Cambodias largest market for exports is the EU

Cambodia's largest market for exports is the EU

Cambodia's textile and apparel export sector could face both short and long-term risks as a result of the UK leaving the EU, while the country's recent rise to lower-middle income status could add to its challenges, the International Labor Organization (ILO) has warned.

The  sector has grown impressively over the past two decades, starting from a base of US$80m in exports in 1996 to become a $6.8bn export industry in 2015, according to the ILO's latest bulletin. Its development has been driven by heavy dependence on the EU and US markets, with the two regions representing 43% and 29% of total exports respectively.

The importance of the EU market, in particular, has been on the rise, with Cambodia's garment and footwear exports here growing from $645m in 2009 to $2.9bn in 2015, partly due to its duty-free access under the EU's 'Everything But Arms' scheme and the relaxation of the 'Rule of Origin'.

Within the 28 EU member states, the UK is Cambodia's most significant market and is the top buyer of its products from 2010 onwards. Indeed, the UK absorbed nearly one-third of Cambodia's garment and footwear exports to the entire EU market last year.

However, the ILO predicts a number of potentially serious headwinds from Brexit, such as a weaker pound and the potential loss of preferential access for Cambodia.

"The significant depreciation of the pound means that imported products have become more expensive for British consumers," the ILO explains. "This includes goods imported from Cambodia. Cambodia is a highly dollarised economy, with a minimum wage and many other costs denominated in USD. Although Britain has not yet withdrawn from the EU, the depreciation of its exchange rate means that the trading environment has already become more difficult for the Cambodian garment and footwear sector. If this depreciation is long-lasting, this difficulty will endure."

Longer-term, Cambodia could face risks posed by the potential loss of the preferential access it now enjoys under Everything But Arms. The ILO says the UK could maintain that access for Cambodia and other so-called Least Developed Countries, or revert to World Trade Organization (WTO) rules. In the latter case, Cambodia would lose its special access unless the government arranges a new free-trade agreement with the UK.

Additionally, Cambodia's move last year from low to lower-middle income status means the country could lose its Least Developed Country status after a three-year grace period – along with the special access it gets to the rest of the EU, harming its competitiveness, the ILO explains.

"The Cambodian garment and footwear sector has some time to prepare for an environment in which its competitive advantage is reduced through loss of EBA status, but it will need to adapt to this reality over the medium-term."