Cambodia’s trade-driven economy grapples with new challenges
Cambodia’s trade-driven economy grapples with new challenges
The buzz of Cambodia exiting from the least development country (LCD) status by 2029 has put every ministry of the Royal Government on high alert, it is more so with the Ministry of Commerce (MoC). Post-2029, Cambodia will no longer enjoy the special privileges provided by the European Union, the United States, China and other international donors. Cambodia’s robust export-driven economy will keep hope floating with experts believing that given its receptiveness to trade agreements and sustained efforts the Kingdom’s growth in all likelihood will have a deeper engagement in the global economy
Despite several challenges stemming from both political and economic uncertainty across the region and the world, Cambodia’s economy has demonstrated resilience and potential for growth. Much of its successes can be attributed to the revival in the export of goods buoyed by global trade recovery.
According to the latest World Bank report, Cambodia’s economic growth is projected to reach 5.3 percent in 2024, up from five percent. In a report titled, ‘Cambodia Economic Update: From Recovery to Resilience – Harnessing Tourism and Trade as Drivers of Growth,’ released last Friday, Tania Meyer, Country Manager for Cambodia at the World Bank, emphasized that to maintain long-term growth, the country must prioritize financial and infrastructure sector reforms. “Cambodia can further boost its growth and resilience by diversifying trade and improving productivity,” she said, adding, “Investing in human capital, in particular education, and deepening reforms to improve the business environment will be key to enable the private sector to create more and better jobs.”
FTAs, RCEP vital
Looking ahead, initiatives like the Cambodia-China Free Trade Agreement (FTA) and the Regional Comprehensive Economic Partnership (RCEP) are expected to enhance further foreign direct investment (FDI) and export potential where the World Bank, in an earlier report, anticipated an even higher growth rate of 6.1 percent for next year.
As Cambodia braces to graduate from the least development country (LCD) status in the next five years, the Royal Government intends not to rely solely on the trade special privileges provided by its counterparts including the European Union (EU), the United States (US) and China.
Despite the preferential trade privilege with the US via the ‘Generalized System of Preference’ (GSP) that expired in December last year, the American market remains the Kingdom’s largest export market with strong demand for apparel, footwear, and travel goods, accounting for about $9.2 billion.
Cambodia’s status under the EU’s Everything But Arms (EBA) initiative has undergone significant changes in recent years, resulting in the reintroduction of customs duties on about 20 percent of the Kingdom’s exports to the EU, affecting key sectors.
Nevertheless, Cambodia continues to enjoy EBA benefits for the remaining 80 percent of its exports. This ensures the EU remains a critical trading partner for the Kingdom, with significant exports including garments, footwear, bicycles, and milled rice.
These sectors have demonstrated steady growth, underscoring their resilience and importance to Cambodia’s export-driven economy. The EU’s sustained demand for Cambodian goods highlights the potential for further strengthening this economic relationship, provided the necessary reforms are implemented to address the EU’s concerns.
According to a report by the Council for the Development of Cambodia (CDC), the Kingdom exports worth $21.9 billion in the first 10 months this year, equivalent to 96.9 percent of the total exports in 2023 which stood at $22.6 billion. Apparel, footwear, agricultural commodities, electronics devices and bicycles are the potential products of the country’s exports in 2024.
Meanwhile, the import’s top products are fabric, textile, construction equipment, electronics, metal, and cars worth $23.6 billion as of October this year, accounting for 97.5 percent of the total import last year which reported a total of 24.2 billion.
The US remained Cambodia’s largest export market, accounting for approximately 43.6 percent of the total export value, followed by the EU at 19.7 percent while China ranked third, exporting just 7.5 percent of the total export value.
Conversely, China ranked as Cambodia’s top supplier, accounting for approximately 40.9 percent of the total imports into the country. Vietnam followed as the second-largest supplier, contributing 13.2 percent, while Thailand ranked third with 12.8 percent of the total imports.
Engines of growth
Talking to Khmer Times, Anthony Galliano, Group CEO of Cambodian Investment Management Holdings (CIM) said, “Cambodia is one of the most open economies in the world with an admirable record of trade growth given its receptiveness to trade agreements and efforts to have a deeper engagement in the global economy.
“Exports of goods and services grew by an annual average of 16 percent and imports grew by 15 percent from 2010 to 2019. Exports are the key engine of the economy, reaching $23 billion in 2023, which represents 73 percent of unadjusted GDP. Concentration risk remains a substantial vulnerability in the Kingdom’s trade, both in products manufactured and countries of export as well as import sources,” he said.
Galliano continued that in terms of trade partners, the US represented 43.6 percent of the export market in 2022, and with the EU, over 60 percent. China represents 35 percent of imports, with Vietnam and Thailand, these three markets represent over 60 percent of imports.
“Imports are still heavily concentrated in textiles and clothing which is about 47 percent, hides and skins at 12 percent and machinery and electronic at 9 percent. Import sources, construction materials and petroleum dominate imports,” he noted.
The limited diversification of products and trade partners leaves Cambodia vulnerable to external shocks, particularly due to its alignment with China and potential adverse US trade policy changes.
However, Cambodia can leverage the shift in supply chains, including the ‘China Plus One’ strategy and ongoing tariff circumvention trends. Investments in solar panel and tyre production have already brought benefits. Upskilling the workforce, reducing electricity costs, improving infrastructure, and enhancing tax and duty incentives could further boost trade, the CIM CEO added.
PM’s recommendations
During the recent Cambodia Trade Expo 2024, Prime Minister Hun Manet offered six recommendations to enhance the development of the trade sector with resilience.
