Cambodia’s delicate balancing act amid tariffs, border deadlock

Cambodia’s delicate balancing act amid tariffs, border deadlock

Cambodia is confronted with unanticipated challenges. On the one hand, the nation’s dependence on external markets has left the Kingdom vulnerable to global trade shocks and disruptions; on the other, border tensions with Thailand have resulted in a trade halt impacting thousands of businesses and border communities on both sides. For a country of Cambodia’s standing with limited bargaining power, such pressures are no doubt serious risks to export competitiveness, investor confidence and cross-border economic stability. So, what is the way out of this Gordian knot? Khmer Times talks with eminent experts to get their dispassionate views on what Cambodia should do. While one bets on the vibrant economic diversification, the other says that Cambodia should give greater access to the US consumer market. All said, the inadequacies were not Cambodia’s creation; it was rather imposed upon it. Therefore, even if tariffs were trimmed, Cambodia’s long-standing strategy to diversify its export base must remain core to its tested policy

Cambodia’s economy has undergone a remarkable transformation over the past three decades. Emerging from the devastation of civil war and economic isolation in the 1980s, the Kingdom has become one of Southeast Asia’s fastest-growing economies.

Export-led growth has driven the Kingdom’s economic success, with garments, footwear, bicycles, and agricultural products now making up over 60 percent of the country’s gross domestic product (GDP), highlighting its dependence on external markets.

However, this deep dependence on external markets has also left Cambodia highly vulnerable to global trade shocks and geopolitical disruptions – risks that have become increasingly pronounced in recent years.

In contrast to previous years, Cambodia is now confronting a new wave of pressure, described by some observers as ‘trade and border wars’, a term that captures the convergence of politically driven trade measures and escalating regional tensions.

These overlapping tensions underscore how both global and regional political dynamics are reshaping Cambodia’s economic landscape, testing its capacity to protect trade flows, maintain stability and stay competitive in a fragmented global system.

Trump’s tariffs

On April 2, the United States Trade Representative (USTR) announced a sweeping tariff realignment targeting several developing economies, including Cambodia.

The move, part of Washington’s broader push to strengthen domestic manufacturing, initially proposed a tariff of up to 49 percent on selected Cambodian exports, including garments, bicycles and travel goods.

The decision sent shockwaves through Cambodia’s industrial sector, given that the US accounts for nearly 40 percent of the Kingdom’s total exports.

After rounds of bilateral dialogue, the Royal Government managed to secure a modest reduction in the proposed tariff. On July 8, just one day before the final deadline, the USTR issued a revised decision lowering the tariff to 36 percent.

Although the reduction was viewed as a diplomatic success, it still places significant pressure on cost competitiveness. Many manufacturers are now considering shifting to non-US markets or relocating parts of their operations to countries with more favourable trade terms.

Manufacturing industry insiders argue that balancing bilateral trade with the US is virtually unattainable. With Cambodia running a trade deficit of nearly $12.3 billion, bridging the gap would require a staggering 4,000 percent increase in imports from the US, an outcome widely regarded as unrealistic under current economic conditions.

Border deadlock

Since May 28, border tensions between Cambodia and Thailand escalated into a full-scale bilateral trade suspension, following disputes over land demarcation, customs enforcement, and cross-border transport permits in the Poipet-Aranyaprathet corridor.

The incident, triggered by Thai authorities’ sudden imposition of additional inspection protocols, prompted immediate retaliatory measures from Phnom Penh, including tightened controls on Thai goods entering Cambodia’s territory.

The bilateral trade halt, which remains unresolved as of July, has disrupted a trade flow valued at over $2 billion annually, impacting thousands of businesses and border communities on both sides.

Key industries, including agriculture, consumer goods and small machinery, have been particularly hard hit. While lower-level officials from both governments have held informal talks, no high-level diplomatic breakthrough has been achieved.

The absence of a settlement timeline has fuelled concern among regional observers and ASEAN trade partners, especially given rising nationalist rhetoric in both capitals.

Tariffs, border pressure

Caught between global and regional trade tensions, Cambodia faces a precarious balancing act, managing external tariff shocks and border disputes while striving to maintain export competitiveness and safeguard its position in regional supply chains.

