Competition, Economic Status Leave Garment Sector at Risk

Cambodia’s upgrade to lower-middle income status and looming competition from an E.U.-Vietnam trade deal pose major risks to the country’s garment and footwear export industry, a European business representative said on Thursday.

Currently, Cambodia enjoys tariff-free access to the E.U. market because of its least-developed country status, which enables countries under that banner to export “Everything but Arms” to the E.U. free of any import duties or quotas, said Michael Scherpe, CEO of global trade fairs organizer Messe Frankfurt France.

Van Sou Ieng, president of the Garment Manufacturers’ Association in Cambodia, speaks during a memorandum of understanding signing event on Thursday at Phnom Penh’s Raffles Hotel Le Royal. (Siv Channa/The Cambodia Daily)

“Cambodia, by reason of the increase in its GDP in 2016, is no longer ranked by the World Bank among the least-developed countries,” Mr. Scherpe said, adding that Cambodia’s status upgrade from low-income to lower-middle income was likely to be adopted by the U.N. soon and made official.

Mr. Scherpe added that a new free-trade agreement between Vietnam and the E.U., set to take effect by year’s end, would remove Vietnam’s 12 percent import tax, further diminishing Cambodia’s competitive advantage.

Mr. Scherpe was speaking at a memorandum of understanding signing ceremony on Thursday with the Garment Manufacturers’ Association in Cambodia (GMAC), which was organized to assist Cambodian firms seeking to explore new European textiles and clothing markets.

The two-year program will provide funding of up to $450,000 for Cambodian firms to help them comply with European production development standards, of which half will come from the German government and half from Messe Frankfurt France.

GMAC president Van Sou Ieng said he believed the U.N. was not yet close to ratifying the country’s upgraded economic status, and that Cambodia could negotiate a new bilateral trade agreement similar to Vietnam with the E.U. in the future.

“Maybe in another eight to 10 years, we can negotiate with Europe when we can afford to buy European products and have our products sent to Europe tariff-free,” Mr. Sou Ieng said.

Mr. Sou Ieng was more concerned about what he saw as more pressing issues for Cambodia’s garment sector, including the high cost of production, workers’ wages and the country’s reliance on importing raw materials because producing them domestically was unfeasible due to the high cost of electricity.

“To produce raw materials for making fabric needs lots of electricity. Now, garment factories spend about 1 to 2 percent of its production cost on electricity, but to use machines to produce raw materials will add almost 30 percent to existing costs,” he said.

Chou Ngeth, senior consultant at Emerging Market Consulting, said the U.N. was unlikely to rubberstamp Cambodia’s upgraded economic status for at least five years because the country’s economy was still relatively volatile.

“The economic problems in agriculture as a growth engine is still a concern and [production] remains weak, and our economy, which relies mainly on garment exports, is not stable,” he said.

Miguel Chanco, regional lead analyst for the Economist Intelligence Unit, also agreed that the threat from Cambodia’s status upgrade wouldn’t come into play in the near future. He was more concerned about the E.U.-Vietnam trade deal, but said that its effects on Cambodia might take a year or more to be felt. 

“The key thing that the government should focus on is to diversify the country’s manufacturing sector,” he said. “More initiatives to invite investment in such areas is crucial for Cambodia’s long-run economic stability.”

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