Serey says US tariff spurs Cambodia’s push for diversification and competitiveness

Serey says US tariff spurs Cambodia’s push for diversification and competitiveness

‘Our trade with Asia has significantly increased, and we’re also diversifying our products… Cambodia used to rely heavily on garments and footwear, which 10 years ago constituted almost all of our exports. Now that reliance has declined, and we’re looking at moving further into value-added products.’

Chea Serey, Governor of the National Bank of Cambodia (NBC), said that the recent US tariff on Cambodian goods, while challenging, is providing an opportunity for the government to accelerate reforms aimed at diversifying trade partners, expanding export products, and improving the Kingdom’s overall competitiveness.

Speaking in an interview with Bloomberg Television released on Friday, Serey explained that the impact of the 19 percent tariff on financial inflows has so far been limited, with Cambodia’s foreign direct investment (FDI) being less sensitive to such external shocks.

“Cambodia has a very small capital market,” she told host Haslinda Amin, “and most inflows are in the form of foreign direct investment. These are the kinds of investments that are not very sensitive to immediate outflow as a result of external or internal issues.”

She noted that while the initial 49 percent tariff imposed by Washington had sparked concern, subsequent reductions – first to 36 percent and now to 19 percent – placed Cambodia on a more level playing field. “This is the same level as our main competitors, so the fear of seeing relocations of manufacturing plants to other countries is a lot less now,” she said.

At the same time, Serey acknowledged that a 19 percent tariff still weighs on the economy, which has faced a difficult global environment following the pandemic and supply chain disruptions. “It’s not as good as the free tariff that we used to enjoy,” she admitted. “But I think it’s also given the government an opportunity to speed up reforms, particularly to diversify our trading partners and products.”

According to the NBC Governor, Cambodia has already made significant strides in this direction over the past decade. “Our trade with Asia has significantly increased, and we’re also diversifying our products,” she explained. “Cambodia used to rely heavily on garments and footwear, which 10 years ago constituted almost all of our exports. Now that reliance has declined, and we’re looking at moving further into value-added products.”

The diversification strategy is supported by broader reforms designed to strengthen the Kingdom’s competitiveness. Serey pointed to the opening of Cambodia’s new international airport, which aims to reduce logistics costs, and efforts to address high energy prices.

“We are known to have one of the highest energy costs in the region,” she said. “But bear in mind that 62 percent of Cambodia’s energy supply is from renewable sources, and the government has the intention to increase it to 80 percent by 2035. This is part of making the country more attractive for manufacturing investment.”

Serey also addressed concerns about Chinese imports and Cambodia’s reliance on external supply chains. “It’s really an opportunity for Cambodia to look at its supply chain. We import a lot from China, process it, and then export. The way forward is to produce as much as possible within the country, and this is where reforms, particularly in energy, can help attract manufacturing plants to Cambodia,” she said.

On debt, she dismissed the notion that Cambodia is overly dependent on Chinese financing. “The government has capped public debt at about 30 percent of GDP. Out of this, I would acknowledge that about 50 percent is from China. But we are not struggling to repay — it’s within limits that are affordable for the government,” she explained.

The NBC Governor further stressed the importance of monetary policy independence, noting Cambodia’s high level of dollarisation. “Unfortunately or fortunately, about 45 percent of the country is dollarised,” she said. “This has helped attract investment, but it also means we have very little independence in terms of conducting monetary policy. To increase resiliency, we need to increase use of our own local currency.”

With inflation at just 1.6 percent as of July, the NBC sees stability as an asset, but Serey argued that deeper reforms are still needed. “To sustain growth, we must strengthen our own monetary policy tools. That requires greater use of the riel, more competitive domestic structures, and continued diversification,” she said.

Despite the pressure from tariffs and global headwinds, Serey struck an optimistic tone, framing the challenge as a chance for structural change. “Of course there are going to be impacts from this high tariff,” she concluded, “but I don’t think it’s going to be as significant, particularly since our competitors face similar tariffs. More importantly, it’s an opportunity to speed up reforms that will make Cambodia more competitive in the long run.”

Cambodia has narrowly avoided the most severe impact of US tariffs but continues to face mounting pressures in global trade, according to Arnaud Darc, Chairman and CEO of Thalias and Co-Chair of the Government-Private Sector Forum (Working Group D).

On July 31, the White House issued Executive Order 14257, setting reciprocal tariffs for Southeast Asia. For Cambodia, the feared 49 percent duty was reduced to 19 percent, effective August 7.

While this spared the country from near-collapse of its exports, Darc cautioned that the new rate remains a heavy burden.

“When combined with existing MFN duties, Cambodian exports face effective costs of up to 39 percent at US borders. This leaves us at a steep disadvantage compared to countries such as Kenya and Honduras, which enjoy duty-free access,” Darc told Khmer Times.

The order includes no review clause, leaving the 19 percent tariff in place indefinitely. It also introduces a 40 percent penalty for transshipment schemes designed to bypass tariffs, with enforcement through US Customs data-matching, port scrutiny and retroactive audits.

To mitigate the impact, Cambodia’s private sector has submitted a seven-pillar policy matrix to the government. Measures include lowering electricity tariffs, waiving port fees for US-bound goods, offering export tax rebates and protecting workers’ incomes. If executed, these steps could cut production costs by up to $1.50 per unit.

Meanwhile, US consumers will likely face higher prices, with a $20 Cambodia-made t-shirt expected to retail at $23-25.

“Cambodia still has a window to adapt,” Darc stressed. “But without swift action, we risk losing not just market share, but our position in the global value chain.”

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