Cambodia mulls economic measures to protect key sectors

Cambodia mulls economic measures to protect key sectors

The sweeping US tariff fallout on Cambodia’s GDP is estimated at a whopping $1.475 billion, excluding the first quarter, with potential adjustments still under review.

The tariffs have created significant challenges for key sectors, particularly the garment, travel goods, and footwear industries. Of the 121 US-exporting factories surveyed, 34 are planning to shut down. Furthermore, 81 out of 125 manufacturers are considering relocating their operations, which could adversely impact Cambodia’s export economy.

Penn Sovicheat, Secretary of State and Spokesperson for the Ministry of Commerce (MoC), confirmed to Khmer Times that Cambodia is preparing to raise several important reasons to protest the United States’ decision to increase import tariffs on Cambodian goods to 49 percent. This is particularly significant as Cambodia is a member of the World Trade Organization (WTO).

He stated that the US’s claim that Cambodia imposes 97 percent tariffs on its own goods is unfounded, as Cambodia’s average tariff on US goods is only 29.4 percent.

Regarding the demand for a balanced trade relationship between the two countries, Sovicheat explained that this is impossible because the US has a large population, high demand, and a significant economy, while Cambodia has only 17 million people and a smaller economy.

He emphasized, “The Royal Government and the Ministry of Commerce are not indifferent to this issue. We will do our utmost to protect the interests of the export industry as well as the interests of workers.”

As a WTO member, Cambodia can utilize the same mechanisms as other countries currently implementing or coordinating bilaterally with the United States.

Additionally, Sovicheat said that the MoC is conducting a study with relevant institutions on each tariff rate to assess its impact on Cambodia’s export industry. This study will allow Cambodia to collect concrete data for bilateral discussions, as well as for broader discussions as an ASEAN partner, considering that Cambodia is a member of ASEAN and the United States is an active ASEAN trading partner.

The tariff-induced strain on wages, especially for factory workers, is also contributing to a broader decline in consumption, with a multiplier effect of 0.9 due to reduced spending on foreign goods. Cambodia’s exports to Vietnam, which relies on raw materials like cashews, are expected to drop, as Vietnam itself faces a 46 percent tariff.

The slowdown in Foreign Direct Investment is another consequence, with many investors expected to delay projects until 2026 or beyond due to the uncertainty caused by the tariffs. If these tariffs remain in place, Cambodia’s GDP growth could see a significant drop from the projected 6 percent to just 0.3 percent, according to conservative estimates. Many factories are considering relocating to countries with more favourable tariff rates, such as Indonesia, India, and Egypt. These countries offer a range of advantages, including lower tariffs, larger capacities, and integrated supply chains.

The root cause of these relocations stems from the disruption of Cambodia’s preferential trade advantages, a trend that accelerated after the US-China trade tensions in 2019. Many factories that previously moved from China to Cambodia are now eyeing other low-tariff destinations.

In fact, over 60 percent of Cambodia’s garment factories are Chinese-owned, and many of these companies are prioritizing loyalty to countries with lower tariffs rather than staying in Cambodia.

To address these challenges, immediate measures are needed. Cash flow relief is urgently required, which could include suspending taxes such as salary, payroll, and minimum taxes for factories to help them stay operational and continue paying workers.

Cambodia should also focus on obtaining product exemptions from the US for non-competing goods like plywood, which has already been exempted. A strategic negotiation approach is imperative, one that involves offering reciprocal tariff reductions and addressing US concerns over transshipment and intellectual property rights compliance.

In addition, Cambodia should consider reducing energy costs, particularly electricity prices, which are currently double those in Vietnam. By eliminating fees for rooftop solar, Cambodia could attract green-energy-focused buyers, such as Nike and Adidas. Simplifying customs procedures for small US e-commerce shipments under $400 would also help Cambodia compete with Chinese platforms. Furthermore, signaling openness to US businesses could be achieved through measures like licensing Starlink.

Long-term structural reforms are also essential to bolster Cambodia’s competitiveness. The country should focus on reducing logistics costs, addressing inefficiencies in port clearance and transportation, and leveraging free trade agreements like RCEP.

Cambodia is facing broader economic concerns due to these tariffs. Small and medium-sized enterprises (SMEs), particularly in low-margin sectors such as agriculture, are feeling the strain, while the banking sector is seeing rising non-performing loans due to factory closures and reduced employment. Moreover, the inflationary impact of the tariffs could reduce global demand, further affecting markets beyond just the US

The US tariffs are believed to be more revenue-driven, with the proceeds used to fund tax reforms, rather than solely aimed at correcting trade imbalances. Cambodia’s small economy limits its leverage in negotiations, which may require aligning with ASEAN or pursuing multilateral appeals, though unity on such matters is unlikely.

The private sector is urging the government to act swiftly, focusing on worker welfare and maintaining competitiveness. In the short term, measures such as tax holidays, cash injections, and energy subsidies are essential to prevent mass layoffs.

In the medium term, Cambodia should accelerate the adoption of solar energy, streamline logistics, and diversify export markets to countries like Japan and China. Long-term actions should include governance reforms aimed at improving trade relations with the US and attracting more FDI.

Economist Darin Duch told Khmer Times that while changes in global tariff policies may influence consumer sentiment, Cambodia remains committed to maintaining an open and predictable investment climate. “Contrary to concerns, many companies continue to recognize the country’s strategic importance due to its young workforce, advantageous geography, and ongoing reforms aimed at improving the ease of doing business,” he said.

Darin said Cambodia has been actively working to diversify its economy, particularly in emerging industries such as electronics, agro-processing, and services, to mitigate the short-term risks of global trade shifts. The country is also engaged in negotiations for trade agreements, including with key partners like the United States.

At the same time, investments in productivity-enhancing sectors such as skills development, digital infrastructure, and trade facilitation are being accelerated, he said.

“Together, these efforts are expected to boost Cambodia’s competitiveness and sustain its export appeal amid shifting global trade dynamics… “In the medium- to long-term, Cambodia’s continued focus on industrial diversification and infrastructure development is expected to expand investment from global partners. This aligns with the nation’s strong commitment to an open, rules-based multilateral trading system,” he added.

While the US and China remain significant trading partners, Cambodia is actively deepening regional and bilateral trade agreements to secure market access. This is evident in agreements such as the Cambodia-Korea Free Trade Agreement, the country’s participation in the Regional Comprehensive Economic Partnership, and ongoing trade discussions with the European Union and other partners.

ASEAN remains a cornerstone of Cambodia’s trade and economic strategy. Duch emphasized that the country should continue strengthening intra-ASEAN trade by working closely with sub-regional partners. “Deeper regional integration and advanced economic cooperation will not only diversify markets and enhance logistics but also strengthen collective resilience against external shocks,” he said.

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