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26 Aug 2020

Econ Digest

The withdrawal of the EU’s EBA preferential arrangement could change Cambodia’s industries and exportation

The “Everything But Arms” (EBA) preferential trade arrangement of the European Union (EU) has played a significant role in changing Cambodia’s trade structure, especially after the year 2011 when the EU relaxed the rules of origin for exports from Cambodia. Thanks to this arrangement, exportation from Cambodia to the EU grew rapidly with an average compound annual growth rate (CAGR) of 18% over the past 10 years, while more than 800,000 jobs or about 10% of the current total workforce have been created. However, Cambodia’s economic and exportation structure became fragile due to the concentration of exported products and a high reliance on the EU market. The impact on major industries of Cambodia will be transmitted to the real sector through various means, such as through a reduction of exportation, a decline in employment, and pressure being put on wage growth.


 

The partial withdrawal of Cambodia’s preferential access to the EU market due to concerns related to human rights ascertained in the country may be a warning sign that Cambodia needs to adjust. However, the scope of the withdrawal of the EBA arrangement is limited, as it covers only 40 items in categories of travel goods, textiles and garments, as well as footwear, which account for 20% of Cambodia’s total exportation to the EU (approximately EUR1 billion) or about 8% of Cambodia’s total overall exportation. Nevertheless, this may be a risk factor that will seriously impact Cambodia’s economy in the future if the EU re-examines the EBA arrangement granted to Cambodia, because the exportation value of Cambodia’s goods that rely on the EBA arrangement accounts for 96% of Cambodia’s total exports.


           KResearch expects that the growing economic pressure may force Cambodia to seek new trade agreements to increase export market opportunities and attract investments in new industries, while Cambodia's most important strategy at present is undoubtedly its economic cooperation with China. The supporting effect of the China-Cambodia trade agreement and the relocation of production bases out of Chinese enterprises to avoid tariffs caused by the Sino-US trade war, as well as the use of the US Generalized System of Preferences (GSP) given to Cambodia, will help support Cambodia’s economy. However, high reliance on Chinese capital to offset trade deficits and current account deficits may pose a threat to the stability of Cambodia’s economy, especially if China reevaluates or delays its investment in Cambodia in the future due to uncertain global economic recovery. Furthermore, the signing of the free trade agreement between Cambodia and China may not be able to increase the strength of Cambodia’s industries, because China seeks opportunities to enter Cambodia’s market rather than to link its production chain with that of Cambodia. In addition to China, South Korea may become another strategic economic partner of Cambodia, as there is potential for expanding South Korea’s textile export markets, and attracting direct investment from South Korea to develop new industries in order to reduce dependence on the textile industry in future.

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