Cambodian Prime Minister Hun Sen (C) irons clothes at a factory compound on the outskirts of Phnom Penh on August 30, 2017. Photo: AFP/Stringer

Months after Cambodia held what many observers saw as a badly rigged election, the European Union is ramping up trade pressure in punitive response to the move away from rights and democracy.

The EU announced on October 5 that Cambodia would lose its special access to European markets under the so-called Everything But Arms (EBA) preferential trade scheme after it conducts a six-month review of its duty-free status launched last week.

The EU is currently Cambodia’s largest export market. The announcement came as a surprise to Cambodian officials, many of whom had publicly doubted the EU would withdraw Cambodia’s privileged market access despite numerous warnings from Brussels.

The economic repercussions of higher tariffs on Cambodia-produced goods could be immense. Cambodian exports to the EU were worth US$5.8 billion last year, the majority of which came from the country’s crucial garment and footwear sectors. Garment exports account for around 40% of Cambodia’s gross domestic product (GDP).

Asia Times analysis of official trade statistics shows that higher European tariffs could reduce garment sector revenues by as much as 11% per annum, a decline that could send the sector into free-fall and impact on the livelihoods of millions of Cambodians. The process for removing Cambodia from the EBA scheme is lengthy and incremental, and is not expected to fully begin for another six-months.

At that time, if there are “no clear and evident improvements on the ground” then it “will lead to the suspending of the trade preferences that they currently enjoy,” European Commissioner for Trade Cecilia Malmström wrote in a blog post on October 5.

Cambodia's Prime Minister Hun Sen (C) casts his vote during the general elections as his wife Bun Rany (centre L) looks on in Phnom Penh on July 29, 2018. Photo: AFP/Manan Vatsyayana
Cambodia’s Prime Minister Hun Sen (C) casts his vote during general elections on July 29, 2018. Photo: AFP/Manan Vatsyayana

By starting that process, the EU has laid down what it considers the “red line” the Cambodian government crossed last year when a compliant Supreme Court forcibly dissolved the nation’s only viable opposition party, the Cambodia National Rescue Party (CNRP).

Additionally, the EU has criticized the government’s attacks on independent media and nongovernmental organizations, and its alleged widespread disregard for human rights.

With the CNRP forced off the ballot, the ruling Cambodian People’s Party (CPP) easily won July’s general election, sustaining its consecutive rule over the country beginning in 1979. The CPP now also controls all but four seats in the Senate and almost all locally elected positions.

Sophal Ear, associate professor of diplomacy and world affairs at Occidental College at Los Angeles, says he was “stunned” by the EU’s decision as he previously thought it didn’t have “the guts to do it.”

“I’m so proud of Europe for standing for what’s right…they’re basically giving Phnom Penh six months to shape-up or ship out,” he added.

To avoid being removed from the EU’s EBA scheme, the CPP-led government must show clear improvement on rights and democracy. Despite the recent release of top political prisoners, there is no indication authorities intend upon allowing the CNRP to re-enter politics any time soon.

Supporters of Kem Sokha, leader of the Cambodia National Rescue Party (CNRP), stand outside the Appeal Court during a bail hearing for the jailed opposition leader in Phnom Penh, Cambodia September 26, 2017. Photo: Reuters/Samrang Pring
Supporters of Kem Sokha, leader of the Cambodia National Rescue Party (CNRP), stand outside the Appeal Court during a bail hearing for the then jailed opposition leader, Phnom Penh, September 26, 2017. Photo: Reuters/Samrang Pring

Speaking last month, European Commission Vice President Federica Mogherini called on the CPP to begin negotiations with the CNRP.

She also called on the government to drop all charges against CNRP members banned from politics and to reinstate the CNRP’s commune officials who were elected but stripped of their posts. It remains unclear if the EU has laid out a complete list of demands to avoid being sanctioned.

Earlier this year, Cambodia sent a lobbying mission to the EU led by lawyer and government adviser Sok Siphana, while there were rumors that China, Cambodia’s closest ally, was also lobbying European politicians on its behalf. These overtures, however, now appear to have failed.

With the ball now in the CPP’s court, the main question is whether Prime Minister Hun Sen’s government will allow Cambodia’s economy to become a victim of his party’s drive for political dominance.

Government sources told Asia Times that the EU’s decision was somewhat unexpected, though the more disgruntled officials claimed the government had been overly optimistic in thinking the EU was bluffing.

Indeed, as recently as late last month, CPP spokesman Sok Eysan told a local newspaper that he thought France, Germany and “all five superpower nations in the UN Security Council” supported the Hun Sen government.

“So, imposing sanctions is impossible because the EU decision won’t have consensus or support,” he added.

