Will Cambodia Become a More Challenging Place to Source Apparel?

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Cambodia wage negotiations

Cambodia has been enjoying a relative climb up the manufacturing value chain, according to the World Bank, but the country’s now facing a deteriorating political climate that has the potential to plague its growing garment industry.

Ahead of upcoming political elections next year, Cambodia’s parties have grown increasingly divided and tensions are high. The country’s current prime minister Hun Sen, of the ruling Cambodian People’s Party (CPP) has faced recent criticism for clamping down on the opposition, on independent media outlets and on nongovernmental organizations. Cambodia’s Supreme Court voted last month to dissolve the opposition Cambodia National Rescue Party (CNRP) and ban more than 100 of its members from politics for the next five years, allegedly for collaborating with the U.S. to overthrow the Cambodian government. Most recently, Sen jailed opposition leader Kem Sokha, reportedly for the same treasonous acts.

U.S. relations with Cambodia have grown tense in recent months, as the U.S. imposed visa sanctions on the country for refusing to allow reentry to persons the U.S. is trying to deport. In November, Sen also accused the U.S. of trying to topple his government.

The opposition party has concerns that the ruling CPP isn’t allowing for democracy and fears next year’s elections will be illegitimate as a result. The pushbacks against the CNRP also come as the party was gaining favor in the country.

The strained political climate has provoked concerns over trade relations, and even the trade benefits Cambodia currently enjoys.

In a press briefing from the State Department following the dissolution, spokesperson Heather Nauert said, “We are gravely concerned that the Cambodian Government’s decision to dissolve the Cambodia National Rescue Party, the CNRP—not only does that set back Cambodia’s democratic development, it unnecessarily damages Cambodia’s relationship with the United States and others in the international community, it weakens Cambodia’s economic growth and prosperity, and isolates the country further from democracies in the region.”

This comes just after an August meeting where the U.S. and Cambodia discussed furthering their partnership under the Trade and Investment Framework Agreement (TIFA) in order to facilitate trade.

What’s more, the European Union has alluded to rethinking Cambodia’s trade status under its Everything But Arms (EBA) program, which allows Cambodia’s garments and other exports to enter the EU duty free.

What it means for the garment sector

On Friday, the Garment Manufacturers Association in Cambodia (GMAC) sent a letter to the United Nations seeking continued support for its garment sector, which is the country’s largest export industry. There’s concern among manufacturers there that foreign buyers will cut back on sourcing from Cambodia in light of its political issues.

“We are just worried there might be some misunderstanding by the U.S. or EU about the decisions of our government,” GMAC deputy secretary-general Kaing Monika told the Phnom Penh Post. “What we are trying to say is to caution people not to misunderstand the situation in Cambodia.”

The letter reportedly went on to point out that Cambodian workers are happy with their recent 11 percent wage hike to $168 per month, which they will earn as of January, likely pointing out that no labor unrest is expected among the already existing tension.

Monika seemed to think the EU would not pull Cambodia’s trade privileges as part of EBA, but that it would not be entirely detrimental if it did.

“Even if we’re going to lose it, we could still survive,” he told the Phnom Penh Post. “It would just demote a level of competitiveness. I think it would be an opportunity as well for the country to reform in order to survive.”

For the year to October, the U.S. imported $2.18 billion worth of textiles and apparel from Cambodia, a 2.42% percent decline from the same period in 2016.

According to the World Bank’s latest economic update on Cambodia, the country’s exports of clothing and other textile products expanded in the first six months of the year, reaching $3.3 billion, but that level of expansion may not continue.

“The value of exports grew at 5.4 percent year-on-year (y/y), down from 8.4 percent in 2016 with declining unit prices caused by rising competitiveness from other textile exporters,” the report said. “Cambodia’s external competitiveness is being constrained by rising real wages and high logistics costs.” Growth in footwear, among other non-apparel related industries, has at least helped offset the deceleration.

[Read more from World Bank’s Cambodia report: Footwear a Growth Leader for Cambodia’s Exports, as Economy Expands]

Separate from its present political woes, World Bank says the growth outlook for Cambodia is favorable, with real growth expected to reach 6.8% this year, and 6.9% next.

“Growth will continue to be propelled by export diversification and underpinned by healthy inflows of FDI. Rising government spending including public investment is also expected to drive growth,” the report noted. “The recovery in global trade is expected to strengthen. There are promising signs of diversification in the manufacturing sector, with the entry of high-value-added manufacturers…”

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