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