With its left hand, the Kingdom is grappling with the escalating global trade barriers, most notably the US decision to impose a 36 percent tariff on key Cambodian exports, including garments and bicycles.

While this represents a reduction from the initially proposed 49 percent, the tariff is not yet final and remains under negotiation until August 1, offering a narrow window for Cambodia to press for further concessions.

However, the ongoing uncertainty has already exerted considerable pressure on the manufacturing sector, undermining investor confidence and threatening the sustainability of its long-standing export-driven growth model.

At the same time, with its right hand, the Royal Government is attempting to resolve a worsening border conflict with Thailand, which has led to a suspension of bilateral trade since May 28.

These dual pressures – global tariff shocks and regional trade blockages – are stretching Cambodia’s diplomatic, institutional and economic capacities, testing its ability to respond effectively while preserving trade stability and national economic interests.

As trade routes narrow and geopolitical fault lines deepen, the Kingdom must carefully align domestic reforms with external engagement to preserve its place in regional supply chains while safeguarding national economic interests on multiple fronts.

For a small, open economy country with limited bargaining power, such pressures present serious risks to export competitiveness, investor confidence and cross-border economic stability.

So what steps can Cambodia take to strengthen trade resilience, uphold border stability and adapt to an increasingly divided regional and global trade regime?

Resilience & renewal

Responding to Khmer Times’ query on what strategies Cambodia should prioritise in the remaining negotiation window to achieve a further reduction in the US tariff?

Jyotsana Varma, Asian Development Bank (ADB) Country Director for Cambodia, said that the Royal Government has held several meetings with the US since April, making it one of the most proactive negotiators in Asia and the Pacific.

“It may still be possible to build on the progress of the past three months to reduce the tariff further ahead of August 1,” she said.

When asked if the 36 percent rate will remain unchanged, how should Cambodia restructure its export strategy to limit damage to key sectors like garments and bicycles?

Jyotsana said, “Cambodia’s export strategy has recognised the importance of economic diversification long before the recent US trade policy shift. The ongoing efforts to support diversification are more important than ever.”

She explained that these include investments in skills for Cambodia’s workforce, infrastructure for improved logistics and regulatory reforms for private sector growth.

“Expanding Cambodia’s productive base and bringing its products to new markets go hand-in-hand, as there is a global tendency for a nation’s export concentration to fall as its economic complexity rises.

“For product diversification, Cambodia is moving into more complex production, as evidenced by its growing export share of electronics and electrical machinery, which quadrupled from 2018 to 2023.

“For market diversification, double-digit growth in exports to non-US markets in the first half of 2025 signals Cambodia’s potential gains from regional trade agreements and resilience to external shocks.”

When further asked how Cambodia’s institutional and policy capacity would manage simultaneous external trade shocks, the ADB Country Director said, “Cambodia has successfully navigated concurrent shocks as recently as 2022, when the Russian invasion of Ukraine disrupted the commodity market amid Covid-19 pandemic recovery.”

She went on to add that the government recalibrated its response by focusing on training displaced workers, supporting affected businesses while protecting the most vulnerable households from falling into poverty.

While the nature of the shocks may be different in 2025, these core elements of crisis response remain essential for maintaining macroeconomic stability and competitiveness, she added.

On tariff update, Anthony Galliano, Vice-President of the American Chamber of Commerce in Cambodia (AmCham), said that having just returned from Washington DC as part of the AmCham of Asia Pacific Annual Door Knock, with engagements across the executive branch, legislative branch and think tanks, the tariff proposition has become significantly more coherent and clearly defined.

Galliano, also Group CEO of Cambodian Investment Management Holdings (CIM) stated, “For the term of this administration, tariffs are one of the main conversations of the presidency.”

He observed that, unless constrained by external factors such as financial markets, inflationary pressures, or judicial intervention, he expects the US President will continue to employ tariffs as a strategic tool to gain leverage in trade negotiations, deter or penalise unfavourable conduct and reorient global supply chains.

