Withdrawal of EU Trade Preferences: What Choices Does Cambodia Have?

An article published in IPP Review.

By Kimkong Heng

In early October 2018, European Trade Commissioner Cecilia Malmström warned Cambodia that the EU would withdraw its EBA (Everything But Arms) trade preferences given to Cambodia, if the kingdom could not improve its current human rights and labor rights situation, which was perceived to have deteriorated prior to and following the national election in July when the ruling Cambodian People’s Party (CPP) won 125 out of 125 parliamentary seats.

The EU’s call for human rights improvement in Cambodia would probably mean releasing Kem Sokha, former leader of the Cambodia National Rescue Party (CNRP) — a now dissolved opposition party — lifting a five-year political ban on 118 members of the CNRP, addressing issues of economic land concessions for sugar plantations, and improving the overall human rights situation in the country, among others. Failing to resolve these issues would most likely result in EU’s suspension of its EBA scheme for Cambodia. EBA is a trade agreement granted to the world’s least developed countries and its major benefit is tax exemption for export of products (except arms and armaments) to the EU Single Market.

The suspension or withdrawal of the EBA would incur Cambodia a loss of up to USD 676 million in taxes based on last year’s export revenue. What could be possibly worse is that the garment sector which accounts for 75 percent of Cambodia’s exports to the EU would face big trouble. Existing investors might continue to leave, new ones may not come, and the whole sector which has enjoyed tax exemptions under the EBA scheme for years and currently absorbs about 800,000 Cambodian work force might collapse. If it is the case, street demonstrations by these close to one million garment workers would very likely ensue, providing a good platform for potential social unrest and chaos the government has been trying to prevent. Given this possible scenario, an important question arises: what choices does Cambodia have in relation to the EU conditions so that Cambodia can sustain the EBA preferential trade scheme? As the EBA withdrawal process would take 18 months to be finalized, Cambodia has plenty of time to decide whether it wants to continue benefiting from the EBA by making some compromises with the EU or go its own way and run the risk of suffering negative consequences of EBA cancellation. The following are two main options available for Cambodia as it sails forward in this troubled time.

First Option: No Compromise At All for EBA

Based on Cambodia’s most recent formal and informal responses to the EU, a compromise for the EBA appears to be a very unlikely course of action. Cambodia has called the EU trade threat “extreme injustice” and warns that the decision to remove the EBA would mean a setback to the EU’s efforts to facilitate poverty reduction in Cambodia. An editorial in Khmer Times has also talked about EU’s double standards, asking why the EU does not take any action against Thailand regarding its military coup in 2014. And why did the EU sign a free trade agreement with Vietnam, a one-party state, while having concern over Cambodia’s alleged move toward a one-party state?

Cambodian Prime Minister Hun Sen, during sideline meetings with his Cambodian supporters in Japan and most recently in Brussels where he attended the 12th Asia-Europe Meeting Summit (ASEM Summit), has talked about resisting foreign interference and defending national sovereignty in regard to the EU’s potential suspension of the EBA. He has boasted about Cambodia’s current economic development and mentioned that it was time for Cambodia to stand on its own feet. He went on to mention that sooner or later Cambodia would lose the EBA, as the country’s economy keeps growing. He was also reported as saying that EBA withdrawal would not affect Cambodia. Hun Sen’s assertion seems to be credible, given Cambodia’s robust GDP growth with an annual average growth rate of 7 percent since 2011 and expected to grow by 7 percent in 2019.

Whether Cambodia or Prime Minister Hun Sen likes it or not, international pressure remains to stay unless something is done to address the human rights issues, as requested by the EU and the international community.

Moreover, it could be possible for Cambodia to neglect the EU’s human rights call, considering China’s continuing support for this Southeast Asian state. China has already sent a signal of support for Cambodia, criticizing the EU for using the EBA to interfere in Cambodia’s internal affairs. Cambodia and China in recent years have become very close friends who stand by one another. While China has been a strong supporter of Hun Sen’s government, Cambodia has in return helped China deal with the ASEAN claimant states in the South China Sea dispute. Trade volume between the two countries reached USD 5.8 billion last year, and China has been Cambodia’s largest foreign direct investor for several years now. Cambodia has thus far received about USD 4.2 billion from China in the form of grants and loans, although there are concerns over the impact of Chinese investment and loans in Cambodia.

Given the Chinese support, robust economic growth, Prime Minister Hun Sen’s rhetoric of foreign interference and national sovereignty, and his willingness to continue serving Cambodia (or rather continue staying in power), it is likely that Cambodia may make no compromise with the EU and start to pay between 10-15 percent extra in export costs to the EU. Although this “no compromise” option is conceivable, an alternative path, discussed below, should be the course of action for Cambodia.

Second Option: A Compromise for EBA

Cambodia definitely needs the EU market, as the latter accounts for more than 40 percent of Cambodia’s garment sector exports, and more than 80 percent of garment factories in Cambodia ship all or part of their products into the EU. The withdrawal of the EBA would lead to adverse consequences on the entire textile industry which contributes about 40 percent to Cambodia’s GDP. Obviously, Cambodia cannot afford to underestimate the potential severe impact on its garment industry — a sector too big to fail.

Although Cambodia’s GDP growth has been robust and shows little signs of deterioration, this developing country has yet to achieve its goal to become an upper middle-income country by 2030. Cambodia still requires technical and financial support from its development partners and the European Union has played a major role in contributing to Cambodia’s economic development. Cambodia’s exports to the EU, according to EU data, equaled EUR 5.86 billion (USD 6.7 billion) last year. Both partners have previously committed to strengthening economic ties prior to the EU’s warning which may result in Cambodia saying farewell to the EBA trading preferences.

In addition, Cambodia’s Hun Sen who has been in power since 1985 needs political legitimacy for his government. The suspension of the EBA and the likely loss of many jobs resulting from it won’t do any good to his regime. Hun Sen needs both internal and external legitimacy. At home he has to gain and secure as much as possible support from the ordinary people, particularly the 800,000 garment workers and their extended families, while abroad he has to make sure his regime appears legitimate and less authoritarian in the eyes of the international community (the EU in this particular case). After all, no man is an island and no country can exist alone, not to mention a donor-dependent country like Cambodia.

So what choices does Cambodia have? Or rather, what should Prime Minister Hun Sen do? Two options are possible, but a viable course of direction seems to be one that involve negotiations, discussions, and dialogues between Cambodia and the EU. In fact, the EU’s wish to withdraw the EBA trade preferences may be seen by Phnom Penh government as a pretext for interference in its domestic affairs, while for the EU the same action may be considered as a moral responsibility of an institution that advocates human rights and democracy. Given this, various channels of diplomatic dialogue are essential to settle the differences in their thinking and find common ground.

Whether or not Cambodia decides to make compromises by responding to the EU’s demands for human rights improvement remains to be seen. What is now clear is that Cambodia cannot afford to lose the EBA and suffer its consequences. Whether Cambodia or Prime Minister Hun Sen likes it or not, international pressure remains to stay unless something is done to address the human rights issues, as requested by the EU and the international community.

About the author

Kimkong Heng is a PhD student at the University of Queensland.

Published by Kimkong Heng

A student, teacher, educator, and researcher

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