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Hun Sen's Cambodia

Hun Sen's 'flawed' victory puts Cambodian businesses at stake

US and EU could deliver blows by taking away tariff-free access to their markets

Cambodian garment workers were promised big raises by their prime minister as he campaigned for Sunday's election, but Western sanctions could dispel their hope.   © AP

PHNOM PENH -- Concerns are looming among Cambodian businesses over possible sanctions from large trading partners following elections that gave Prime Minister Hun Sen's ruling party a record number of seats in parliament.

The electoral victory came in a vacuum. The country's largest opposition party, which had proved itself a force to be reckoned with, was forcibly dissolved in November. For this reason, Sunday's elections were the most controversial since the country emerged from civil war in 1991.

The U.S. has already condemned the elections as "flawed" and said "additional steps" could be coming. Before the election, Washington told Americans as well as companies with a U.S. presence to cease doing business with the commander of Hun Sen's bodyguard unit and to freeze his assets.

Cambodia's economy averages 7% annual growth, one of Southeast Asia's highest rates and a big justification of Hun Sen's continued rule.

If sanctions come, they could include the revocation of Cambodia's tariff-free access to the West's markets. This would deliver a powerful blow to Cambodia's garment industry, which accounts for more than half of the country's $11 billion worth of exports.

Cambodian factories ship some $6.7 billion worth of clothes and shoes to fashion labels around the world. Of these exports, 45% in 2017 went to the European Union and 23% to the U.S.

What the industry fears most is the EU action. The Everything But Arms initiative, to which Cambodia was added in 2001, gives developing countries tax-free access to the 28-member economic bloc.

"Our industry grew so fast with the EBA," said Kaing Monika, deputy secretary-general of the Garment Manufacturers Association in Cambodia. Losing this preferential treatment would hurt, Monika said.

The Cambodian garment industry is already facing headwinds, as Hun Sen's campaign promise of sharp wage increases could make it harder to compete with exporters in Vietnam, Bangladesh, Myanmar and India.

The EU has echoed Washington by stating that the electoral process was not legitimate. Following the court order dissolving the Cambodia National Rescue Party and amid the Hun Sen government's crackdown on free speech, Brussels said it might review the EBA as it pertains to Cambodia.

Some observers say neither the EU or U.S. will take steps that would hurt Cambodian workers, more than 2 million of whom are either directly or indirectly employed by the garment industry.

"The Western countries acknowledge the fact that behind the value of the exports lie the lives of workers and their families," said Songrit Pongern, a lecturer at the Faculty of Social Sciences of Thailand's Kasetsart University. "There are other measures they could select, such as targeted sanctions on individuals [in the government and the ruling party]."

The post-election statement released by the U.S. on Sunday says "the additional steps" being considered include "a significant expansion of the visa restrictions" it imposed on high-ranking officials in December. It did not touch on trade sanctions, such as revoking tariff-free privileges under its Generalized System of Preferences program.

Nevertheless, one exporter outside the garment industry said a tarnished image of Cambodia, as a result of any kind of sanctioning, would be a blow to his business. "No one will want to do business with Cambodian brands or companies, especially Western countries that value human rights and democracy," said the exporter, who spoke on condition of anonymity.

Rice growers are also fretting what the West might do. Some 600,000 tons of the grain, valued at around $360 million, is exported annually. Roughly half goes to the EU through the EBA program, which has allowed Cambodia to become the bloc's largest provider of white rice.

Cambodia is the largest exporter of white rice to the EU. This farmer's paddy is on the outskirts of Phnom Penh.   © Reuters

Rice exporters are now increasingly turning to China and other markets to offset risks. Since 2016, Beijing has created a new quota for Cambodian rice that could increase to 500,000 tons in 2019. China could easily fill any void created by the EU.

China has congratulated Cambodia for a "smooth and successful" election.

China is by far Cambodia's largest source of foreign investment. As such, Beijing has emerged as the Hun Sen regime's strongest backer. According to 2017 World Bank figures, China holds 48% of Cambodia's $5.8 billion of public debt.

"The significant rise of China as an investor and trading partner does provide some level of alleviation, and Chinese actors have shown a willingness to strategically throw economic support behind the Cambodian government in the past," said Courtney Weatherby, a research analyst at the U.S.-based Stimson Center. "There is a reasonable likelihood that if Cambodia faces significant disruption due to sanctions from the West that Chinese actors may step in and fill some portion of that void, if not in the same industrial sectors, [then] in a way that would produce similarly equitable benefits across as many sectors of society."

But businesses are worried about depending on a single market. "The Cambodia government has heaps of loans from China," said one rice exporter who preferred not to be named. "We don't know what [Beijing] can do to us."

Western sanctions would have unpleasing consequences on Chinese investors, too. Of the 600 apparel factories in Cambodia's garment association, around 200 are owned by mainland Chinese investors. In addition, 65% of the fabric used in Cambodia-made garments comes from China.

Some analysts say Hun Sen, now that he has secured his electoral victory, could reconcile with his political foes and perhaps even reinstate the now-vanquished CNRP and release its senior members from prison. "Reconciliation could take place to save the country," said Vannarith Chheang, associate fellow at ISEAS-Yusof Ishak Institute. "Hun Sen is a flexible and pragmatic guy."

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