It is becoming a regular occurrence: Every six months or so, Cambodian Prime Minister Hun Sen jets to Beijing and returns with a bounty of new trade deals, investment promises and assurances of the Chinese government’s backing against Western criticism.
Hun Sen, who spent five days in Beijing for the second Belt and Road Initiative (BRI) Forum, arrived home on April 29 with half a dozen new trade agreements that he said brings “Cambodia-China relations to their best level ever.”
“As a comprehensive strategic partners and iron-clad friends, we are siblings who share a single future,” he added, noting that China for has been for years the largest investor in Cambodia.
The new deals include US$89 million in Chinese aid for the Cambodian military; a Beijing pledge to import 400,000 tonnes of Cambodian rice; an agreement by Huawei, the Chinese tech giant, to help build Cambodia’s 5G network; and a new memoranda on customs regulations.
Equally important, Hun Sen arrived home with a promise from China of its “clear willingness to help” in the event that the European Union (EU) removes Cambodia from the Everything But Arms (EBA) preferential trade scheme, a decision that would severely undercut Cambodia’s export competitiveness by removing its duty-free status in EU markets.
The EU is the main purchaser of Cambodia’s exports, and its threat to remove Cambodia from the preferential deal could decimate parts of the country’s export-driven economy. The process of withdrawal began in February and could take 18 months to finalize, though Brussels can call it off if it feels Cambodia is making progress on rights and democracy.
It all stems from the EU’s criticism of Cambodia’s democratic backsliding, a political crackdown by the ruling Cambodian People’s Party (CPP) that saw it forcibly ban the main opposition party in late 2017, stage manage a general election in 2018 and in the process create a de facto one-party state.
Hun Sen said he discussed his financial concerns about the possible withdrawal of EBA with Chinese premier Li Keqiang and senior politburo member Wang Huning, who apparently told him that China had conducted its own studies on the likely impact of the EBA’s removal and found “it will not cause any serious impact.”
Wang also promised, according to Hun Sen, that Beijing “will find other measures by which to help Cambodia” in the event that the European trade scheme is removed.
But Hun Sen, who clearly intended these reassuring words to calm public sentiment back in Cambodia, provided few details about why Beijing thinks the EBA’s withdrawal won’t be as serious as most economists predict, nor how Beijing would step in to help.
Rong Chhun, president of the Cambodian Confederation of Unions, said in an interview with Radio Free Asia that all this was China simply “consoling” Hun Sen. Just as likely, it was Hun Sen reassuring the Cambodian people that their economy isn’t in serious danger, despite what many economists think.
Sam Rainsy, the acting president of the now-dissolved opposition Cambodia National Rescue Party, recently asserted in a Project Syndicate article that Hun Sen “appears to be clinging to a variant” of the autarky that defined the Khmer Rouge’s economic model.
Indeed, Hun Sen has been speaking more often about self-reliance in recent months, and even asserted this week while in Beijing that he will defend “national development based on self-reliance.” However, most analysts think he is speaking solely about cutting Cambodia’s reliance on the West and reorienting towards more economic dependence on China.
“This will prove to be a grave mistake. Chinese capital will never be sufficient to offset lost Western investment,” Sam Rainsy wrote. “And, because Cambodia’s export goods compete with China’s domestic production, China imports little from Cambodia.”
China cannot readily replace the EU or the United States (US), which is also threatening to impose punitive sanctions, as a major importer of Cambodian products.
In 2017, China imported just $991 million worth of goods from Cambodia, while the US, Germany and Britain imported $3.1 billion, $1.8 billion and $1.3 billion, respectively, according to United Nations trade data. Moreover, Cambodia’s main export is garment and footwear products, which China produces domestically.
One possibility is that China could agree to buy Cambodian products regardless of its domestic demand, though this would likely be a short-term measure and would not be sustainable over the long-term.
Most of Cambodia’s imports from China are raw materials that are processed at its garment factories and then exported to the EU or US, meaning a drop in exports from Cambodia to the West would necessarily mean fewer imports from China.
Alternatively, Beijing could simply give the Cambodian government funds to compensate domestic garment exporters who will be forced to pay EU tariffs if Cambodia is withdrawn from the EBA, some analysts predict.
Even without the EBA’s removal, Cambodia’s garment sector is already losing competitiveness due to rising wages and poor infrastructure, raising the costs of a potential Chinese lifeline for the sector.
If Cambodia is stripped from the EBA scheme, the removal will put many of its 700,000 garment workers, who are mainly young, female migrants from the countryside, out of work.
According to one industry estimate, each worker provides remittances for at least another two people.
Judging by initial comments from Cambodia’s and China’s governments, Beijing is more likely to increase its investment in other areas of the economy to compensate for any decline in the labor-intensive garment sector.
Some analysts think Beijing might instruct certain of its manufacturers to relocate their assembly plants to Cambodia, especially those in middle-skilled sectors such as electronics assembly and car parts production.
Joseph Matthews, a senior professor at the Beltei International University in Phnom Penh, was paraphrased by Xinhua as saying this month that “more investment in manufacturing, preferably in electronics and car spare-parts, can create jobs to offset layoffs from the garment sector due to factories cutting back on production because of decreased overseas purchase orders.”
Economists believe that Cambodia must move away from its reliance on labor-intensive, low-skilled industries, including garment and footwear assembly. Chinese investment in other industrial sectors could facilitate the move up the value-added ladder.
But is China truly willing and able to aid Cambodia’s economic transition?
So far that has not apparently been Beijing’s priority. Most Chinese investment has gone into funding major infrastructure projects, such as bridges, ports and roads – all necessary to attract higher-end investors to Cambodia.
Xinhua paraphrased President Xi Jinping as telling Hun Sen this week: “The two sides should deepen cooperation on jointly building the Belt and Road, and construct key projects such as special economic zones, airports and highways.”
During his visit to China, Hun Sen was keen to stress that the Sihanoukville Special Economic Zone (SSEZ), a major destination of Chinese investment in Cambodia, is an illustration of the success of bilateral trade and China’s Belt and Road Initiative (BRI).
The 148 Chinese firms based in the SEZ, Hun Sen said, have so far created jobs for 20,000 workers, while an additional 80,000 jobs will be created in the project’s second phase.
However, not all those jobs have or likely will be created exclusively for Cambodians and that more than 10% are in the at-risk garment sector.
Beijing is more likely to offer investment in either traditional sectors, like agriculture, or areas that directly benefit Chinese consumers, such as tourism and gambling. The Cambodian government has said it hopes to lure three million Chinese visitors by 2020 and eight million by 2030.
China’s growing import of milled rice, which rose by 59% in the first quarter of 2019 compared to the first quarter of last year, has helped to offset a fall in EU imports, which dipped by 33% over the same period, according to local media reports.
If China sticks to its agreed quotas on rice imports – it hasn’t in past years – it will certainly be a boon for rural Cambodia, especially as the EU imposed protective tariffs on Cambodian rice earlier this year.
But more rice exports to China is unlikely to help Cambodia leapfrog into a middle-skilled economy, nor will the export of bananas, for which a deal with China was agreed earlier this month. China’s assistance will help ease the blow of EU punitive measures, but it’s not clearly a path to a brighter economic future.