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Cambodia’s economy in the post-EBA era
Op-Ed: East Asia Forum, 16 December 2019
Author: Pheakdey Heng, Enrich Institute
It has been yet another impressive year for Cambodia’s economy. Thanks to continued strength in traditional sectors such as garments, tourism, trade and construction, Cambodia’s GDP grew 7 per cent in 2019 — the highest growth in the ASEAN region according to the IMF.
While this impressive growth is a reason to celebrate, the possible withdrawal of the EU’s Everything But Arms (EBA) initiative may affect Cambodia’s growth prospects for 2020 and beyond. Established in 2001, the EBA gives Cambodia and 48 of the world’s poorest countries access to zero tariffs on all exports except arms and ammunition to the European Union on the condition that they comply with the principles of 15 United Nations and International Labour Organization conventions on core human and labour rights.
The European Union launched an EBA withdrawal procedure on 12 February 2019 after citing ‘a deterioration of democracy and respect for human rights’ in Cambodia. After a six-month monitoring and evaluation period, the EU Commission issued a report on the situation in November and gave the government a month to respond. Depending on developments in the country, the Commission will decide by February 2020 whether or not to suspend Cambodia’s EBA privileges fully or in part. A suspension would come into effect by August 2020.
EBA termination will be a big economic loss for Cambodia, currently the second-largest beneficiary of this trade privilege. Cambodia’s exports to the European Union last year totalled around US$5.8 billion — 95 per cent of which entered the European Union duty-free.
The textile industry will be hit the hardest. The EBA has fuelled an export boom that has kept the economy growing at a steady 7 per cent a year and helped to lift millions of people out of poverty. Suspending the EBA makes exports less competitive, putting workers at risk of losing jobs and dragging down economic growth overall. Around 2 million Cambodians depend on the textile industry, including 750,000 employees.
To help cushion the negative impact of the EBA withdrawal, the government is introducing measures to facilitate trade by lowering logistical costs, cutting red tape and supporting businesses with a six-day reduction in the number of public holidays to increase productivity.
Around US$3 billion is reserved for fiscal stimulus to cope with the potential slowdown. The government also plans to increase revenue raised from taxation, customs and excise by more than 20 per cent next year. The government collected some US$4.57 billion in revenue from customs and taxation in the first nine months of 2019.
While Cambodia is almost certain to miss out on growth potential, the EBA withdrawal is also an opportunity to implement deep reform to ensure sustainable growth over the long term.
Currently Cambodia’s main exports are garments and footwear, mostly to the European Union and the United States. But this industry is labour-intensive, has low levels of technology application and low value addition. Cambodia needs to transform its industrial structure from a labour-intensive sector to a technology-driven, knowledge-based modern industry if it wants to generate lasting growth.
The strategic approach is to promote the development of the manufacturing and agro-processing industries. Investment in these sectors is more sustainable than the low-wage garment industry. It can enable Cambodian workers to acquire higher skills, paving the way for higher value products and services and better integration into regional and global production chains.
To build economic resilience, Cambodia also needs to diversify its economic partners. Trade with China, Japan and South Korea has been on the rise and there is still room to grow. Cambodia and China are now discussing a free trade agreement. If successful, it sets a good precedent for bilateral FTAs with other countries.
Economic diversification and modernisation can only be achieved with the support of hard and soft infrastructure, a constructive policy and political environment and strong human capital. Investment is needed to improve the availability, reliability and affordability of energy, to develop a multimodal transport and logistics system and to strengthen the labour market through skill development. Political stability, good governance and sound regulation are also essential to attract foreign investment and technology transfer.
|Original Source for Reference: Congressmen Lowenthal and Chabot Introduce Bill To Suspend Cambodia’s Preferential Trade Status|
Washington, D.C., February 26, 2019 |Congressmen Alan Lowenthal (CA-47) and Steve Chabot (OH-01) today introduced bipartisan legislation requiring the Trump Administration to review the preferential trade treatment that Cambodia receives from the United States.
The Cambodia Trade Act (CTA) would require the Administration to review Cambodia’s preferential trade status under which it is allowed exemptions or reductions to tariffs on goods it exports to the United States. However, the thirty-four-year regime of Prime Minister Hun Sen has been accused of serious labor and human rights violations, as well as actions to undermine the nation’s path toward democracy by attempts to abolish any political opposition or dissent.
“The regime of Hun Sen has steadily dismantled what was the burgeoning democracy of Southeast Asia,” Congressman Lowenthal said. “He has undermined the will of the people, subverted the promise of free and fair elections, and wielded power with the iron glove of a dictator. Intimidation, threats, violence, and even murder, are the tools of his regime. He and his regime must pay a price for their role in destroying the rule of law and violating the basic freedoms of the Cambodian people.”
The CTA would also require the Trump Administration to use the findings of the review to reach a decision on whether Cambodia’s preferential trade privileges should be withdrawn, suspended, or limited.
“As I have said repeatedly in the past, Prime Minister Hun Sen must be held accountable for uprooting democracy in Cambodia,” Congressman Chabot said. “Cambodia continues to receive preferential trade status when dealing with the United States while he continues to trample on the rights of his people. In light of his actions, it is time for us to reevaluate this special treatment.”
Cambodia currently receives preferential trade treatment under the General System of Preferences (GSP). Under the GSP program, specific products from recognized developing countries can enter the United States duty-free. Cambodia received the preferential status in 1997 and Cambodia currently exports more than $180 million a year in goods to the U.S. duty-free under the program. The U.S. last renewed Cambodia’s GSP status in April 2018.
Last month, Senators Ted Cruz (TX) and Chris Coons (DE) introduced identical legislation in the Senate.
The European Union, citing human rights violations by Hun Sen’s regime, has also begun a process to suspend their own preferential trading status granted to Cambodia.
Click here to read the text of the bill.
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