Prime Minister Hun Sen is scheduled to be in Beijing at the end of August to sign a free trade agreement (FTA) with his Chinese counterpart, China’s President Xi Jinping. On July 20, Cambodia’s Ministry of Commerce and the Chinese Embassy in Phnom Penh announced via social media that negotiations over the free trade deal had been completed.
The tariff-reducing pact will be inked few weeks after the European Union (EU) re-introduces tariffs on Cambodian exports today, 12 August 2020.
In February, the European Commission decided to withdraw part of the tariff preferences granted to Cambodia under the EBA trade scheme due to “the serious and systematic violations of the human rights principles enshrined in the International Covenant on Civil and Political Rights.” Cambodia has been a major beneficiary of the EU’s ‘Everything But Arms’ (EBA) tariff-reducing trade preference system for developing nations in recent years.
The EU is Cambodia’s largest trading partner, accounting for 45% of Cambodian exports in 2018. Exports to the EU from Cambodia reached €5.4 billion in 2018, more than double the €2.5 billion recorded in 2013. 95.7% of these exports entered the EU market under EBA tariff preferences (i.e. €5.2 billion out of the €5.4 billion in total).
Back in December 2019, the IMF warned that the withdrawal of the European Union’s trade preferences under the Everything But Arms scheme from Cambodia would cause a decline of exports to the EU of about 13%, and a 3 percentage point decline in GDP growth, without prejudice to other indirect effects. In terms of jobs, an estimate was made that in the vital garment sector, 43% of workers (nearly 225,000 people) plus 20% of workers in footwear factories (more than 20,000 people) would become unemployed, Sim Vireak advisor to the Asian Vision Institute noted on Euractiv.
Cambodia’s undeveloped economy has benefited from close ties with Europe since the United Nations Transitional Authority of Cambodia helped govern the country from 1991 to 1993 following years of war that had decimated the country. Europe’s sanctions against Cambodia through the withdrawal from the EBA and the signature of the Cambodia-China FTA will push Cambodia away from Europe as the Asian country would get closer to China, the European and USA main competitor. But it’s not yet clear if the China trade pact will have that desired effect.
Firstly, Cambodia’s main exports to China, especially milled-rice, won’t have tariffs fully removed under the agreement for several years. Another critical aspect to the FTA will be whether it can offset losses from the partial suspension of trade benefits to Europe. Ken Loo, secretary-general of the Garment Manufacturers Association in Cambodia, said the trade agreement will benefit Cambodia’s garment sector since Cambodia will be able to export to China without tariffs, even though exports to China were seven to eight percent, compared to the 45 percent already being exported to the European Union. “I can’t say whether it is possible [to replace EBA] or not, but I want to say FTA with China is a good point,” Ken Loo said as reported to VOA – Cambodia.