Effect on Cambodia’s Garment Industry Uncertain as Suspension of EU Trade Scheme Looms

cambodia-garment-worker-jan-2019.jpg A garment worker walks with her child from the factory after her shift in Phnom Penh, Jan. 29, 2019.
AP Photo

Workers and factory owners in Cambodia remain uncertain about how the suspension of trade preferences with the European Union will affect the country’s key garment industry, representatives said Tuesday, weeks after the bloc announced an end to tariff-free access to its market.

The EU in mid-February announced plans to suspend tariff-free access to its market under the “Everything But Arms” (EBA) scheme for around one-fifth of Cambodia’s exports, citing rollbacks on democracy and human rights—a decision that would reinstate tariffs on garments and footwear beginning Aug. 12, unless it is overturned by the bloc’s governments or its parliament.

The decision will result in a loss of around U.S. $1.1 billion of the country’s annual U.S. $5.8 billion in exports to the bloc, some 75 percent of which are made up of clothing and textiles—a crucial industry in Cambodia that employs one million people.

Cambodia’s Prime Minister Hun Sen, who has shrugged off the EU’s move, on Monday pledged to cut taxes for up to a year for garment producers facing new tariffs, while promising that workers will be provided with 60 percent of the current minimum wage for up to six months in the event that production is suspended.

On Tuesday, government spokesperson Phay Siphan said the tax cuts will allow Cambodian garment producers to remain competitive in the EU, but acknowledged that no other plans are in place to subsidize the industry. Discussion on the issue will take place during a forum between the government and the private sector scheduled for next month, he said, without providing a specific date.

Ath Thun, president of the Coalition of Cambodian Apparel Workers’ Democratic Union (CCAWDU), told RFA’s Khmer Service that the reinstatement of tariffs on Cambodian exports to the EU could leave 80,000 workers from more than 1,000 garment factories in Cambodia jobless if buyers from the bloc stop placing orders because of increased costs.

“If they keep buying, it won’t affect things—we believe this will only be the case if the EU proceeds with the suspension of the EBA in August, and buyers are no longer able to purchase at a discount,” he said.

“The scale that we are talking about could involve the closure of some 40 factories, although we believe it could be more, for obvious reasons.”

He said he welcomed proposals by the government and companies on measures to limit the impact on the industry, such as tax exemptions, but noted that such measures would likely result in a loss of income for the government.

“If the government reduces taxes, does not charge taxes on profits, or allows an exemption on import taxes for raw materials … it will limit national income,” he said.

“So, apart from acceding to the EU's demands [to improve human rights] to reinstate EBA benefits, there will be no profit—only losses.”

Employers unsure

RFA also spoke with Ken Loo, the secretary-general of the Garment Manufacturers Association in Cambodia (GMAC), who said that with the reinstatement of tariffs at a rate of around 12 percent, garment products will be subject to a tax of U.S. $120 million—a number that will increase to U.S. $150 million when shoes and bags are added.

As the cost will be passed on to buyers, factory owners in Cambodia will need to see how the reinstatement of tariffs will affect product orders from the EU, and that will determine whether workers will be laid off.

“We do not yet know how many workers will be affected or how many factories are going to close,” he said.

“If buyers are required to pay tax, prices for products from Cambodia could be more expensive than those from neighboring countries, so the employers in Cambodia may face some problems if buyers scale back on orders.”

Loo said that GMAC is investigating ways to reduce production costs and plans to discuss them with government representatives at next month’s meeting.

Nguon Channara, a deputy secretary-general of the Cambodian Shoes Association, said he had no comment on the CCAWDU’s expectations of how a partial loss of EBA status could lead to layoffs, but acknowledged that if the decision is implemented in August it will definitely impact footwear factories in Cambodia.

“The industry will really be affected if [the EBA withdrawal] happens,” he said.

“Whether it will have a small or large impact, we don’t yet know, so we are now looking into all the ways that association members could be affected.”

Appealing to investors

Meanwhile, the government on Tuesday introduced measures to encourage investors to keep their businesses in Cambodia as they face suspension of EBA privileges, including relaxing regulations and fees on cargo shipping, reducing the cost of electricity for industrial factories, cancelling seven public holidays beginning this year, and new legislation on investment and special economic zones.

After announcing the plan, Hun Sen called on China to invest in Cambodia and appealed to Beijing to help make his country a more attractive market, saying he will never bend to the EU’s demands that he reverse his crackdown on the country’s political opposition, NGOs, and the independent media.

“I have nothing to say to [the EU], because they have the right to make this decision,” he said.

“But they have to respect our position. The Khmer people are living in a very difficult situation, and they will lose a lot of profit if they are required to pay U.S. $100 million or more in taxes.”

Moeun Tola, a human rights campaigner and the executive director of the Center for Alliance of Labor and Human Rights (CENTRAL), told RFA he does not believe the new measures will encourage factory owners to continue to invest in Cambodia without EBA benefits.

“It is difficult for major companies, because they haven’t prepared business plans that accommodate a drop in buying orders,” he said.

Reported by RFA’s Khmer Service. Translated by Pheap Aun. Written in English by Joshua Lipes.


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