First, to continue implementing the approach of ‘Strengthening Current Markets and Expanding to New Markets’ to ensure that Cambodian products can access both domestic and international markets by further deepening integration into the regional and global economy and exploring new markets with preferential tariffs through the negotiation of bilateral, regional and multilateral trade agreements.
Second, promote the attraction of FDI in backward linkages to support the resilience of existing potential industries, especially as the country prepares for its 2029 graduation from LCD status, ensuring smooth progress and sustainability.
Third, continue participating in international trade and world exhibitions, and organise international exhibition events both domestically and internationally.
“In particular, expand export possibility through the Ministry of Commerce’s fostering export mechanism, and encouraging the private sector to join prominent international exhibition events in potential markets such as the EU, the United Kingdom and Australia. For domestic exhibitions, focus on targeted products by prioritising the matching of supplier and buyers,” the Premier explained.
Fourth, continue to modernise the exhibition-related work by utilizing technology platforms to manage the events and handle requests for permits for the private sector and public institutions in a timely manner and efficiently.
Fifth, foster the strategic development for a smooth and momentum transition for the graduation from LCD status by minimising negative impacts and proposing approaches and strategies aimed at ensuring sustainable development as well as achieving Cambodia’s vision in 2050 of becoming a high-income country.
Sixth, contribute to achieving the RGC’s vision outlined in the Cambodia Digital Economy & Society Policy Framework 2021-2035 and Cambodian Digital Government Policy 2022-2035.
“To ensure economic efficiency, reduced trade costs and time consumption, the MoC must further foster digitalisation of public services at both national and sub-national levels while also strengthening the capacity of digital officials through regular training and the promotion of digital leadership for the management and officials aimed to maximise the benefits of digital technology growth,” Mr Hun Manet added.
Responding to a query from the Khmer Times regarding the Kingdom’s investment climate for traders, Chea Chandara, President of the Logistics and Supply Chain Business Association in Cambodia (LOSCBA), highlighted significant improvements in recent years, supported by a range of positive factors.
“Cambodia has immense export potential, particularly to neighbouring countries such as Vietnam and Thailand, given their proximity and robust trade relationships. Additionally, the US, EU, China, and other regional markets play a critical role as major export destinations for the Kingdom,” he noted.
Chandara further emphasised that ongoing government reforms, infrastructure upgrades, and trade facilitation initiatives have positioned Cambodia as a competitive player in global supply chains, offering traders greater opportunities to expand their reach.
He continued that Cambodia benefits from several trade agreements, including the ASEAN Free Trade Area (AFTA), RCEP, and EBA, which enhance access to global markets. These agreements are driven by the garment, agricultural, and industrial sectors, creating opportunities for exporters.
“Export and investment growth has been significant this year, surpassing 2023 levels and potentially providing further positive momentum in 2025. RGC has actively promoted investment through various incentives, such as reduced import duties, exemptions on agricultural equipment, and duty-free exports for many goods.”
Overcoming challenges
However, exporters, particularly small and medium enterprises, face challenges such as understanding international trade processes, completing export formalities, and dealing with high transportation costs. These costs remain higher than in neighbouring and regional countries, making competition more difficult, the LOSCBA President added.
On Cambodia’s logistics potential, Chandara highlighted it as a priority sector with significant prospects for economic growth. Infrastructure improvements, including roads, railways, and ports, are enhancing connectivity and transportation efficiency.
“E-commerce is driving demand for efficient transportation services, creating opportunities for investment in warehouse construction and goods distribution. As ASEAN countries continue to integrate, Cambodia’s logistics sector can play a critical role in facilitating regional trade and attracting businesses seeking reliable logistics partners,” he stated.
He added that foreign direct investment (FDI) in the logistics sector could support the establishment of processing plants, agro-industrial complexes, and factories, further facilitating transportation and adding value to supply chains.
The LOSCBA President emphasized the untapped potential of Cambodia’s logistics sector, noting it offers significant returns in a fast-growing market.
“I encourage investors to visit Cambodia and seek advice from experts, professional institutions, business associations, and reliable local and foreign partners. Engaging with those who are already benefiting from the sector and receiving government support can provide accurate insights and opportunities for success,” he noted.
On the (FDI) attraction, Chandara noted the government’s efforts to address key challenges, particularly in infrastructure, transportation, energy, and labour development which included amending investment laws, streamlining regulations, and reducing taxes on imported goods.
“RGC is implementing electronic administration and encouraging tax exemptions on long-term profits. These measures create opportunities for foreign companies to invest in Cambodia,” he said.
Despite progress, Chandara acknowledged that Cambodia, as a developing country, still faces significant challenges. Transportation remains costly due to limited infrastructure and outdated methods, including difficulties in consolidating cargo and inefficiencies in some cases in round-trip transportation.
Regarding the potential collaboration on clean energy with China, Yann Vaudin, Founder and CEO of VOLTRA and also an expert in the electric vehicle (EV) industry for over a decade told Khmer Times that Cambodia’s cooperation with China on green energy, infrastructure, and technological modernisation is a pivotal step toward sustainable economic growth.
Vaudin stressed that the focus on clean energy solutions and advanced infrastructure will reduce dependency on fossil fuels, create jobs, and position Cambodia as a regional leader in sustainability.
“However, while this collaboration opens doors for international advancements, it’s equally critical for the government to support local brands to remain competitive. Local companies play a vital role in addressing Cambodia’s unique needs and fostering domestic innovation,” he said.
By providing incentives, access to technology, and fair opportunities, the Royal Government can ensure that both international partnerships and homegrown businesses contribute to building a resilient, inclusive green economy, the VOLTRA CEO added.
