Cambodian Prime Minister Hun Sen delivers a statement to journalists in Phnom Penh, January 30, 2020. Photo: AFP/Tang Chhin Sothy

The European Commission formally announced today (February 12) that Cambodia will be partially removed from a preferential trade scheme, a damning decision for the country’s export-driven economy which counts Europe as its largest and most lucrative market.

The European Union (EU) began a review of Cambodia’s trade privileges last year following the forced dissolution of the country’s main opposition party and the arrest of its leader in late 2017.

Josep Borrell, the EU’s High Representative for Foreign Affairs and Security Policy, said in a statement on February 12 that “the [EU] will not stand and watch as democracy is eroded, human rights curtailed, and free debate silenced. Today’s decision reflects our strong commitment to the Cambodian people, their rights, and the country’s sustainable development.”

The EU’s preferential Everything But Arms (EBA) scheme removes nearly all tariffs for 47 designated developing countries on the condition the beneficiaries uphold basic human rights.

EBA privileges helped Cambodia’s exports to European markets surge by almost 600% since it joined the scheme in 2012, according to EU figures. In 2018, Cambodia exported some US$5.9 billion worth of goods to the EU, up from US$5.5 billion in 2017, according to EC figures.

Exports account for roughly 60% of Cambodia’s gross domestic product (GDP), while around 40% of all its exports are sent to European markets.

Now, however, tariffs will be formally imposed on roughly 20% of Cambodian goods, with the taxes coming into force after August 12. The EC estimates the new tariffs will effect around one-fifth, or $1.09 billion worth, of Cambodia’s current exports to Europe.

Workers in a Cambodian garment factory. Photo: Facebook

The lost preferential rights are not expected to hit the most important sectors to Cambodia’s economy, including the garment and footwear manufacturing sectors, which are by far the largest source of exports to Europe and a top local employer.

Cambodia can be fully reinstated into the EBA scheme if it demonstrates improvements in democracy and human rights, which the EU says it will continue to monitor and assess.

Sophal Ear, associate professor of diplomacy and world affairs at Occidental College at Los Angeles, says the partial suspension of Cambodia’s tariff privileges won’t be as devastating as a full suspension, but will have “a reputational risk regardless.” He added: “Even in terms of signaling, it will have impact.”

In 2018, a leaked internal government report suggested that new EU tariffs would cost Cambodia’s exporters roughly $676 million per year, or around more than one-tenth of annual receipts from exports to the EU. That estimate, however, was based on a full suspension of EBA privileges.

But even the imposed partial suspension will now likely add hundreds of millions of dollars to the costs of Cambodian exporters – which will either have to be shouldered by manufacturers or passed onto consumers – and make Cambodian goods less competitive in EU markets.

“The effects of the removal of Cambodia from the EBA scheme would be destructive and deleterious to the Cambodian economy,” said Paul Chambers, a political scientist at the Center of ASEAN Community Studies at Naresuan University in Thailand. “Most likely, Cambodia would become much more dependent upon China’s economy.”

A Ministry of Economy and Finance report released in December predicted that gross domestic product (GDP) growth would slow to 6.5% in 2020, compared to 7% last year, because of “uncertain trade preferences,” a reference to the EBA scheme.

The International Monetary Fund (IMF), however, predicted that a full removal of EBA would result in Cambodia’s GDP growth dropping by three percentage points, which would drag down growth to 4% this year, the lowest clip in years. Cambodia’s GDP grew by around 7% in 2019, according to the Asian Development Bank.

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

Prime Minister Hun Sen, who last month marked 35 consecutive years in office, had oscillated between appealing to the EU for clemency and blustering that Cambodia can survive without its trade privileges.

In a speech on February 11, the day before the EC’s decision on EBA, he called for Cambodians to unite to protect the country’s “independence, sovereignty and peace.”

“We want to be friends and partners with all countries around the world but if they do not understand us and want to force us, we don’t agree,” Hun Sen said. “We have already tasted countless war, tragedies they had made for us, but we are not dead.”

