The Basics of Cambodia’s Export Market: Moving Beyond the Garment Sector

Jonathan Roberts, Research Associate

International trade is vital to robust economic growth – as the theoretical literature (Bhagwati, et al) has consistently demonstrated. Moreover, this is self-evident by simply looking at the cases of other Asian countries—the Four Asian Tigers, for example—who used export revenues to sustain rapid industrialization and technological advances, climbing the “ladder of production,” and exporting increasingly higher value-added goods. Cambodia, for its part, has steadily increased its trade output since joining the World Trade Organization in 2004 (and being the first least-developed country to do so). Since then, Cambodian exports have risen from $3.4 billion to $16.1 billion in 2015, making Cambodia 71st largest export economy in the world,[1] according to the Massachusetts Institute of Technology.

So, what is the breakdown of Cambodian exports? MIT breaks down Cambodia’s exports by specific product, and the results are not surprising to anyone who has driven around the outskirts of Phnom Penh: knit sweaters, knit women’s suits, and non-knit women’s suits. Garments continue to dominate in Cambodia, composing about 80% of total merchandise exports, according to the International Labour Organisation. Therefore, as regular observers of the country know, understanding the dynamics of and future development of Cambodia’s export economy begins with recognition of the centrality of the garment industry. Trends in the garment industry have economy-wide implications. Concerning this, there are three aspects to look out for that may have lasting effects on Cambodia’s garment industry, and the economy as a whole: Cambodia’s improving developmental status; Brexit; and new export opportunities between the United States and Cambodia.

The EU is Cambodia’s largest export market, composing 45% of Cambodia’s garment and footwear exports in Q1 and Q2 2016. For Cambodia, the primary beneficial aspect of exporting to the EU was the ‘Everything but Arms’ (EBA) scheme, which gave the 49 Least Developed Countries full duty-free and quota-free access to the EU market for exports (save of arms and ammunition). Cambodia, however, has been reclassified as a lower-middle income country by the World Bank, having reached a GNI per capita of $1,070 in 2015. While this reclassification is reflective of serious economic improvement in Cambodia, its downside is that it may render the country ineligible for the EU’s EBA scheme, thereby losing its tariff preferences. The UN has yet to follow suit and reclassify Cambodia, and there is currently no change in export status. However, Cambodia needs to be prepared for the inevitable, medium-term, externalities of its improving developmental status. Obviously, there will be negative aspects here but at the same time as Cambodian human capital improves there is also the need for greater incentivization for Cambodia to begin to move up the aforementioned ladder of production.

Within the EU, Cambodia’s most important export market is the United Kingdom, which receives about 25% of EU exports. Therefore, the Brexit situation will likely have a lasting effect on Cambodia’s export economy. There are two scenarios to look out for: one, the UK’s departure from the EU may lead to a depreciation of the UK’s real exchange rate against the dollar, meaning the British consumers’ spending on imported goods, such as Cambodian-produced garments, may decline. Two, the EU will no longer take part in the EBA scheme upon leaving the EU, and may not maintain tariff preferences for Cambodian exports.

While Cambodia’s market in the EU may diminish in the near future, there are newfound opportunities across the pond. Cambodia has been granted tariff-free access for travel goods exports to the United States. Travel goods are a small industry in Cambodia, representing only 1.3% of total garment and footwear exports. However, its growth rate is quite strong, and both the Ministry of Commerce and the Garment Manufacturers Association of Cambodia (GMAC) believe this preferential treatment will boost the sector’s growth, and attract more investment. The ‘catch’ is that such privileges can be revoked if Cambodia is found to be in violation of international standards for workers’ rights. Thus, labor standards are an important part of the ongoing labor strategy, as was noted at a conference in Phnom Penh on the status of the garment workers earlier this week – with a particularly strong presentation of the results of survey work conducted by the good folks at Angkor Research.

I must underline one more key point: simply increasing Cambodia’s export volume and international market access for the garment industry will only go so far. As mentioned in previous posts, Cambodia’s industry faces a unique challenge in moving from low-skill work to higher value-added goods, which ultimately generate increased revenue and finance further industrialization and technological advances. There is evidence of steps toward diversification and increased economic complexity in Cambodia—the first salt export ever, from earlier this year, comes to mind. But the country still remains on the lower rungs of the metaphorical ladder of production. The recently adopted Industrial Development Policy may improve this problem; it obliges Cambodia to increase GDP share of industrial sector to 30%, the share of the manufacturing sector to 20%, and the share of exports of non-textile goods to 15%, by 2025. Given the extraordinary growth of various sectors in Cambodia—not the mention the economy as a whole—there are reasons to be cautiously optimistic, but with continued questions as to the political future of Cambodia and (perpetual) capacity problems in the governance sector highlight the “cautious” aspect of that conclusion.

1. Cambodia imported $15.3 billion, resulting in positive trade balance of $768 million
2. Cambodia market profile, Export.gov, accessed on 5 August 2017
3. Cambodia, Observatory of Economic Complexity (OEC), MIT, accessed on 5 August 2017
4. Cambodia Garment and Footwear Sector Bulletin, International Labour Organisation (ILO), Issue 5, January 2017, accessed on 5 August 2017
5. European Commission
6. Kali Kotoski, Garment exports surge up EU list, Phnom Penh Post, 26 May 2017, accessed on 5 August 2017
7. Cheng Sokhorng, First salt export deal crystallises, Phnom Penh Post, 14 February 2017, accessed on 5 August 2017
8. Ben Paviour, Government Records Show Spike in Timber Exports to Vietnam, Cambodia Daily, 10 May 2017, accessed on 5 August 2017
9. Cambodia Industrial Development Policy 2015-2025, Council of Ministers, 6 March 2015, accessed on 5 August 2017