Cambodian Prime Minister Hun Sen said on Monday that a dissolved opposition party will be “dead” if the European Union (EU) moves ahead with plans to withdraw his country from a tariff-reducing trade arrangement.
The threat comes amid reports that international brands are pulling contracts from Cambodia’s crucial garment and footwear sectors in anticipation of the EU possibly ending the country’s tariff-free access to European markets.
Marking his 34th year as Cambodia’s prime minister earlier this week, an anniversary that makes him one of the world’s longest serving non-royal leaders, Hun Sen launched one of his strongest tirades yet against the EU.
“There is no need to embrace [you] because it’s too late, so let it be. If we were to step on the necks [of the opposition party], it would be just like this,” he said in a public speech, referring to the Cambodia National Rescue Party (CNRP), the country’s only viable opposition party that was dissolved by the Supreme Court in November 2017.
The CNRP was accused of conspiring with the United States to conduct a “color revolution,” despite almost no evidence provided to support the allegation. The EU has pressed for the party’s reinstatement and the release of its president Kem Sokha, who has been held in pretrial detention since his arrest in September 2017 on treason charges.
“If you want the opposition dead, just cut it,” Hun Sen added, referring to the EU’s threat to withdraw Cambodia from the “Everything But Arms (EBA)” preferential trade scheme in response to his political crackdown.
“If you want the opposition alive, don’t do it and come and hold talks together,” he added, in what amounted to a possibly lethal ultimatum to the EU.
Hun Sen’s Cambodian People’s Party (CPP), which has been in power since 1979, easily won a general election last July, at which it took all 125 seats in the National Assembly. Many Western nations considered the election illegitimate.
In principle, the EU wants Hun Sen’s government to engage in judicial and political reform, including allowances for the CNRP to return as a legal entity again. The CPP has constantly said the CNRP’s restitution is not on the table, though it has released jailed activists and conducted limited political reforms in recent months.
Some of the 177 CNRP politicians who were banned from politics in November 2017 were offered a reprieve after the government amended the constitution in December.
Those tentative reforms seemed to acknowledge the importance of maintaining access to EBA trade privileges. Cambodia exported roughly US$5.8 billion worth of goods to the EU in 2017 under the scheme.
The majority of those exports came from its vital garment and footwear sector, which accounts for almost 40% of Cambodia’s gross domestic product (GDP).
In 2016, roughly 18% of all European imports under the EBA scheme came from Cambodia, with only Bangladesh selling more. The EU has not yet formally launched the withdrawal process, though it is thought to have begun informal procedures in that direction.
In October, the European Commissioner for Trade Cecilia Malmström said that Cambodia had been notified of the EU’s position, adding that “without clear and evident [political] improvements on the ground, this will lead to the suspending of the trade preferences that they currently enjoy.”
Once the withdrawal process is started, it could take up to a year before the European Commission actually decides if tariffs will be placed on all Cambodian exports or just certain products. It is unlikely, unless the EU wants to be most punitive, that garment exports will be the first to face duties.
But even the threat of withdrawal is giving investors and purchasers pause, with some opting to preemptively leave Cambodia for perceived as more sustainable markets.
Earlier this month, the industry publication Apparel Insider reported that Cambodia is set to lose “huge swathes” of orders because international brands are fearful that it could lose EBA privileges.
“Our sources suggest a number of brands have already decided to begin pulling orders from the beleaguered country,” the article stated without naming any particular brands. Leading global companies such Armani, Gap, and H&M source clothing from Cambodia-based factories.
Better Factories Cambodia, a United Nations-backed initiative, found in a recent report that labor conditions are improving in Cambodian factories, an important issue for some international brands in past years.
But threats to their bottom lines and the desire to avoid associated problems of doing business in a country sanctioned by the EU could prompt many to divest or stop sourcing from Cambodia in the months ahead.
A spokeswoman for Marks & Spencer told media last week that the brand would “cancel contracts and cease trade” with Cambodia-based garment producers if international labor rights standards aren’t followed.
It is difficult to measure the health of the industry from official statistics. This month, the Ministry of Economy and Finance said that in the first eleven months of 2018 exports rose by 16.3%, with the garment sector growing 7.8%, faster than in 2017.
But, only a month earlier, the Ministry of Commerce reported that exports grew by just 4% in 2018, worth US$11.2 billion, compared to 19% the previous year. Either way, the government is scrambling for protection against losing its EBA status.
“We are too reliant on exports and foreign direct investment. This is a weakness,” Mey Kalyan, a senior advisor to the Supreme National Economic Council, told local media last month at the time of the Commerce Ministry’s report.
“Events in the global economy can harm us significantly. We must diversify our production and our export market,” he added.
For months, Cambodian ministries have championed diversification away from European markets, but it will be an onerous and economically painful transition.
Roughly 40% of all exports from Cambodia’s garment and footwear sector head to European markets. The next three largest export destinations combined – the United States, Canada and Japan – account for approximately the same percentage.
Cambodian negotiators are now thought to be pursuing a trade deal with the Eurasian Economic Union (EAEU), a bloc composed of Armenia, Belarus, Kazakhstan, Kyrgyzstan and Russia. Commerce Minister Pan Sorasak has said that these countries’ demand for winter clothing might provide new markets for Cambodian garment producers.
There is also official talk that China and Southeast Asian markets could make up for any lost exports to Europe, though analysts have their doubts.
China, Cambodia’s largest investor and closest ally, imported just US$182 million worth of textiles and clothing in 2016, chiefly because China produces the same type of clothing products.
In sum, Cambodia exported only US$609 million worth of goods to China that year; the EU received US$5.7 billion in 2017 under the EBA scheme.
Russia, the wealthiest nation in the EAEU bloc, imported just US$41 million worth of textiles and clothing from Cambodia in 2016. Total exports were worth only US$46 million that year.
It is difficult to envision how the likes of China, Russia or even Vietnam, a key trading trade partner of Cambodia’s but another garment-producing economy, could increase their imports enough to fill the EU’s gap.
Moody’s, a market ratings agency, warned in a recent release of the impact Cambodia’s loss of EBA trade privileges would have on exports.
“Additional cost increases as a result of tariffs would undermine the price competitiveness of Cambodia’s garments exports unless they are offset by productivity gains,” the Moody’s report stated.
A letter sent to the EU last year by five Cambodian trade unions asserted that imposing tariffs would directly affect as many as three million Cambodians: the 800,000 odd workers employed in the garment sector, as well as their families who depend on their remittances.
The closure of factories, most based in the capital region, could have implications for stability. Mass protests of garment workers haven’t been seen since early 2014, when five striking workers were fatally shot by security forces.
This month, some 1,200 employees at factories in Phnom Penh, which supply products for top international brands like H&M and Marks & Spencer, were reportedly sacked after “illegally” striking over new seniority pay guidelines.
Hun Sen’s government is clearly keen to win the support of garment workers, who voted mainly for the CNRP in recent competitive elections, and has made a slew of pledges to improve their lot.
One of its recent edicts requires factory owners to make seniority payments, a bonus based on length of employment, to workers every six months, as well as severance pay when their contracts come to an end.
There are concerns that this seniority payment scheme, which could cost factory owners tens of millions of dollars when it has to be first paid in June, could prompt some to shutter operations in Cambodia and move to cheaper destinations such as Bangladesh.
This is especially acute for smaller factories, whose owners might not have the capital at their immediate disposal to pay the bonuses. Last year saw a number of factory owners abscond from the country, saddling their employees with months of unpaid wages and prompting a government bailout for the workers.