Trade preferences that Cambodia enjoys under the Everything But Arms (EBA) arrangement of the European Union, have been the backbone of the country’s trade for years. These preferences include duty-free and quota-free access for all Cambodian exports into the EU market, including all products, except arms and ammunition, which has been a major boost to strategic sectors such as garments, footwear and agriculture among other. However, democracy, human rights and good governance concerns have raised the EU’s concern, and thus the probability of losing this trade privilege has been a subject of interest.

The most significant and straightforward impact of the removal of EBA would be on the economy. The garment and footwear sectors which are major exports to the EU will suffer from high tariffs that will make them less competitive in the global market. The EU is one of the biggest markets of Cambodia and loss of special access might result in the reduction of export as the European consumers seek for more affordable products made in Vietnam, Bangladesh or any other country with low production costs.

The garment sector alone provides employment to 800,000 workers who are mainly women from the rural areas. Most of these jobs may be at risk if the factories receive lower orders or if some of them even close down due to poor profitability. This could lead to high levels of unemployment, increased levels of poverty and therefore, increased levels of social inequality.

Trade preferences such as EBA are one of the factors that make Cambodia an attractive investment location. As such, loss of this preference may discourage the foreign investors especially those who are eyeing Cambodia as a cheap source of labor to produce goods for the European market. Countries such as Vietnam will be even more attractive since they also have FTA with EU. The reduction of FDI could hamper innovation technology transfer and infrastructure development that is important for the sustainable development of Cambodia’s economy.

The Cambodian government should understand that Chinese investors are investing in Cambodia at the present time because they know that Cambodia receives the EBA from the EU. It is clear that if Cambodia loses the whole EBA benefits, those Chinese investors will leave Cambodia to find the good places where they can make more benefits.

The social effects of the loss of EBA would not be limited to the numbers and the reports. This would especially have an impact on women since the garment sector is dominated by women. For many Cambodian women, these jobs are not only a way to earn money but also a way to gain freedom and assertiveness that is not usually allowed to women. What happens if they are taken away?
Politically, it will be quite problematic for the Cambodian government if the country is to lose the whole EBA. Internally, it will encounter rising pressures from the affected workers as well as businesses. The Cambodian government should readjust its foreign policy, especially with the EU if the EU has frozen EBA from Cambodia.

The loss of the EBA could lead to further isolation of Cambodia from the western countries and may align the country more with China which has been the primary sponsor of Cambodia in recent years. Although the Chinese assistance and investment play an important role, they cannot substitute the positive impact of the diversified trade relations with the EU in the economy. China is always like the strong friend or the qualified friend.

The Cambodian government should take the lesson from its history in 1965 after Cambodia cut off diplomatic relations with the US.

Opportunities for Resilience and Reform

While the loss of EBA would undoubtedly be a setback, it could also serve as a wake-up call for Cambodia to diversify its economy and reduce its dependence on preferential trade schemes.

The government could seize this moment to invest in higher-value industries, enhance labor productivity, and strengthen domestic markets. Improving governance, upholding labor rights, and fostering a more inclusive political environment could also pave the way for restoring trust with the EU and other international partners.

Additionally, Cambodia could explore new trade agreements and partnerships.

The Regional Comprehensive Economic Partnership (RCEP) and Cambodia’s free trade agreement with China are steps in the right direction, but they require robust implementation strategies to deliver tangible benefits.

A Shared Responsibility

It is important to note that the EU also has a role to play in ensuring that its policies do not inadvertently harm the very people it aims to support. While concerns about human rights and governance are valid, the EU should consider the socio-economic consequences of withdrawing EBA entirely. A more balanced approach, perhaps involving targeted sanctions or conditional extensions of trade preferences, could incentivize reform without causing undue harm to Cambodia’s most vulnerable populations.

All in all, the threat of losing EBA is a crossroads for Cambodia: further down the road of further economic and political polarization or a new strategy of the ‘more markets – less rules’ approach.