While the USTR and the Department of the Treasury serve as the foundation for trade negotiations and draft agreements, Galliano emphasised that it is President Trump who ultimately makes the final decisions.

He added that the emerging strategy resembles a ‘shock and awe’ approach, involving the imposition of provocative tariffs that are subsequently reduced in exchange for concessions, incentives and outcomes that benefit the US.

Based on lessons from recent trade deals, particularly with Vietnam and Indonesia, Galliano noted that the US seeks tariff-free market access, the reduction or removal of non-tariff barriers, significant commitments to purchase American products (especially in agriculture, energy, aerospace and technology), and pledges to curb transhipment practices.

He said the administration believes access to the US consumer market, which accounts for over 25 percent of global household consumption despite comprising less than five percent of the world’s population, holds immense value.

“Therefore, countries should expect to pay tariffs, with rates contingent on the success of bilateral trade negotiations.”

Galliano said that while the US President prioritises larger economies such as the EU, Japan and India, smaller markets—particularly those with trade imbalances—typically receive direct communications with pre-set tariff levels.

On the tourism impact, Chhay Sivlin, President of the Cambodia Association of Travel Agents (CATA), said the recent tightening of the Cambodia-Thailand border has had a significant effect on both Thai and international tourist arrivals.

“For Thai tourists, all trips have been completely cancelled and international charter flights organised by Thai companies have also been suspended,” she said.

“This has had a major impact, as we normally receive a steady flow of tourists through Poipet and other land border checkpoints with Thailand, particularly since we lack direct flights to many major international destinations.”

Sivlin explained that Cambodia relies heavily on neighbouring countries like Thailand and Vietnam, which serve as regional travel hubs capable of attracting large numbers of international tourists.

“Cambodia often benefits from extended trips, where travellers decide to continue their journey into the Kingdom after seeing advertisements or promotional content. We attract more tourists through the neighbouring countries—especially Thailand—and now we are losing them,” she said.

The loss of cross-border tourist flows has disrupted tourism-dependent businesses along the border, Sivlin said. “Many tourists stop for various services before travelling to other destinations inside Cambodia – transportation, meals and other local services. This slowdown is directly affecting local economies.”

If tensions at the Cambodia-Thailand border persist for several more months, Sivlin warned that the prolonged uncertainty could undermine tourist confidence in the safety and reliability of travelling to Cambodia via land borders. “Once confidence is lost, rebuilding it could take years,” she said.

She added that travellers who previously transited through Thailand may begin choosing alternative destinations in the region they perceive as more stable.

“While tourists entering via Vietnam or Laos may still reach our country by land, those arriving in distant countries may opt not to come at all, as they generally prefer to avoid multiple flights during one trip,” Sivlin added.

Dual challenge

The Kingdom faces a dual challenge: navigating rising US tariff pressure while managing regional border disruptions that threaten key sectors like manufacturing and tourism. These external shocks have underscored the need for economic resilience built on diversification, institutional capacity and proactive diplomacy.

Efforts to negotiate a reduction in tariffs have been timely and persistent, reflecting Cambodia’s growing assertiveness in global trade talks. Yet, even if tariffs remain elevated, the country’s long-standing strategy to diversify its export base remains vital.

Investments in workforce development, improved logistics and regulatory reforms are beginning to yield results, particularly with the rise in electronics and electrical machinery exports and double-digit growth in trade with non-US markets.

Simultaneously, border tensions with neighbouring countries have exposed the vulnerability of tourism-dependent economies. The sudden halt in cross-border travel has disrupted services and livelihoods in provinces that rely on land-based tourist flows.

Prolonged uncertainty may also undermine long-term confidence in the Kingdom as a reliable destination, affecting regional connectivity and economic activity.

Amid these pressures, the Royal Government’s response must focus on three key priorities: maintaining macroeconomic stability, accelerating diversification across sectors and markets, and enhancing institutional readiness to respond to shocks.

Going forward, the country’s ability to adapt to shifting trade dynamics and regional uncertainties will be essential in securing sustainable growth and ensuring that its economy remains open, attractive, and resilient in an increasingly volatile global landscape.

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