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EU-Vietnam Free Trade Agreement (EV-FTA) and Its Implications on Cambodia

ISSUE 2019
No 10
Release 06 September 2019
By Mr. Lim Menghour

The European Union (EU) recently signed a landmark free trade agreement with Vietnam in June 2019. The deal between this trading bloc and the Southeast Asian country has paved the way for tariff reduction on 99% of the goods flowing in and out of the two sides. Although it still needs the approval from the European Parliament, this is no doubt the most ambitious free trade deal that the EU has ever concluded with a developing country. According to the agreement, both sides will benefit from more affordable products and consumer goods, and they will see an increase in trade and investment activities. In this case, what could be the implications on Cambodia’s economic development?

In terms of trade, the exports of Cambodian manufacturers will be highly affected. It should be noted that once the agreement comes into force, manufacturing firms will be flowing into Vietnam in order to take advantage of the free trade deal and to export most tariff-free goods to Europe. In this regard, many manufacturing companies in Cambodia could consider moving their production bases to Vietnam to enjoy the incentives for their exports, especially if the EU, Cambodia’s biggest export market, withdraws the Everything But Arms (EBA) from the kingdom. In this case, Vietnam will increase its exporting activities into the EU market. This will tremendously affect Cambodia’s export sector. The World Bank estimated in 2016 that the EU-Vietnam Free Trade Agreement (EV-FTA) would cost Cambodia USD350 million in exports. Most Cambodian industries including garment, footwear and rice will be hugely affected. It could be argued that Vietnam will replace Cambodia as the main exporter to Europe because of EV-FTA. However, Cambodia could still benefit from this deal if the kingdom transfers its products into Vietnam and use the EV-FTA advantage to re-export into the EU market. However, the chance could be very low since Vietnam alone has plenty of export capacity and infrastructure. In this context, Cambodia could shift its focus to other destinations to export its products. It should be noted that Cambodia has enjoyed a very good relationship and economic ties with other countries including ASEAN members, Japan, South Korea and particularly with the superpowers like China and the US. They could become potential destinations and partners for Cambodia’s exports after the EU. It is worth mentioning that the US is considered as the second biggest export market after the EU for Cambodian products.

Therefore, maintaining access to the US market is crucial for the sustainability of Cambodia’s export sector in the contexts of fiercer competition and potential decline in the country’s exports to the EU market.

In terms of investment, Vietnam would become a direct competitor to Cambodia for the EU market. After the conclusion of EV-FTA, more foreign investors are expected to move into Vietnam as they seek a duty-free access to the European market. In contrast, Cambodia could be expected to see a decrease in its foreign direct investment. In addition to EV-FTA, the trade war between the US and China could be a driver to boost more investment in Vietnam due to its export potentials to the EU. Some experts estimated that Vietnam could become the next main destination for companies that plan to leave China because of the increasing labour cost and some obstructions resulting from the trade war between the US and China. Hence, from all aspects considered, Vietnam will see a dramatic influx of foreign investment flowing into the country after the conclusion of this trade deal. This could negatively impact the economy of Cambodia that depends largely on foreign investment to develop and sustain economic growth.

In summary, the free trade agreement between the EU and Vietnam will be successful for both sides. However, it is also worth mentioning that Cambodia will be expected to experience a decrease in exports and investment activities particularly with the EU, once the EV-FTA comes into force. How much decrease in Cambodia’s export and investment will be defined by whether or not the EU will eventually withdraw the EBA from Cambodia. If the EBA is withdrawn, Cambodia will likely experience a sharp decrease in its exports and investment activities with the EU and vice versa. In this case, Cambodia will be motivated to shift its export destinations to other ASEAN countries, China, and the US, just to name a few. Nevertheless, the conclusion of the EV-FTA has signaled that Vietnam could become an economic hub in Indochina. In this respect, Cambodia will have to maintain and uphold a stable and strong relationship with this larger neighbour who currently has the economic advantage. The Cambodian government and business leaders need to find innovative ways to turn challenges into opportunities by positioning Cambodia to benefit from the EV-FTA. Moreover, they have to diversify Cambodia’s export markets and at the same time build a self-sustaining local market. Otherwise, when exports shrink, many jobs may be lost and there may be serious economic and social ramifications.

The views expressed are the author’s own and do not reflect the views of the Asian Vision Institute.