Minutes after President Trump read out the reciprocal tariffs on April 3, all hell broke loose in most economies across the globe. Cambodia was imposed a staggering 49 percent tariffs. Trumpism at its worst – was what some leading economists ...Read more
Minutes after President Trump read out the reciprocal tariffs on April 3, all hell broke loose in most economies across the globe. Cambodia was imposed a staggering 49 percent tariffs. Trumpism at its worst – was what some leading economists told Khmer Times. In a way, they are not entirely wrong. But since then, two principal developments took place: One, Cambodia and the United States started negotiating to find an amicable way out. Two, as some avid watchers suggest, what if talks fail or what options are left with the Royal Government to address the crisis? It’s the latter that today’s Explainer discusses. As one of the top priorities, Cambodia must step up its economic diversification with a leading thinker suggesting that the Kingdom will have to focus on FDI emerging mostly from non-Chinese sources. Future diversification from intra-sectoral specialisation, or diversification within sectors, will make Cambodia more resilient, and “less heavy reliance on the US market alone”. An independent Cambodia can well bargain with the mighty US, but only to a certain degree.
Early this month, Cambodia, along with 90 other nations, woke up to shocking news. US President Donald Trump’s sweeping reciprocal tariffs left the economies of many countries in mayhem.
A staggering 49 percent tariffs were imposed on Cambodia’s exports to the world’s largest economy.
For months, since President Trump assumed office, discussions on tariff onslaught dominated the meetings of ministries concerned and intellectuals in Phnom Penh, yet hardly anyone expected Cambodia to become one of the worst victims.
The impact of the Trumpism shock was so widespread that not only it was felt by the policymakers, entrepreneurs, diplomats or SME owners but also trickled down to the semi-skilled workers employed by the textiles, footwear and travel goods sector – one of the largest labour segments in the country estimated to be hosting nearly a million.
What will happen to Cambodia’s economy now? Will it affect the GDP growth? What about the LDC graduation that is scheduled to happen in 2029? Why did Trump take this step? Is Cambodia’s strong bilateral, diplomatic and economic ties with China the reason? Multiple questions continue to fill the air, though there seems to be no specific one-size-fits-all answer.
Making of Trumpism
Speaking to Khmer Times, Vikas Reddy, a researcher in economics and international relations at Ohio University, said Trump took the decision after believing his conservative advisors to boost the manufacturing sector and win over his core electorate.
“If you look at the people who voted in blocks to Trump, you can easily find that all Caucasians, African Americans, Asians and Latinos, who just had a high-school diploma or lower stood as his firm supporters. And this is his core electorate, who once formed the major working class in the manufacturing sector, be it automobiles, steel or electronics.
“With these tariffs in, Trump and his advisors believe that there will be a revival in the local manufacturing, boosting the goodwill of tycoon-turned President.”
Vikas said Trump also want to settle scores with Jerome Powell, who has refused to reduce interest rates citing inflation despite the President asking him multiple times to do so. “It’s more of an internal political battle than an external battle. Tariffs will certainly further fuel inflation, which has remained a great headache for the Fed Reserve in the last few years.
“Trump wants to end quantitative tightening and this is one of the ways to force Powell to do so.”
Vikas also singled out the ‘DOGE’ factor. DOGE is a new advisory body created by Trump and led by Elon Musk, the world’s richest man who has been tasked with cutting US government jobs and other spending. Elon Musk has repeatedly said that he remains confident about DOGE finding $1 trillion in savings, slimming current total federal spending levels of about $7 trillion down to $6 trillion.
“Tariffs are supposed to generate $700 billion, though there are opposing claims, every year. And this would contribute towards reducing the fiscal deficit as envisaged by the DOGE.
“And the most important thing Trump and his team have done here is a policy gamble carried out to impress the middle-income population of the US though a growing number of American middle class now work in the services sector. It is an effort to make them believe that manufacturing jobs are returning to the US. Whether it will return or not is a different question though. The team also acknowledges that a strong manufacturing sector is highly essential to maintain the US military dominance, which is now being challenged by the Chinese might.”
