The EU says Cambodia must improve its human rights record or face a suspension of trade privileges. What will that mean for the nation’s financial health and the lives of ordinary Cambodians?
The Cambodian government is making preparations to mitigate the impact of the possible suspension of the European Union’s (EU’s) ‘Everything But Arms’ (EBA) agreement. Hun Sen’s government announced on Tuesday that it had held back around US$3 billion from tax revenues to deal with the implications of losing preferential access to EU markets.
Under the EBA, 47 of the world’s lowest-income countries receive duty-free access to EU markets for all export products, excluding weapons and ammunition. However, last month, the EU warned Cambodia that it would lose its benefits under the agreement unless it improved its human rights record.
Cambodian exports to the EU totalled US$5.8 billion last year, 95% of which were exempt from duty under the EBA agreement.
As of the end of October, the Cambodian government was holding almost 60 political prisoners across the country. Since August it has arrested more than 50 former members of the opposition Cambodian National Rescue Party (CNRP).
Cambodia had a month to clean up its act
In the warning, issued on November 12, the European Commission expressed its concern over Cambodia’s human rights abuses. Cecilia Malmstrom, the EU trade commissioner, tweeted: “The Cambodians now have one month to respond and we will make our final decision in Feb next year.”
Initially, the Cambodian government appeared open to engagement on the issue. It eased the terms of opposition leader Kem Sokha’s house arrest. The leader of the CNRP was arrested in 2017 for allegedly conspiring with foreign powers to overthrow the government. Kem Sokha faces treason charges for which the maximum penalty is 30 years behind bars.
However, in recent weeks, Hun Sen’s public rhetoric has become more defiant, framing the issue as a direct attack on Cambodian sovereignty. “We don’t want to lose it [the EBA agreement], but they want to use it in exchange for our independence,” he said.
On Monday, the Phnom Penh Municipal Court also confirmed that Kem Sokha will face trial. A date has not yet been set for the trial’s commencement.
The suspension of trade privileges is looking increasingly likely
Hun Sen appears to have made his choice. “If they say we need to pay taxes, we will pay, [and] we will still make a profit but only less than before,” the Cambodian Prime Minster told reporters last month.
Rather than channel efforts into improving his government’s human rights record, Hun Sen is making preparations for the deal’s suspension.
To mitigate the economic impact, the government plans to increase tax revenues. It has pledged not to implement any new taxes or raise existing taxes. Instead, it will increase revenue by modernising revenue collection processes to increase the sum collected from customs and excise in 2020.
Can a more streamlined collection system offset the withdrawal of the EBA?
Cambodia’s revenue mobilisation strategies have been a boon for the Kingdom in recent years. The General Department of Taxation (GDT) transitioned away from a paper-based system, made improvements to auditing capabilities, and improved management of arrears tax liabilities between 2014 and 2018.
Over the same period, the GDT drastically increased the size of its workforce and improved its collection practices from large companies (those with an annual turnover of more US$494,000).
There are indications that it can continue to increase tax revenues by further streamlining collection processes. The GDT is still notoriously slow in its transfer of data. An estimated 20% of tax credit claims are also inaccurate and the system is rife with abuse.
The government has set the target of increasing tax revenues by 21.3% in 2020, bringing collections to US$2.33 billion in 2020—contributing around 7.9% of national GDP. This figure is within reach if the GDT continues to make progress in implementing fiscal reforms. However, this is only half of the picture.
Losing trade privileges will also have less discernible impacts
Measuring the EBA agreement’s benefits in purely financial terms misses the human impact of a possible suspension.
The Cambodian agricultural sector offers a glimpse into a future without duty-free access to European markets. In January, the European Commission imposed duty on Cambodian rice exports for a period of three years to offer protection to EU rice producers. Almost overnight, rice exports to the European markets dropped by more than 57%.
The rice sector was able to increase exports to China to offset the reduced European demand. However, should duty be imposed on the Cambodian garment sector, which makes up around 75% of European imports from the Kingdom, it may not find a Chinese market willing to pick up the slack.
As order volume decreases, garment workers will suffer from reduced job stability. With 86% of factory workers employed in the garment sector, the impacts of the EBA agreement’s suspension will not be insignificant.
Hun Sen’s public indifference towards the EBA agreement is an affront to Cambodian workers in industries that depend on European markets for orders. Indifference to the EBA is an indifference to the job stability of the 800,000 workers and their families that rely on the garment sector for their livelihoods.
While the economic implications of a possible suspension may be absorbed by a streamlined and robust tax collection system, the immeasurable impacts like the stress of the workforce and increased domestic tensions as a result of reduced job stability should not be overlooked.