It is a delicate situation and the time to act is now. Both Cambodia and the EU have to come up with a solution that will respect human rights and democracy and at the same time ensure the welfare of millions of people. In today’s interconnected world, such decisions have implications and effects on other countries and such decisions made have effects on other countries as well. At this critical crossroads for Cambodia, the path it selects will determine its future not only in its economy but also in the international community.

Dr. Seun Sam is a policy analyst at the Royal Academy of Cambodia. All views in this article are his own.

This article firstly published on Khmer Times

Cambodia’s Economy Set to Flourish with a 6.3% Growth in 2025: Unveiling the Optimism Behind the Numbers

In a promising projection, Cambodia’s economy is poised to expand by 6.3 percent in 2025, as highlighted in the recent Budget in Brief report for the Fiscal Year 2025, issued by the Ministry of Economy and Finance (MEF). This projection isn’t merely a numerical forecast; it carries with it a wave of optimism and potential for transformative growth across the nation.

A Closer Look at the Numbers: A Beacon of Progress

The MEF report anticipates that this growth will elevate Cambodia’s GDP at current prices to approximately 209,163 billion riels, or about $51.39 billion. Such a surge is expected to bring the GDP per capita to $2,924, a substantial leap that hints at improving living standards and economic conditions.

Key Sectors Fueling the Growth Engine

The industrial, services, and agricultural sectors emerge as the powerhouses driving this economic acceleration:

• Industry: Projected to grow by 8.6 percent in 2025, the industrial sector remains a cornerstone of economic expansion. A balanced growth between garment and non-garment sub-sectors will underpin this rise, while construction is expected to stabilize post-pandemic.
• Services: With an anticipated growth of 5.6 percent, the services sector is on an upward trajectory, fueled by the hospitality and food industries. Although the real estate sub-sector may grow at a moderated pace, its steady progress contributes to overall economic vitality.
• Agriculture: A modest growth of 1.1 percent is expected, driven by advancements in crop and livestock production. The gradual recovery of the fisheries sub-sector also adds a layer of stability to this sector.

Inflation and Reserves: Stability in Sight

An inflation rate of 2.5 percent is forecasted for 2025, reflecting stable domestic economic activity and a normalization of global commodity prices. Furthermore, Cambodia’s international reserves are predicted to hold steady at $24.42 billion, a safety net sufficient to cover 7.5 months of imports.

Economic Diplomacy: The Unsung Hero

Economist Duch Darin attributes much of Cambodia’s projected economic success to effective economic diplomacy. By diversifying export markets and fortifying trade relationships, these diplomatic efforts have not only expanded Cambodia’s global market reach but also secured vital funding for infrastructure projects.

“Economic diplomacy has been pivotal in accelerating GDP growth by enhancing exports and rejuvenating the services sector,” Darin stated. “These initiatives have also attracted more Foreign Direct Investment (FDI), fueling industrial expansion and diversifying the economy.”

Government’s Optimistic Outlook

Deputy Prime Minister and Minister of MEF, Aun Pornmoniroth, emphasizes the continued momentum in export-oriented sectors, particularly garments, as a key growth driver. He also notes the expected resilience of non-garment industries, including automotive assembly and food production, which are set to bolster economic diversity.

World Bank’s Perspective

While the World Bank forecasts a slightly lower GDP growth of 5.5 percent for 2025 and 2026, it underscores the importance of diversifying trade and enhancing productivity. Tania Meyer, World Bank Country Manager for Cambodia, highlights the need for investment in human capital and business reforms to sustain this growth trajectory.

A Promising Horizon

The projected 6.3 percent growth rate for Cambodia in 2025 is more than a statistic—it is a testament to the country’s resilience and strategic planning. As the nation moves forward, leveraging its industrial, services, and agricultural strengths, the focus on economic diplomacy, infrastructure, and human capital development will be pivotal. The collective efforts promise not only economic growth but also a robust foundation for sustainable development, benefiting all Cambodians.

As Cambodia stands on the cusp of this promising economic horizon, it beckons a future rich with opportunities, resilience, and prosperity.