Little more than a decade ago, before Cambodia’s garment industry grew to be a pillar of its economy, the US made the country a fateful offer.
If Cambodia allowed monitoring of labor conditions in its garment factories, the US would give it high-quota access to its market.
Back in 1999, garment factories here faced a long list of disadvantages—high electricity prices, lengthy trade facilitation, difficult transportation and an untrained work force.
So in 1999, Cambodia and the US signed the Agreement on Textiles and Clothing and, despite all of the apparel sector’s problems, exports skyrocketed from $650 million in 1999 to nearly $2 billion in 2004. Cambodia has since produced garments for international brands such as Gap and Levi’s and employed hundreds of thousands of Cambodians, many of them rural women with few other employment options.
But the agreement expired in 2004. And though exports still climbed to $2.9 billion in 2008, they dropped 19.19 percent in 2009. Economists say the financial crisis has exposed the persistent competitiveness problems in the industry, reducing numbers of orders, jobs and factories.
But if the US Congress is able to extend new trade benefits to Cambodia this year, as some legislators want, it will be a game-changer for Cambodia.
“If Cambodia cannot get this trade benefit, it will be very hard to compete with China, Vietnam and Bangladesh,” said Neou Seiha, senior researcher for the Economic Institute of Cambodia. “It can survive but will not grow.”
There appears to be reason for optimism.
At a hearing of the US Senate committee on finance on Tuesday, senators and trade experts discussed reforming the US’s General System of Preferences, a massive trade system of benefits, and some even raised the possibility of including Cambodia’s garments.
“We must provide generous benefits to least developed countries like Cambodia that are using economic development to create social and political stability,” Senator Max Baucus, a Democrat from the state of Montana and the Finance Committee chairman, said at the hearing according prepared remarks posted online.
Still, Cambodia has been waiting for those benefits for more than five years and has faced opposition from other developing countries also ravaged by war.
African countries that receive benefits under the 2000 African Growth and Opportunity Act have strenuously objected to benefits to Cambodia and Bangladesh, telling the Congress last year that helping Cambodia will damage their industries that are attempting to grow.
“A critical problem for Cambodia is that its exports of garments are not diversified across many markets. US imports of Cambodian garments are only a tiny part of US garment imports, while the US market constitutes a large part of Cambodian garment exports,” said Eric Sidgwick, Cambodia’s senior country economist for the Asian Development Bank. “That’s one reason why Cambodia is pushing so hard for this.”
Trade policy which help nurtured Cambodia’s garment sector, has always held sway for Cambodia.
After Cambodia joined the World Trade Organization and the agreement ended in 2004, orders declined for Cambodia factories—that is until the US quickly imposed trade restrictions on China which ended in 2008, the last year that Cambodian garment exports grew.
“What was supposed to happen [from 1999 to 2004] was that the Cambodian garment industry would gradually improve its competitiveness so that it would be able to stand on its two feet by the time protection was scheduled to end,” Mr Sidgwick said.
“I think the hope was that Cambodia would be able to improve its competitiveness… And that window of opportunity may not have been used as effectively as it could have. With the protection you don’t have the proper incentive to increase productivity and lower production costs.”
Mr Sidgwick said Cambodia’s improvements in competitiveness over the last ten years have been surpassed by its competitors who have improved more.
He also said the vulnerability of Cambodia’s garment industry is due in part to the fact that it takes part in a few steps of the production of clothing by trimming and sewing mostly T-shirts, pullovers and trousers. Other countries like China reduce costs with more integrated garment production systems that include more textile production.
Whatever the causes, there is no lack of portents about Cambodia’s troubled industry.
Over 90,000 workers lost their jobs since the start of the crisis in late 2008, leaving fewer than 260,000, while more than 80 factories have closed leaving less than 250.
Garment exports made up 90 percent of Cambodia’s total exports last year, which saw a drop of 19.19 percent in the value of garment exports to $2.38 billion.
Exports to the US, Cambodia’s main export destination, dropped by 21.26 percent, according to the US Commerce Department. But worldwide, garment exports to the US dropped only 11.83 percent in 2009, indicating a loss of market share for Cambodia.
Competitors such as China and Bangladesh, which also face US duties on the same garments, fared far better during the economic crisis. Chinese garment exports to the US increased 2.52 percent and Bangladesh’s garment exports to the US dropped just 0.92 percent in 2009.