“I think there are also some game theorists in Trump’s team, who believe in ‘escalation dominance’, which is a nation’s ability to control the escalation of a conflict, ensuring it can escalate or de-escalate the situation to its advantage. The concept is widely applied in geo-political and economic aspects. However, we have to wait until we find who will emerge as the winner of ‘escalation dominance’.”
Effect on Cambodia
What will be the effect on the Kingdom if these higher rates of tariffs are imposed? If implemented in full measures, it will have a direct impact on Cambodia’s GDP, reducing it by $1.5 billion in the very first year, according to reliable sources attached to the Royal Government of Cambodia.
“There is a high risk for factory closures and factory relocations within the textiles, apparel, footwear and travel goods sector, leading to huge job losses. Altogether, it will reduce the country’s domestic consumption while citizens engage in extra spending on foreign goods.
“Also hit by tariffs, Vietnam will definitely face a slowdown, adversely affecting the exports of raw materials from Cambodia. There will be a substantial decrease in Foreign Direct Investments (FDI) with investors delaying projects due to uncertainty.
“A conservative prediction puts the decline in GDP between 0.3 percent and 6 percent. US tariffs will disrupt Cambodia’s preferential trade advantages.”
The sources also revealed that the Royal Government has been advised by experts and industry specialists to suspend taxes for factories to retain operations and pay workers. “Call to reduce electricity charges for factories and simplifying customs procedures for US shipments are among the advices placed before the government.”
“The country also needs to embrace structural reforms with major transformation in the logistics sector. It should focus on diversification leveraging free trade agreements and upstream integration to meet rules of origin.”
The sources emphasised that the tariffs will cripple low-margin businesses as well as agriculture. “It could also lead to a rise in Non-Performing Loans (NPLs) along with high levels of unemployment due to large-scale factory closures.”
The way forward
The Royal Government will have to implement many measures to overcome the crisis, though the 90-day pause by Trump offers some relief for the country.
The Ministry of Commerce has said that a special committee has been set up under the leadership of Sun Chanthol, Deputy Prime Minister and First Vice-Chairman of the Council for the Development of Cambodia, to negotiate with the US Trade Department over possible tariff reductions.
The Kingdom will have to implement many measures including short-term tax holidays, cash injections and energy subsidies to prevent layoffs across industries. Renewable energy adoption, streamlining logistics and boosting E-Governance will have to be put on a fast lane.
Speaking to Khmer Times, Dr Jayant Menon, a visiting senior fellow at the Institute of Southeast Asian Studies (ISEAS-Yusof Ishak Institute) in Singapore, earlier said, the focus on tariff war is likely to shift from ‘Made in China’ to ‘Made by China’.
“Cambodia will have to focus on FDI emerging mostly from non-Chinese sources. President Trump is likely to continue the trend that started with the recent measures announced by President Biden, which target ownership and nationality rather than the location of firms, in determining who to penalise.”
He emphasised that the Kingdom must make economic diversification one of its top priorities. “A key constraint in Cambodia is the lack of diversification of the economy, which has not affected the rapid pace of economic growth but only its inclusiveness and sustainability.
“The early phase of economic diversification involving rural-urban migration from the agricultural sector into the industrial and services sector may be reaching its limit.”
Jayant noted that future diversification will have to come from intra-sectoral specialisation, or diversification within sectors. “This involves the shift into higher value-added products and activities within the industrial, services and agricultural sectors.
“Unlike the early phase of industrialisation, this process is unlikely to happen naturally and will require government intervention and policy reforms. There are two major constraints that need to be addressed to enable greater intra-sectoral diversification in order to broaden the composition of exports.
“Efforts are needed to ensure that export markets are diversified so that there is less heavy reliance on the US market alone.
