[Analytics] EU, US pressing towards Cambodia trade reprisals

Hun Sen irons clothes at a factory compound on the outskirts of Phnom Penh on August 30, 2017. Photo: AFP/Stringer. Sketched by the Pan Pacific Agency.

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A United States Trade Representative (USTR) and Department of State delegation wrapped up a five-day mission to Cambodia on June 7, a visit that could ultimately have major ramifications for the Southeast Asian nation’s economy. The delegations were deployed ostensibly to “discuss bilateral trade issues, including automobile standards, as well as Cambodia’s labor situation,” the US Embassy in Cambodia’s Facebook page said. David Hutt specially for the Asia Times.

More likely, sources say, the delegations were looking into the potential of removing Cambodia from the US’ Generalized System of Preferences (GSP), a preferential trade scheme that grants tariff and quota-free status to exports from developing countries.

The USTR, the agency responsible for advising the US president on trade policy, is believed to be weighing whether to launch a review of Cambodia’s GSP status because of alleged poor labor rights’ conditions.

In the past two months, India and Turkey have had their GSP designations removed over market access issues. When Asia Times went to press, the USTR mission to Cambodia had not yet made a public comment on its visit.

It was likely not a coincidence that the American delegation arrived in Cambodia the same week as a fact-finding team from the European Commission and the European External Action Service were in country.

The European delegations were dispatched to assess whether the country should remain part of the “Everything But Arms” (EBA) scheme, the European Union’s version of the GSP.

The US and EU are by far the two largest customers of Cambodia’s export-driven economy, purchasing combined around US$9 billion worth of its exports last year. Of these, roughly half were shipped under the EBA and GSP schemes.

Cambodia’s removal from the preferential trade deals would hit the economy hard, a potential problem for Prime Minister Hun Sen’s increasingly repressive regime that has based its legitimacy largely on achieving years of high economic growth.

In February, the EU started an 18-month process of reviewing Cambodia’s place in the EBA scheme, citing “serious human rights violations as well as a deterioration of democracy.”

Unlike normal trade deals, these preferential schemes require signatory nations to meet certain criteria, though the EU’s EBA scheme imposes more political conditions than America’s GSP, which is chiefly about labor rights, property rights and equal access for US firms.

It remains to be decided whether Cambodia has fulfilled the criteria to remain part of the GSP, though clearly the USTR thought so in April 2018 when its inclusion was extended. That decision, however, was made before last July’s controversial general election that many observers saw as rigged in Hun Sen’s Cambodian People’s Party’s (CPP) favor.

Last month a group of international businesses involved in Cambodia’s vital garment sector – including Nike, Adidas, and Levi Strauss – sent a joint letter to Hun Sen stating: “We are concerned that the labor and human rights situation in Cambodia is posing a risk to trade preferences for Cambodia.”

The EU’s investigation arose because of deteriorating political conditions, as the ruling CPP formed a de-facto one-party state last year and tightened its chokehold over politics and dissent.

In late 2017, a pliant Supreme Court formally dissolved the country’s largest opposition party, the Cambodia National Rescue Party (CNRP), while the party’s president Kem Sokha was arrested on treason charges.

Months later, the CPP won all 125 seats in parliament at last year’s election, which many in the international community dubbed “illegitimate.”

Both the US and EU have called on the government to release Kem Sokha, who has now been in detention for 22 months; introduce judicial reforms; improve human rights conditions; and retract the legal changes that allowed for the dissolution of the CNRP and the banning of its officials.

However, Hun Sen has said that he will not “exchange national sovereignty with aid,” and vowed not to be backed into a corner by external influences.

At the same time, his government has oscillated between saying that it isn’t too concerned about losing preferential trade status, as it aims to diversify its trade, and saying that such threats by foreign governments are an assault on Cambodia’s sovereignty and would prove disastrous for the country’s poor.

“There is a red line in which the government will not exchange its sovereignty for access to the EBA,” Foreign Affairs Minister Prak Sokhonn reportedly told the visiting European delegation this week. It is believed that this “red line” is the CNRP’s reinstatement.

In some respects Phnom Penh has offered clemency. Minor reforms to the judiciary have been introduced, while pardons were granted to some political prisoners, though not yet to Kem Sokha.

But in recent months, even as the government prepared to welcome yet another EU delegation, analysts say that authorities have again stepped up their repression.

In a statement released on June 2, Human Rights Watch asserted that this year alone Cambodian authorities “have issued at least 147 arbitrary court and police summonses” against members or supporters of the CNRP.

“The EU and other donors to Cambodia should demand that the Hun Sen government immediately release all arbitrarily detained opposition members and fully restore the CNRP as a political party,” said Brad Adams, HRW’s Asia director, said in a statement.

