The Partial Withdrawal of EBA from Cambodia Impacts Factory and Logistics Sectors

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by Mr. Bee

The partial withdrawal of Cambodia’s access to the ‘Everything But Arms’ (EBA) preferential trade initiative will impact or put downward pressure on factories and the logistics sector
Following the likely implementation of the EBA withdrawal in August, CBRE Cambodia expects to see some moderate downward pressure on factories and the logistics sector and some of the factories currently producing goods impacted by EBA withdrawal will likely be shuttered temporarily or will transition to goods not impacted by the withdrawal.

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“We may witness some relocation to other developing countries, including Myanmar and Bangladesh, but these are expected to be few. It is believed that manufacturers in the affected sectors will instead see Cambodia as less competitive for future location decisions, meaning Cambodia may miss out on future growth rather than be struck by issues to the existing production economy” CBRE Cambodia said..
Vacancy in industrial estates is likely to increase marginally as a result of these changes; especially as after a prolonged period of increasing demand, increases in industrial supply have begun to gather speed. However, at present industrial vacancy is estimated at less than 2%, and as such, limited impacts are expected to market rents or industrial land prices.

Whilst some unemployment will invariably result from suspension of EBA trade preferences, any issues should be relatively small. The World Bank has already factored in a reduced GDP growth rate for Cambodia in 2020, down to 6.8% from 7% in 2019.

The Cambodian government has been taking several steps to insulate its export sector, including; reducing the number of public holidays, facilitating lower logistics costs, supporting reductions in utility costs and streamlining several processes and procedures to ease red tape.

AN EXTREME CASE

More extensive risk exists should the impact on the industrial sector be more severe than currently forecast. Mass unemployment or corporate bankruptcies driven as a result of a more severe reaction to EBA withdrawal would give rise to potential contagion risk between the industrial and financial sectors of the economy becoming considerably more tangible.

Coupled with a drag on overall growth, this would have implications for retail spending, service sector growth and borrowing on residential real estate. However, given the relatively constrained response from the EU, this scenario appears remote.

Investors into Cambodia’s industrial sector should take careful note of corresponding responses from both China and the USA in the wake the EU’s announcements, particularly with global trade tension and geo-politics remaining fraught.

After an extensive 18-month review of trade policy towards Cambodia, the European Union has moved to partially withdraw the Kingdom’s access to the ‘Everything But Arms’ (EBA) preferential trade initiative. The initiative has formed an important part of Cambodia’s export market, particularly the country’s dominant garment and footwear manufacturing sector, which has increased its exposure to European markets in recent years.

EBA

The European Union accounted for €5.4 billion (US$5.9 billion) in exports during 2018. The partial withdrawal of preferences impacts approximately €1 billion (US$1.1 billion) of exports and will likely come into force as of 12th August 2020, unless the European Parliament or Council object.

EBA provides full duty and quota free access to the EU Single Market. Withdrawal of EBA access means that those goods affected will be subject to European ‘Most Favoured Nation’ tariffs, which will add a tariff of 12% to clothing exports and between 8% and 17% to footwear exports.

The export goods affected are detailed as follows; selected garments & footwear, travel goods and sugar.

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