Cambodia's Prime Minister Hun Sen (C) poses for a picture during a ceremony at a compound of factories in Phnom Penh on September 6, 2017. Photo: AFP/Tang Chhin Sothy
Cambodia’s Prime Minister Hun Sen (C) poses for a picture during a ceremony at a compound of factories in Phnom Penh on September 6, 2017. Photo: AFP/Tang Chhin Sothy

Not all government officials shared that view. A leaked letter by the Ministry of Commerce in December estimated that the imposition of tariffs on exports to Europe would incur an additional cost of US$676 million.

The figure is believed to be based on data from 2016, when total exports to the EU were worth US$6.2 billion.

Cambodia-based manufacturers already face rising costs that have put many factories out of business. When the government mandated minimum wage for garment workers was increased at the beginning of the year, many factory owners said they couldn’t afford the additional cost.

Those higher wages, which rose from US$153 per month in 2016 to US$170 per month this year, will cost employers an additional US$204 per worker per year – or roughly US$172 million per year for the entire sector.

EU-imposed tariffs will necessarily make Cambodia’s garment exports less competitive vis-a-vis its manufacturing rivals – especially Bangladesh – which are still afforded tariff-free treatment under the EBA scheme. In 2016, roughly 18% of all European imports under the EBA scheme came from Cambodia, with only Bangladesh selling more.

Kimty Seng, a lecturer of economics at the Royal School of Administration in Phnom Penh, says EU tariffs would compound the problem of Cambodia’s “very slowly diversifying” economy.

Kimty says that if Cambodia “cannot improve its trade competitiveness…the possible decrease in garment exports” as a result of EU tariffs “is very likely to destroy jobs” in the sector.

Considering that most manufacturing workers contribute part of their salaries to family members, any one person laid off work will impact the finances of at least another two or three people, analysts say.

Garment workers hold petrol bombs after clashes broke out during a protest in Phnom Penh January 3, 2014. Cambodian military police opened fire with assault rifles on Friday to quell a protest by stone-throwing garment factory workers demanding higher pay, killing at least three people, witnesses said. Military police spokesman Kheng Tito, however, said only one protester was killed.      REUTERS/Samrang Pring (CAMBODIA - Tags: BUSINESS TEXTILE CIVIL UNREST POLITICS) - RTX170K8
Garment workers hold petrol bombs after clashes broke out during a protest in Phnom Penh January 3, 2014. Photo: Reuters/Samrang Pring

A letter sent to the EU this year by five Cambodian trade unions claimed that imposing tariffs would directly affect as many as three million Cambodians.

The impact may or may not be that drastic. Last year, government spokesmen claimed Cambodia could simply diversify its export markets, shifting from Europe to other Asian nations, especially China. Independent analysts, however, say that’s easier said than done.

“In the short-run China will likely fill the void left by the application of tariffs. But in the longer term, China will have to clash in a trade war with [the US] as well as pass through an expected economic contraction,” says Paul Chambers, a political analyst at the College of Asean Community Studies at Naresuan University in Thailand.

“Very few exports go from Cambodia to China anyway. Only in the short term should we expect to see financial benefits for China in Cambodia,” he added.

Cambodia’s exports to China were worth US$609 million in 2016, and were thought to be slightly higher last year, but were still less than half of the value of exports to the United Kingdom, for example.

If European consumers stop purchasing Cambodian goods because of tariff-driven higher prices, it’s highly unlikely that China will have the political will or economic capacity to import several billion dollars worth of Cambodia-made goods to make up for the EU’s shortfall.

The EU’s announcement was made shortly before the Pchum Ben holiday in Cambodia so government spokespeople did not immediately respond. Asia Times’ calls to officials went unanswered.

Best of friends: Xi Jinping (L) Cambodian Prime Minister Hun Sen in Phnom Penh on December 21, 2009. Photo: AFP/Tang Chhin Sothy
Xi Jinping (L) and Cambodian Prime Minister Hun Sen (R) in Phnom Penh in a file photo. Photo: AFP/Tang Chhin Sothy

But Hun Sen made a speech on Sunday in Japan in which he maintained his obstreperous stance against the EU.

“No matter what measures they want to take against Cambodia, in whatever way, Cambodia must be strong in its defense of its sovereignty,” Reuters quoted him saying.

“I say it again and again: don’t exchange national sovereignty with aid; don’t exchange the peace of the country with aid.”

Hun Sen has also already made clear on several occasions that he will not consider negotiating with the dissolved CNRP, meaning he’s likely on a collusion course with the EU.

But if the EU lifts Cambodia’s tariff-free status in the next six months, the impact will be felt most acutely by ordinary Cambodians, including those employed in the politically and economically important garments sector.

Government propagandists will no doubt try to pin the blame for the people’s hardship on European politicians. Hun Sen’s administration is already well-versed in presenting itself as the victim of foreign strong-arming, often dipping into the country’s colonial history for his oratory material.

Indeed, the CNRP was dissolved on the basis of the government’s specious allegation it was conspiring with the US to overthrow the CPP’s regime. But whether that narrative will sufficiently assuage out-of-work Cambodians is yet to be seen.

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