PHNOM PENH -- A rare public spat has broken out between Cambodian garment factories and the international brands they supply as concerns grow that the country will soon lose its tariff-free access to Europe.
Less than two weeks remain until the European Union decides whether it will revoke Cambodia's trade privileges, granted under the Everything But Arms scheme for least-developed nations, due to the country's "systematic" violations of human and labor rights.
Losing EBA privileges would add a 12% tariff to Cambodian apparel exports to the EU and between 8% and 17% for shoes. Europe is a crucial market for the country's $9.5 billion apparel and footwear export sector, and experts warn that other countries competing in the "cutthroat" world of low-cost apparel will be keen to snatch market share from Cambodia.
With a decision due on Feb. 12, major brands including Adidas, Levi Strauss, Ralph Lauren and New Balance last month sent an open letter urging Cambodia's Prime Minister Hun Sen to undertake reforms "immediately."
"The credibility of Cambodia's apparel, footwear, and travel goods sectors are at stake," the joint letter, sent by the American Apparel & Footwear Association, warned.
The letter --signed by 23 companies and associations -- noted some progress but said that many of the brands' concerns remained unaddressed.
They demanded amendments to make the country's trade union law more permissive, a complete repeal of "repressive" legislation regulating NGOs, and that authorities drop all outstanding charges against union leaders. The group also called for greater accessibility for all unions to the country's Arbitration Council.
The letter provoked a sharp response from the Garment Manufacturers Association of Cambodia, which represents 580 factories and rarely criticizes the buyers upon which its members depend.
The association accused the brands of putting "workers at risk" by presenting a "counterfactual" image of Cambodia's garment industry that ignored its achievements.
"GMAC recognizes that there is much work still to do in improving labour and living conditions. But much progress, including increases in wages and social security benefits, has been accomplished," GMAC stated, calling the brands' letter "disappointing."
Such progress may not be enough for Cambodia to retain its trade privileges, however. In a provisional report in November, the EU wrote the country had not done enough to maintain its EBA access. The EU also has the option of applying a partial suspension of trade privileges.
A core EU concern has been the reinstatement of the court-dissolved main opposition party -- the Cambodia National Rescue Party -- and the dismissal of the treason case against its leader, Kem Sokha.
The CNRP remains banned, with many of its members in self-imposed exile abroad. Sokha is currently facing a trial expected to last for three months.
Longtime labor rights activist Moeun Tola says the government's measures are "cosmetic."
"Without the proof of systematic progress or improvement, I'm really concerned that the EBA would be lost," Tola said.
Despite the uncertainty, Cambodia's total exports continued to grow last year, surpassing $10.8 billion in the first ten months of 2019 -- a 6.45% increase on the year.
Figures from the EU trade database show exports of textiles, apparel, footwear, travel wear and headwear remained stable, reaching 4.6 billion euros in the first 11 months of last year, on par with 4.8 billion euros for all of 2018.
Gains were made in orders to the U.S. market, where the export value of those goods reached $3.8 billion in the first 11 months of 2019, compared to $3.2 billion in 2018. The biggest jump was in travel goods, which came to $834 million in the first 11 months of 2019, from just $389 million in 2018.
GMAC secretary general Ken Loo said the "strong growth" in the U.S. market came as buyers moved away from China to Southeast Asia last year to avoid tariffs leveled by President Donald Trump in the trade war with Beijing.
The flexibility of buyers, however, could come back to haunt Cambodia.
Capital Economics senior Asia economist Gareth Leather said there would be "no shortage" of countries looking to take Cambodia's market share should it lose its duty-free European access.
"Cambodia is quite vulnerable if this change does happen. The margins are so low with a lot of this stuff, the 12% is going to make quite a big difference."
Leather also points out that the EU decision will come at a time Cambodia is grappling with the economic shock of the coronavirus outbreak in China, which will "whack" the local tourism sector, he said.
"At least in the short term, it could have quite a big, a very big negative impact on Cambodia's economy," he said.
In a recent economic analysis prior to the virus outbreak, the World Bank -- which has estimated the EBA loss would shrink Cambodia's garment exports by between $320 million and $380 million -- forecast the country's GDP would dip to 6.8% in 2020, from 7% last year.
Maxfield Brown, an independent consultant advising companies on investment in the region, said Cambodia's tensions with its main export markets made it a long-term risk. While the EU mulls its decision, U.S. Congress members have also demanded a review of Cambodia's trade privileges. Cambodia's trajectory could lead to sanctions, Brown warned.
"That creates challenges for anyone who's thinking of a five- or 10-year long investment plan in the Cambodian market," he said.
"From a cost perspective it makes great sense, but in terms of the political risk profile of the country, I think there are much stabler alternatives close by."