Some argue, like the Cambodian government, that the country has made strides in infrastructure. But decades of war left Cambodia further behind in infrastructure.
On top of those issues, the US system of preferences unintentionally hurts Cambodia’s garment industry, according to Commerce Minister Cham Prasidh.
Unlike products from more than 60 other countries in Latin America, the Middle East and Africa, which enjoyed duty-free status because of US trade agreements, Cambodia’s $1.485 billion in garment exports to the US in 2009 faced a tariff penalty of more than 16 percent.
In November, Mr Prasidh visited the US Congress describing an “unprecedented crisis” in the industry and the need for US assistance. More than 70 percent of Cambodian apparel exports went to the US in 2008, he said. In 2009 the amount was 60 percent.
“Unfortunately, our garment workers and we continue to work under a disadvantage, imposed unintentionally by the US tariff system,” Mr Prasidh told a trade subcommittee of the Committee on Ways an Means in the House of Representatives, a panel in the lower chamber of the US legislature which drafts tax laws.
“The Cambodia apparel industry faces an unprecedented crisis and the action we request in response is for this committee and the congress to give our apparel sector duty free access,” he said.
Ken Loo, the secretary-general for the Garment Manufacturers Association in Cambodia, said of all external factors that could help the industry recover after a difficult year, the trade benefit would immediately make a difference.
“It’s got to come. The US cannot discriminate against Cambodia, or LDCs specifically. Getting duty free would mean an immediate improvement in the eyes of the buyers,” he said. “I don’t think that this year will be much worse than last year. I think we have seen bottom, the only question that remains is how soon will there be rebound.”
But he said high production costs continue to be a factor in the sector.
“Let’s just say it’s getting more and more difficult for us to compete. We are losing our competitive advantage, which used to be cheap labor, but has been eroded away because wages have gone up over the years, and in addition we’ve not seen corresponding improvement in productivity,” he said.
Production costs in Cambodia have long been cited as inhibiting not just garments but other industries.
The average price of electricity per kilowatt-hour is $0.055 in Vietnam compared to $0.17 in Cambodia, according to the Vietnamese government.
In The World Bank’s 2009 “Doing Business” report, which ranks the ease of doing business among 183 countries, Cambodia is now ranked 127th with regards to trading across borders. According to the report, businesses in Cambodia take 30 days to import goods and 22 days to export them, a process that requires the completion of 11 documents.
By contrast in Thailand, which is ranked 12th in the same category, it takes businesses 13 days to import and 14 days to export and only four documents are required. Vietnam ranked 74th.
Ed Gresser, a trade expert with the Progressive Policy Institute in Washington who testified Tuesday in favor of extending trade benefits to more Least Developed Countries, wrote in an email that it appears likely the US will reform its trade preferences this year, pushed forward by the need to help Haiti, whose capital was ravaged by an earthquake in January.
“But, it’s always an uphill battle to change American trade policy anyway,” he said last month. “There are usually stronger forces trying to keep things they the way are than trying to change them. I think that Cambodia’s case is less uphill than most.”
Mr Gresser doubted extending benefits to Cambodia and Bangladesh would make a large difference for the AGOA countries. African countries’ garment imports to the US only grew from $900 million in 2001 to $1.3 billion in 2007, he said.
He added that congress, particularly the governing Democratic Party, will want to reward the success of Cambodia’s agreement to enforce labor standards.
Congress’ schedule is likely to be busy this year.
The debate over US healthcare and addressing its trade system during an election year may prove to be too much for the Congressional agenda, said Toby Whitney, legislative director for US Representative Jim McDermott, a Democrat from the state of Washington. Mr McDermott proposed legislation last year that would give some duty-free access to both Cambodia and Bangladesh.
Mr Whitney said there were any number of obstacles to granting greater access for Cambodia.
“For one thing, there is only a limited amount of time to get it passed before Congress starts looking to the elections,” he said, referring to the Congressional midterms elections to be held in November.
The needs of so many countries also complicate the issue, he said.
“The biggest challenge is how you give benefits to Southeast Asian countries…while at the same time preserving the policy benefits that have been implemented for other countries,” he said. “This a big lever and then you add more levers into the mix it gets more complicated.”
Cambodia, he said, does have an advantage.
“I think a lot of people recognize that Cambodia has pulled itself up by its bootstraps, in the wake of what has happened in Cambodia in the 1970s and 1980s. I think Cambodia has made progress,” he said.