Trump’s tariff may diversify FDI sources in Cambodia

Trump’s tariff may diversify FDI sources in Cambodia

In the wake of US President Donald Trump’s new round of tariffs announced yesterday, to what he termed as ‘Liberation Day’ for his country’s economy, what impact will it have on Cambodia?

Contrary to the adrenaline rush among the stakeholders, a leading Southeast Asian economist exclusively told Khmer Times that Trump’s tariffs could, in fact, result in the diversification of more foreign direct investment (FDI).

Trump’s tariffs could result in diversification with more FDI emerging from non-Chinese sources, said Dr Jayant Menon, a visiting senior fellow at the Institute of Southeast Asian Studies (ISEAS-Yusof Ishak Institute) in Singapore and formerly Lead Economist in the Office of the Chief Economist at Asian Development Bank.

More importantly, he said the focus on tariff war is likely to shift from ‘Made in China’ to ‘Made by China’.

“The escalation in the US-China trade war, involving an additional 10 percent tariff is likely to adversely impact exports from China, inflation in the US, and indirectly the economies of Southeast Asia through supply chain links.

“The electronic supply chain in Southeast Asia is still centered in China and Cambodia is involved in it at the lower end. Therefore, the tariff will reverberate throughout the supply chain, resulting in a drop in output and employment in all countries involved, including Cambodia,” he explained.

“In the past, Chinese and other foreign firms have shifted their production to countries in Southeast Asia to bypass bilateral tariffs in the US.

“This has benefited several countries in the region, especially Vietnam, Malaysia, and Indonesia, but this may soon end. President Trump is likely to continue the trend that started with the recent measures announced by President Biden, which target ownership and nationality rather than the location of firms, in determining who to penalize.

“This is a shift from the so-called Made in China to Made by China. If these measures continue or increase, then they will mainly be negative spillovers on the Southeast Asian region.

“If Trump targets Vietnam, it is unlikely that Cambodia or other Southeast Asian countries will receive Chinese FDI as a direct result because of this shift in focus towards ownership rather than location.

“It could, however, result in more FDI from non-Chinese sources currently in China or in Vietnam. This could diversify sources of FDI in Cambodia, which will add to resilience and reduce heavy dependence on just one country.”

He emphasised that the Kingdom must make economic diversification one of its top priorities. “A key constraint in Cambodia is the lack of diversification of the economy, which has not affected the rapid pace of economic growth but only its inclusiveness and sustainability.

“The early phase of economic diversification involving rural-urban migration from the agricultural sector into the industrial and services sector may be reaching its limit.”

Dr Jayant noted that future diversification will have to come from intra-sectoral specialisation, or diversification within sectors. “This involves the shift into higher value-added products and activities within the industrial, services and agricultural sectors.

“Unlike the early phase of industrialisation, this process is unlikely to happen naturally and will require government intervention and policy reforms. There are two major constraints that need to be addressed to enable greater intra-sectoral diversification in order to broaden the composition of exports.”

He also highlighted that the Kingdom must improve across various areas to thwart competition that emerges from within the Asean region. “The first is limited human capital and skills mismatches. Second is the high cost of doing business, which limits the development of the private sector and domestic and foreign investment.

“There is an urgent need to improve the quality of education at all levels. Technical and Vocational Education and Training and tertiary education can only succeed if students have had a strong educational foundation in primary and secondary schooling.

“In addition, Cambodia needs to invest in skills development and training in close collaboration with the private sector to avoid skills mismatches. The high cost of doing business stems from limited physical and logistics infrastructure, high energy costs, and the high cost of finance.”

khmertimeskh