In February 2019, the European Union launched an 18-month process over whether or not to maintain Cambodia's preferential access to the EU market under the Everything But Arms (EBA) trade scheme. The review follows what the European Union perceives as 'the deterioration of democracy, respect for human rights and the rule of law in Cambodia'.
Analysts, civil society members and many in the private sector have expressed concern over the European Union's potential suspension of the trade scheme, due to how much is at stake for Cambodia.
The EBA scheme allows Cambodia to export anything to the EU market, with the exception of weapons, duty-free and quota-free. In return Cambodia must fulfil its obligations to the core UN and International Labour Organization conventions. Cambodia was granted access to the scheme, offered to most Least Developed Countries, in 2001.
In 2018, exports to the European Union accounted for more than a third of Cambodia's total exports and were valued at €4.9 billion (US$5.5 billion), of which 99 per cent were eligible for EBA preferential duties. Textiles and footwear, prepared foodstuffs, vegetable products, rice and bicycles represented 97 per cent of exports to the European Union in the same year. The textiles and footwear industries alone employ more than 700,000 Cambodians, indirectly benefitting millions of others.
How much the EBA scheme has contributed to Cambodia's economic development is difficult to precisely determine. Cambodia's merchandise exports have grown from US$1.5 billion in 2001 to over US$12 billion in 2017. Over the same period, its GDP per capita has more than doubled, from US$454 to US$1137. The poverty rate also declined from 50.2 per cent in 2003 to 13.5 per cent in 2014.
It is also difficult to predict the economic consequences of the EBA removal in the long run. A recent report by the World Bank hints only that 'losing EBA preferences … would likely result in slower export growth'. The suspension of the EBA would increase tariffs by 12 per cent in the garment sector and by 8-17 per cent in the footwear sector. It will likely cost Cambodia's economy US$676 million in additional taxes.
It is reasonable to speculate that in the short term - depending on the effectiveness of the Cambodian government's economic reforms - the EBA withdrawal could deprive hundreds of thousands of Cambodians of decent jobs and plunge them into poverty. This could create conditions for social unrest and political instability. Data from the World Bank indicates that 4.5 million Cambodians, or 28 per cent of the population, remain 'near-poor' - extremely vulnerable to returning to poverty if exposed to economic and external shocks.
The Cambodian government is launching a 17-point strategy to stimulate Cambodia's economy in response. Measures include reducing the number of national holidays, reducing costs in shipping and electricity and reforms in railway management. These measures - if effectively implemented - should save the private sector around US$400 million.
The EBA review has soured Cambodia-EU relations, rendering Cambodia more dependent on China. The Cambodian government blasted the EU's move as an 'extreme injustice', vowing not to trade the country's 'sovereignty and independence' for 'foreign aid'. The European Union has acknowledged that recently 'the Cambodian authorities have taken a number of positive steps, including the release of political figures, civil society activists and journalists', but continues to expect more.
The ordeal began following a number of domestic events in Cambodia that were to the European Union's chagrin. In late 2017, Cambodia's Supreme Court disbanded the Cambodia National Rescue Party (CRNP) and imprisoned CRNP leader Kem Sokha on the charge of treason. This occurred a few months after the June 2017 local government elections and ahead of the July 2018 national election.
The CNRP was the country's only effective opposition prior to its dissolution, posing a credible threat to the ruling Cambodian People's Party that has held power for decades. In its February 2019 statement, the European Union demanded 'more conclusive action' from the Cambodian government to ensure continued EBA participation, but fell short of publicly addressing concrete specifics.
China pledged to help Cambodia overcome the hardships of an EBA suspension, promising US$588 million in aid to Cambodia from 2019-2021. Reports suggest China had already promised to import 400,000 tons of rice and increase investment as part of the Belt and Road Initiative. Since overtaking Japan in 2010, China has become Cambodia's largest donor. China has also been Cambodia's largest foreign investor for several years.
The European Union is engaging in political dialogue with the Cambodian government to promote democracy. Before the European Union makes a final decision over whether or not to withdraw, it should aim to reach a win-win deal with the government. This deal should give enough incentive to the government to pursue economic reforms, including the full and effective implementation of its 17-point economic strategy, and to foster further democratization.
A full EBA removal would be counter-productive to Cambodia's socio-economic and political development. It may also change the European Union's image as a goodwill provider in the eyes of Cambodians and nations sympathetic to Cambodia, including China.
The writer is a PhD candidate at the Crawford School of Public Policy, The Australian National University.
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