Hun Sen has also warned that if EBA privileges were removed then his government would take revenge on supporters of the now-dissolved opposition party, known as the Cambodia National Rescue Party (CNRP).

Kem Sokha, the CNRP’s leader, was arrested on treason charges in September 2017. Two months later, the CNRP was formally dissolved by the Supreme Court after being charged on spurious grounds of conspiring to mount a coup with tacit support from the United States.

Without the CNRP on the ballot at the 2018 general election, the ruling Cambodian People’s Party (CPP) secured all 125 seats in parliament, making Cambodia into a de facto one-party state.

Since it began EBA-related investigations last year, Brussels has been clear that it wants Kem Sokha released from priso and the CNRP reinstated, as well as other legal and political reforms.

The CPP has so far resisted most of those demands, which analysts say is because of concerns it might lose a new election if the CNRP was reinstated, as well as Hun Sen’s suspected plans to hand power to one of his children in the near future, which the CNRP would no doubt challenge if represented in Parliament.

Cambodians hold a protest in front of the European Commission in Brussels, Belgium on September 18, 2017 to demand the release of Kem Sokha. Photo: AFP Forum/Wiktor Dabkowski

“The EU’s action on EBA is a slap down of Hun Sen and his blatant disregard for human and labor rights,” Phil Robertson, Deputy Asia Director of Human Rights Watch, said in a statement today.

“The EU bent over backwards to give Hun Sen opportunities to reverse his brutal clampdown on the political opposition, NGO activists, trade unionists and independent journalists, but over the past year he’s doubled down on his repressive tactics.”

Kem Sokha’s trial finally began last month, after being held in pre-trial detention for over two years. Many analysts reckon Hun Sen’s government intends to hold him as a bargaining chip with the EU.

Phnom Penh still has time to turn the situation around. Before or even after new tariffs are imposed in August, the EC can repeal its decision and reinstate Cambodia’s full EBA privileges if it finds that political progress has been made.

The EU’s requirement for that designation, analysts say, would basically return Cambodian politics to how they were in early 2017, before the CNRP’s dissolution and Kem Sokha’s arrest.

Phnom Penh has had years to prepare for the EBA’s withdrawal. But there are concerns that exporters will not be able to shoulder the additional financial burden themselves, with many having already gone bankrupt in recent years.

One option is for the government to subsidize the additional tariff costs for exporters. Hun Sen has mused that the funds needed to do so could be taken from Cambodia’s foreign reserves, which were valued at $15 billion last year, according to government reports.

Cambodian Prime Minister Hun Sen (L) shakes hands with Chinese President Xi Jinping before their meeting at the Great Hall of the People in Beijing on April 29, 2019. Photo: AFP/Madoka Ikegami/Pool

Another possibility would be for China, Cambodia’s main diplomatic and economic patron, to provide the funding, either through aid or loans which would then be distributed among exporters.

It would be a trifling figure for China’s deep pockets, and would be in line with the considerable aid it has provided to Phnom Penh in recent years.

Hun Sen visited Beijing earlier this month, the first foreign leader to do so since the coronavirus outbreak, where he is thought to have been reassured by President Xi Jinping that China would offer financial assistance to Cambodia in the event of the EBA’s withdrawal.

Brussels decision to only partially reinstate tariffs on around 20% of Cambodian exports to the EU complicates Hun Sen’s calculations.

Full suspension would have allowed him to trumpet a nationalist narrative of defiance against a Western power, a line that has certain resonance considering the country’s tragic experience during the Vietnam War.

With only a partial revocation, however, Brussels can argue Cambodia’s route back into the EBA is much easier, as long as Phnom Penh makes sufficient democratizing reforms, long a condition for Western aid and assistance.

“Our aim is that the Cambodian authorities end human rights violations, and we will continue working with them in order to achieve that,” the EU’s Commissioner for Trade, Phil Hogan, said in a statement.

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