaffected, the current global economic climate that Cambodia is operating in is cause for serious concern.

The Coronavirus has completely devastated tourism within the region (considered a pillar of the Cambodian economy) and is causing havoc for garment manufacturers, with the Garment Manufacturer’s Association in Cambodia reporting that some factories will suspend operations directly because of the Novel Coronavirus disruption to the import of raw materials from China.

In addition, politically, the EU’s decision will also have serious consequences on the fate of the former CNRP President Kem Sokha, who is currently under house arrest and facing treason charges.

Prime Minister Hun Sen addressed a meeting between CPP members and representatives of the Lao People’s Revolutionary Party in Phnom Penh last week and stated, “I am waiting to see whether we [Cambodia] will completely lose it [the EBA] or lose some parts of it. I told them if they cut off EBA completely, they will have no right to talk to us about human rights and democracy and their aid to us [Cambodia] will be meaningless.”

He said that by cutting off the EBA, the EU is sealing the fate of the court-dissolved CNRP and its former president Kem Sokha who are accused of being  puppets of the West, which wants the party to be reinstated and Kem released.

While the Commission stated that the partial withdrawal can be reviewed, reinstatement appears very unlikely, with most calculating that Cambodia will be looking to other destinations to diversify its export market.

The obvious answer is China. President Xi Jinping  last month reassured Prime Minister Hun Sen that China will continue to support the Kingdom’s economy if there was a potential Everything but Arms suspension by the European Commission.

The next six months before the implementation of the EU’s decision will be vital as Cambodia steers itself through an economic period of rapid economic change and serious global headwinds to ensure economic security for the approximately 2 million Cambodians that depend on the nation’s textile industry.

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