Speaking during his state visit to Japan last week, during which he was met by protests from the Cambodian diaspora, Hun Sen upped his rhetoric, pledging to “wage war” against the dissolved CNRP. He referred to the party’s acting-president Sam Rainsy as a “a dog that I need to destroy.”

It is unclear how much this rhetoric and recent repression influenced the European and American delegations that were in Cambodia this week. However, it might not be a coincidence that both delegations arrived at the same time.

Indeed, analysts reckon that Washington and Brussels are keen to work together on lobbying Phnom Penh to mend its ways and restore political conditions to how they were in 2016, which was not quite democratic but certainly more so than today.

Their reasoning might be justified. While Cambodia might be able to cope with losing preferential trade status with one of its two main export partners, its economy certainly wouldn’t be able to weather losing both.

The government estimates that new tariffs, if the EBA scheme is revoked, will cost exporters roughly $700 million each year. More costly, however, would be a decline in investment as manufacturers look to setup shop elsewhere. Factory closures, particularly in the garment sector, the largest single employer, of around 800,000 workers, could lead to mass layoffs and spiraling debt.

While China, Cambodia’s top ally, has promised financial support in such an event, it cannot replace the country’s two main export markets in the long-term. China only purchases about 6% of all Cambodia’s exports, and chiefly less-profitable agricultural goods.

On the surface, Cambodia has much more to lose if it is kicked out of the EU’s EBA scheme than America’s GSP. Of the $5.5 billion worth of goods Cambodia exported to the EU last year, some US$5.4 billion fell under the EBA scheme, meaning they were exempt from tariffs and quotas.

By comparison, only $720 million out of the total of $3.8 billion worth of exports to the US last year was shipped under the GSP scheme.

But exports to the US are fast growing, from around $2 billion in 2014 to $3.1 billion in 2017 and $3.8 billion last year. Moreover, in the first quarter of this year exports amounted to $1.1 billion, up 24% from the same period last year, portending yet another big increase in 2019.

In March, a spokesman for Cambodia’s Ministry of Commerce told local media that the rapid increase of exports to the US over the last few years was largely due to Cambodian-produced travel goods, such as luggage, backpacks and handbags, being included in the GSP scheme in 2016.

Indeed, after GSP status was applied to this category, exports of travel goods to the US rose from just $50 million in 2016 to $400 million last year, according to US Embassy figures.

An investigation into Cambodia’s place in the GSP scheme could provide new momentum to potentially punitive bills introduced to the US Congress earlier this year. If passed, these could lead to sanctions being placed upon political and military elites in Phnom Penh, and could see Washington pressure the World Bank and International Monetary Fund (IMF) to cut loans to Cambodia.

GSP status gives the US leverage over Cambodia. The GSP scheme would be far more important for Cambodia if it also included and gave duty-free status to garments and footwear, Cambodia’s two main export items, worth about $10 billion for the economy in 2018. (The EU’s EBA scheme covers both products).

Last year, the US purchased roughly 24% of all Cambodia’s exports from the garment and footwear sector, while the EU took about 46%.

The Cambodian government has since last year lobbied Washington to expand its GSP status to those two products, which economists predict would give a big boost to the local market and Cambodia’s export receipts.

Documents filed under the US Foreign Agents Registration Act show the Cambodian government has also spent $1.2 million this year on two US lobbying firms, the notable Brownstein Hyatt Farber Schreck and the lesser known PacRim Bridges.

These lobbyists are believed to be working to against Washington imposing sanctions and rescinding the country’s GSP status. They have their work cut out for them.

In February, the Cambodia Trade Act of 2019 (CTA) was introduced to the House of Representatives. If passed, it would call upon US President Donald Trump to order a review of Cambodia’s place in the GSP scheme. A similar bill with the same name was also introduced to the US Senate in January.

“Cambodia continues to receive preferential trade status when dealing with the United States while [Hun Sen] continues to trample on the rights of his people. In light of his actions, it is time for us to re-evaluate this special treatment,” Congressmen Steve Chabot, one of the CTA’s sponsors, said in a statement at the time.

It is also possible for the USTR to unilaterally conduct an investigation into Cambodia’s place in the GSP scheme without action by Congress, though in that case President Trump’s administration will have the final say.

Last month the Trump administration terminated India’s place in the GSP scheme, after a 60-day warning in March.

Trump said that this was because India, the largest beneficiary of the scheme in 2017, had failed to “provide equitable and reasonable access to its markets.” Washington also terminated Turkey’s GSP designation in May.

The USTR is currently reviewing eight countries now in the GSP scheme, including Thailand and Indonesia, for infringements on workers’ rights, intellectual property rights and market access for US firms.

Given that the USTR is currently reviewing workers’ rights in various countries, and with its visit to Phnom Penh to inspect “Cambodia’s labor situation,” it seems possible that Cambodia could soon find its trade privileges under review.

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