Cambodia Confronts Double Whammy From Tariffs, Virus

Garment industry, which drives economy, hard hit

By: David Van

It has been a grim few weeks for the Cambodia government. It has become the latest Southeast Asian nation to suffer from the Novel Coronavirus, which has decimated Chinese tourism from 2 million plus in 2019 – nearly half of them on business – to a trickle. All tour groups have been cancelled and individual tourists have stopped coming as well.

In addition, in October 2018, the European Union started an 18-month process designed to lead to the suspension of Cambodia’s duty-free trade access over its record on human rights and democracy unless the country reforms, which it shows little sign of doing. Partial EBA revocation was announced by Brussels on February 12, 2020.

Although the government has been pushing since last year for a 17-point reform to help alleviate the costs of production, the 12 percent tariff the European Union imposes on garments, measured against the 2 percent savings made by working smarter and harder, it still means a regressive 10 percent added cost.

While the Cambodia Import-Export Inspection and Fraud Repression Directorate-General (Camcontrol) and Kampuchea Shipping Agency and Brokers (Kamsab) have been dissolved to reduce the difficulties and complexities in doing business and to facilitate the import and export of Cambodian goods to international markets, the unofficial fees paid in the past to these institutions have been conveniently swept under Customs clearance by brokers and freight forwarders who charge the Garment Makers Association of Cambodia (GMAC) members the same amount.

The garment industry continues to drive the Cambodian economy, employing 600,000 people, making the sector the country’s biggest investor and accounting for 16 percent of gross domestic product and 80 percent of export earnings. The country is home to more than 600 factories.

Discreet investigations revealed that unofficial fees charged by customs have indeed gone down per full container load but the garment maker group members are still charged the same fee as before. The association has expressed a wish that brokers and freight forwarders simply be more “transparent” and reflect in their invoicing that portion to be an actual incremental charge on freight. They haven’t increased their charges over the last few years but nobody is willing to be the first to do so for fear of losing business to competitors. The truth is that conveying goods by lorry in Cambodia is still the cheapest cargo transportation in the region, at only about US$1 a kilometer from Phnom Penh to Sihanoukville compared with the regional average of US$2.50/km.

Minimum wage

From 2005 to 2019, garment factory workers saw their minimum salary jump from US$85 a month to now US$190 but the garment makers appealed to the government not to increase it more than 3.5 percent or a maximum of 4 percent a year for the next two to three years. To date, Cambodia is already on a par with the minimum wage in the Vietnamese garment sector on paper but, realistically, it is well above Vietnam when we factor in the actual productivity aspect.

Vietnam is expected to increase its minimum wage 5 percent per annum for the next two to three years so Cambodia must avoid going above Vietnam’s wage or the sector will surely see investors and buyers walk away.

Virus impact

The garment makers estimated that because of the recent shutdown of factories in China, at least half of their member factories here would be affected and would need to shut down for two to four weeks on average in March to April, laying off “temporarily” the workforce. However, there is some encouraging news in that some Chinese factories have already resumed production this week between Feb 17 and 21 after Chinese New Year holiday was extended because of fears over the transmission.

List of dutiable items

Although the list of items to be hit by the recommended removal of the Everything but Arms trade deal of zero tax would only affect 20 percent (US$1.1 billion) of Cambodian exports to the European Union (Cambodia exported worth of US$5.4 Billion to EU in 2019), that would still affect about 10 percent (75,000 employees) of the total garment sector workforce (estimated at 750,000 workers). Because each factory worker also enables five to six peripheral small businesses to thrive, the impact of laying off some 75,000 workers is rather worrying.

This brings us back to the government’s efforts that could, to date, only alleviate 2 percent of total production costs. A total of 60 percent of production costs go towards raw materials, an element beyond control, but within the remaining 40 percent of costs lie 25 percent on manpower cost, leaving a balance of 15 percent for logistics cost.

The Ministry of Economy and Finance initiated in 2016 and finalized in 2018 a private sector strategy but is not implementing it fully yet. The garment makers association argues that buyers and investors need better clarity on the government’s vision. The government, they say, must spell out a clear vision on its intentions to reduce further production costs over the next two to three years and the strategy with which it will go about implementing it. Perhaps then factories and buyers may chip in to bear some of the cost to help offset.

A perfect example is found next door in Vietnam where the government has clearly spelled out its vision for a free-trade agreement (FTA) with the EU over 10 years. Although they missed the planned start date by two years, the full implementation initially targeted for 2018 is now underway. Vietnam has been specific in its vision and strategy, giving investors ample time to adjust and position/plan foreign direct investment (FDI) ahead of a full FTA between the EU and Vietnam. Cambodia should emulate that approach.

Damocles sword

The coronavirus has also caused disruption in global supply chains, impacting businesses worldwide. Local production facilities and businesses in Cambodia depending on Chinese supply sources have been caught in the storm. Should EU ratify the Everything but Arms recommendation, the US general system of preferences (GSP) trade preference program for travel goods may follow suit. Export of travel bags to the US was nearly on a par – or more than – the US$4.6 billion earned from the EU, which may deal a serious blow to the labor-intensive manufacturing industry. The slowdown in China’s economy and the ban on online gambling are the quadruple whammy that the Cambodian government must now confront.

Tourist arrivals have also been drastically affected with just hundreds of people visiting Siemreap when it traditionally welcomed thousands during the peak travel season. We are none the wiser whether Chinese tourists would return in such large numbers once the Covid-19 crisis subsides, or whether ordinary Cambodians may be fearful of their return. Should there be a community outbreak of the syndrome in Cambodia, it would further dampen tourist arrivals from other countries.

So the big question is what will transcend at the next Government-Private Sector Forum chaired by the Prime Minister in April and the progress report of the 17 reform points announced with fanfare last year.

David Van is a Cambodian entrepreneur and public-private partnership advocate.