“The EU and other regional markets can definitely absorb exports from a small country like Cambodia. But it will take time.”
Economist Darin Duch said Cambodia should focus on its inherent advantages to overcome the crisis. “Although global tariff policies changes may affect consumer sentiments, Cambodia is making sure to keep its commitments to offer an open and predictable investment climate.
“To the contrary, many companies still see in the country its strategic importance, owing both to its population of young workers, advantageous geography, and reforms to improve the ease of doing business.
“In particular, Cambodia has been stepping up efforts to diversify its economy, especially in emerging industries (electronics, agro-processing and services) in order to help mitigate the risks of short-term impacts by global trade shifts. And they are actively negotiating for trade deals, including with important partners like the United States.
“Simultaneously, investments to enhance productivity, such as in skills development, digital infrastructure, and trade facilitation, are being stepped up. All of these efforts combined should help make Cambodia more competitive and keep its exports appealing amid changing global trade landscapes.”
The economist pointed out that in the medium to long term, Cambodia’s ongoing emphasis on industrial diversification and infrastructure development should underpin and broaden investment from global partners in line with the Kingdom’s strong commitment to an open, rules-based multilateral trading system.
“Despite the US and China being Cambodia’s trading partners, Cambodia is manoeuvring sharply to deepen regional and bilateral trade agreements and secure access to the markets. This can be seen in agreements such as the Cambodia-Korea Free Trade Agreement, the countries’ entrance into the Regional Comprehensive Economic Partnership (RCEP), and continued trade dialogues with the European Union and others.
“Asean is still a pillar of Cambodia’s trade an economic policy. Cambodia should continue to pursue to promote intra-Asean trade by continuing to closely cooperate with sub-regional partners to improve supply chain integration, standard harmonisation and utilise the RCEP framework to the fullest.
“Such deeper integration in the region, this advanced level of economic cooperation, will offer diversification of markets, more developed logistics, and collective resilience to external shocks.”
Potential export markets
Doris Liew, economist and public policy specialist, believes that Asean nations including Cambodia must turn this disruption into an opportunity to balance its economic interests and geopolitical considerations.
Expressing her opinions at the Lowy Institute, an independent think tank, she said: “Expanding the market share remains the only alternative.” But, how could it be carried out?
Doris finds BRICS (an acronym for Brazil, Russia, India, China and South Africa) as the answer to this colossal question.
“Asean has already laid important groundwork in this direction. In 2024, several Asean member states, including Malaysia and Thailand, secured observer status in BRICS. At the same time, Asean countries such as Singapore, Malaysia and Indonesia have recently signed or are in the process of negotiating new trade agreements with the European Union, and the bloc as a whole has expanded economic cooperation with the Gulf Cooperation Council (GCC).
“Collectively, these developments position Asean to respond to the US tariffs not by retreating inward but by stronger engagement with non-US markets. While the United States remains one of the largest importers of Asean goods, a broader diversification strategy would gradually reduce US influence in the region, both economically and politically.”
She is also hopeful that the US can’t sustain the implementation of reciprocal tariffs, especially with countries such as Cambodia, as “it remains unclear whether American industries have the capacity to absorb the resulting production shift, particularly in low-cost manufacturing sectors such as garments from Cambodia or downstream manufacturing goods from Vietnam and Malaysia”.
Before April 2, all pundits believed that Cambodia would benefit from Trump tariffs, and now they claim that Cambodia will be the most affected. History has many a time proved that economists, even renowned ones, have most often gone wrong with their models vis-à-vis real outcomes, beginning from the ‘The Great Depression’ to the ‘Sub-Prime Crisis’ and the ‘East Asian Crisis’.
The Cambodian top leadership has already started negotiating with the Trump administration to ensure a smooth and successful discussions on tariffs. We will have to wait and watch.
The article is firstly publihed on Khmer Times
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Cambodia’s exports to the U.S. reached $9.9 billion, growing by over 11%.
