I found the letter of the Commerce Minister to be intriguing. There is an implicit assumption that Cambodia would have to pay $676 million a year to the EU if EBA is suspended as suggested by the European Parliament.
It would be simple if the Cambodian government could shoulder the tax in the event that the EBA benefits are suspended and Cambodia wants to keep normal trade flows.
However, if the Cambodian government leaves it to the market, I think there will be trade and industry readjustments. The exporting industry will survive, but the net effect is likely large and negative.
It shouldn’t be Cambodia alone that benefits from tax exemption under the EBA scheme. If it is no longer for Cambodia, there are many factors for readjustments.
1. The feasibility of buyers to go elsewhere to source their needed products.
2. Buyers’ ability to absorb the imposed import tax by themselves.
3. Buyers’ ability to pass through the tax to end consumers in Europe (e.g. increasing the price of a shirt made in Cambodia from €20 to €21).
4. The ability of manufacturers to absorb the tax, through temporary cross-subsidies from other revenues.
5. Manufacturers’ flexibility to adapt to markets other than Europe and/or to make products with less significant tax into Europe.
6). Manufacturers’ flexibility to move their production base to other LDCs.
7. Cambodian government to provide more incentives to manufacturers.
8. Workers to accept some wage cuts to keep their jobs and industry afloat.
The burden of import duties to be charged by the EU can be shared by many of the above-mentioned parties or factors.
I think the likelihood is that some of Cambodia’s exports to the EU will become uncompetitive and lose ground, but some will still be competitive and go on.
It could be like when Cambodian products were subject to import tax to continue entering the US market after the quota system under the GSP regime before 2005 ended. Despite the full tax under WTO terms and conditions, Cambodia could still export $2.9 billion to the US market in 2016.
My rough guess is that without EBA, producers in Cambodia will still be able to export a lot, at least $4 billion a year, a remarkable decline from $6 billion in 2016, assuming the free market forces without government interventions.
If nothing is done and exports to the EU go down by some $2 billion, I think the loss of value added is at least $700m/year, or 3 percent of GDP. With this, about 200,000 jobs will likely be lost. And the negative knock-on effect will be quite large on MFIs and other supporting services.
Whether Cambodia can do better or worse than this scenario would depend on the garment competitors like Myanmar, Indonesia, Bangladesh, Vietnam and China, where wages are rising too. Most of the garment manufacturers in Cambodia are from China.
A little bit of their shift to Cambodia, away from rising wages over there, will be a big addition to Cambodia. So the situation could be mitigated by various actions of the RGC or other partner countries.
The MOC letter mentions the EBA benefits were once withdrawn from four countries (Sri Lanka, Sudan, Myanmar and Belarus). It would be great to get information about their experiences.
For more detail and comprehensive analysis, which should be done by someone, there is a need to find out all the MFN tariff lines for the products made in Cambodia for export to Europe and the potential ones, of which Cambodia can produce more, if the EBA is suspended.
Director at CPS – Centre for Policy Studies,