Cambodia’s critical garment export sector could face major risks in both the short and long term from the U.K.’s surprise vote last year to exit the E.U., the International Labor Organization (ILO) has warned.
And while new duty-free access to the U.S. for some items offers a ray of hope, Cambodia’s recent rise to lower-middle income status could also add to its challenges in a few years, it says.
In its latest bulletin on Cambodia’s garment industry, the ILO backs up early reports that exports continued their strong growth over the first half of last year, up 10.8 percent year-over-year to $3.5 billion.
But it predicts a couple of potentially serious headwinds from Brexit, the “no” vote the U.K. delivered in a referendum on E.U. membership in June: a weaker pound and the loss of preferential access for Cambodia.
Thanks to the E.U.’s Everything But Arms trade scheme, Europe has been Cambodia’s No. 1 garment export market since 2014, with the U.K. topping the list. But the pound’s slide against the dollar—20 percent between the third quarters of 2015 and last year—is making those exports more expensive and could lead to a drop in orders.
“Although Britain has not yet withdrawn from the E.U., the depreciation of its exchange rate means that the trading environment has already become more difficult for the Cambodian garment and footwear
sector,” the bulletin says. “If this
depreciation is long-term, this difficulty will endure.”
Post-Brexit, Cambodia may face more long-term trouble if it loses the preferential access it now enjoys under Everything But Arms. The ILO says the U.K. could maintain that access for Cambodia and other so-called Least Developed Countries, or revert to World Trade Organization rules. In the latter case, Cambodia would lose its special access unless the government arranges a new free-trade agreement with the U.K.
The ILO says the duty-free access the U.S. granted Cambodia’s travel goods exports such as wallets, handbags and suitcases could help grow the industry—which is categorized as a sub-sector of garment manufacturing—in the coming years. However, it remains in its infancy and currently accounts for only 1.3 percent of total garment exports.
At the same time, Cambodia’s move last year from low to lower-middle income status means the country could lose its Least Developed status after a three-year grace period—and the special access it gets to the rest of the E.U. along with it.
“The Cambodian garment and footwear sector has some time to prepare for an environment in which its competitive advantage is reduced through loss of [Everything But Arms] status,” the ILO says, “but it will need to adapt to this reality over the medium term.”
The Garment Manufacturers Association in Cambodia, which represents the sector’s exporting factories, could not be reached for comment.
Soeng Sophary, spokeswoman for the Commerce Ministry, downplayed the pound’s decline.
“It’s not shocking Cambodia too much,” she said, noting that the depreciation was hurting Cambodia’s competitors in the U.K. market as well.
And should Cambodia lose its duty-free access to the U.K. once Brexit actually arrives, she said a bilateral trade deal was “a possibility.”
In the longer term, Ms. Sophary said the government was also working on a host of new laws and regulations to keep diversifying its economy and make it more reliant on domestic demand “so that the garment industry becomes less important and we are not threatened by the export market.”
Garments currently make up roughly 80 percent of Cambodia’s total exports and have been its most reliable growth engine for the past several years. The country has struggled to diversify its economy beyond garments, tourism, agriculture and construction.
sector,” the bulletin says. “If this
depreciation is long-term, this difficulty will endure.”
Post-Brexit, Cambodia may face more long-term trouble if it loses the preferential access it now enjoys under Everything But Arms. The ILO says the U.K. could maintain that access for Cambodia and other so-called Least Developed Countries, or revert to World Trade Organization rules. In the latter case, Cambodia would lose its special access unless the government arranges a new free-trade agreement with the U.K.
The ILO says the duty-free access the U.S. granted Cambodia’s travel goods exports such as wallets, handbags and suitcases could help grow the industry—which is categorized as a sub-sector of garment manufacturing—in the coming years. However, it remains in its infancy and currently accounts for only 1.3 percent of total garment exports.
At the same time, Cambodia’s move last year from low to lower-middle income status means the country could lose its Least Developed status after a three-year grace period—and the special access it gets to the rest of the E.U. along with it.
“The Cambodian garment and footwear sector has some time to prepare for an environment in which its competitive advantage is reduced through loss of [Everything But Arms] status,” the ILO says, “but it will need to adapt to this reality over the medium term.”
The Garment Manufacturers Association in Cambodia, which represents the sector’s exporting factories, could not be reached for comment.
Soeng Sophary, spokeswoman for the Commerce Ministry, downplayed the pound’s decline.
“It’s not shocking Cambodia too much,” she said, noting that the depreciation was hurting Cambodia’s competitors in the U.K. market as well.
And should Cambodia lose its duty-free access to the U.K. once Brexit actually arrives, she said a bilateral trade deal was “a possibility.”
In the longer term, Ms. Sophary said the government was also working on a host of new laws and regulations to keep diversifying its economy and make it more reliant on domestic demand “so that the garment industry becomes less important and we are not threatened by the export market.”
Garments currently make up roughly 80 percent of Cambodia’s total exports and have been its most reliable growth engine for the past several years. The country has struggled to diversify its economy beyond garments, tourism, agriculture and construction.
