1. The garment industry matters significantly to Cambodia, both economically, and socially. As of 2019, as much as 70% of Cambodia’s merchandise exports were apparel items. Likewise, around one-third of Cambodia’s manufacturing output currently comes from the garment sector alone. Further, as of 2016, the garment industry in Cambodia employed nearly 928,600 workers (almost 79% were female), an increase of 239% from 2007.
2. Cambodia’s apparel exports have enjoyed steady growth in recent decades, reaching US$7.83 billion in 2018 – a jump of 256% from US$2.2 billion in 2005. Yet, it faces several major challenges:
Due to limited production techniques and capital availability, apparel producers in Cambodia are still mostly engaged in cut-make-trim (CMT) activities, meaning they rely heavily on imported textile raw material and are only able to make a marginal profit based on low-value-added sewing work.
Cambodia’s apparel exports are highly concentrated on the EU and the US markets, which together accounted for 73.4% of the country’s total garment exports in 2019.
Cambodia is facing intense competition in its main apparel export markets—there has been little growth in Cambodia’s share of EU and US apparel imports over the past two decades, remaining as low as 3% as of 2019.
3. Cambodia has benefited significantly from the EU Everything But Arms (EBA) program. Established in 2001, the EBA trade initiative provides least developed countries (LDCs), such as Cambodia, with duty-free and quota-free access to the vast EU market for all products except weapons and ammunition. Like other EBA beneficiary countries, the majority (around 95%) of Cambodia’s apparel exports to the EU currently claim the duty- and quota-free EBA benefits.
4. Out of concerns over Cambodia’s “serious and systematic violations of the human rights principles enshrined in the International Covenant on Civil and Political Rights,” the European Commission on 12 February 2020 formally announced the withdrawal of part of the tariff preferences granted to Cambodia under the EBA program. Starting from 12 August 2020, a select group of Cambodia’s apparel exports to the EU, together with all travel goods, sugar, and some footwear will be subject to the EU’s Most-Favored-Nation (MFN) tariff rat, which were at the rate of 11.5% on average for apparel items in 2019.
5. Even the partial suspension of Cambodia’s EBA eligibility could result in significant and lasting negative impacts on its apparel exports to the EU:
The apparel items directly affected by the EBA suspension accounted for around 15% of the value of Cambodia’s total apparel exports to the EU in 2019. For those apparel categories directly targeted by the EBA suspension, EU fashion brands and retailers may quickly shift sourcing orders from Cambodia to other supplying countries to avoid paying the additional tariffs.
Social responsibility is being given more weight in fashion companies’ sourcing decisions. This means even those apparel items not directly targeted by the EU EBA suspension could face widespread order cancellations as sourcing from Cambodia is deemed to involve higher social compliance risks. In a worse but possible scenario, Cambodia’s apparel exports to the whole world could be under threat as many EU fashion brands and retailers operate globally and adopt a unified ethical standard and code of conduct for apparel sourcing across different markets.
Additionally, the timing cannot be worse: Due to the devastating hit by Covid-19, as of April 2020, Cambodia had reported nearly 130 garment factory closures and more than 100,000 workers laid off. These numbers may increase further as the effect of the pandemic continue to unfold.
EVFTA will eliminate nearly all tariffs (over 99%) between the EU and Vietnam. However, textile and apparel (T&A) are among a few exceptions that will not be able to enjoy duty-free treatment on day one. Specifically:
The EU will eliminate duties with more extended staging periods (up to 7 years) for some sensitive products in the textile apparel and footwear sectors (see the graphs above).
By adopting the fabric-forward rules of origin (or the so-called “double transformation”) for apparel items, EVFTA intends to prevent products from a third party (such as China) from flooding the EU market. Specifically, to benefit from preferential access, garments will need to use fabrics produced in Vietnam or the EU. However, through the EVFTA cumulation provision, fabrics originating in South Korea or other ASEAN countries with which the EU has a free trade agreement in force will be considered as originating in Vietnam. (Note: South Korea is a free trade agreement partner of the EU). While China remains the top textile supplier for Vietnam, the EVFTA apparel-specific rules of origin will provide more incentives for Vietnam to reduce its China dependence and restructure its textile and apparel supply chain. On the other hand, the totality of EU textile fabric exports to Vietnam will be liberalized immediately when the agreement enters into force.
Statistics show that Vietnam was EU’s sixth-largest extra-region apparel supplier in 2019 (after China, Bangladesh, Turkey, India, and Cambodia), accounting for 4.3% in value (or US$4.3 billion). Many of Vietnam’s primary competitors already enjoyed duty-free market access to the EU, such as Turkey (through the Customs Union), Bangladesh, and Cambodia (through the EU Everything But Arms program). EVFTA will provide a level playing field for Vietnam, which is expected to see a continuous robust growth of its apparel exports to the EU and gain additional market shares in the years to come. Meanwhile, not eligible for any EU preferential duty benefit, apparel exports from China are likely to face intensified competition in the EU market after the implementation of EVFTA.
The latest statistics from the Office of Textiles and Apparel (OTEXA) show that the negative impact of COVID-19 on U.S. apparel imports deepened further in April 2020. Specifically:
Unusually but not surprisingly, the value of U.S. apparel imports sharply decreased by 44.5% in April 2020 from a year ago. Between January and April 2020, the value of U.S. apparel imports decreased by 19.6% year over year, which has been much worse than the performance during the 2008-2009 global financial crisis (down 11.8%).
2. As the first country took a hit by COVID-19, China’s apparel exports to the United States continue to deteriorate—its value decreased by a new record of 59.0% in April 2020 compared with a year ago (and -46.4% drop year to date). This result is also worse than the official Chinese statistics, which reported an overall 22% drop in China’s apparel exports in the first four months of 2020).
3. For the second month in a row, Vietnam surpassed China and ranked the top apparel supplier to the U.S. market in April 2020. China’s market shares in the U.S. apparel import market remained as low as 18.2% in April 2020 (was 30% in 2019), although it slightly recovered from only 11% in March 2020. With U.S.-China relations at a new low, there have been more intensified discussions on how to move the entire textile and apparel supply chain out of China and diversify apparel sourcing from the Asia region as a whole. However, as China itself has grown into one of the world’s largest apparel consumption markets, there is little doubt that China will remain a critical player for apparel sourcing, especially for the “China for China” business model.
4. Continuing the trend emerged in recent years, China’s lost market shares have been picked up mostly by other Asian suppliers, particularly Vietnam (19.7% YTD in 2020 vs. 16.2% in 2019) and Bangladesh (9.8% YTD in 2020 vs.7.1% in 2019). However, no clear evidence has suggested that U.S. fashion brands and retailers are giving more apparel sourcing orders to suppliers from the Western Hemisphere. In the first four months of 2020, still only 9.4% of U.S. apparel imports came from CAFTA-DR members (down from 10.3% in 2019) and 4.1% from NAFTA members (down from 4.5% in 2019).
5. As a reflection of weak demand, the unit price of U.S. apparel imports was lower in the first four months of 2020 (price index =102.1) compared with 2019 (price index =104.7). Imports from China have seen the most notable price decrease so far (price index =71.5 YTD in 2020 vs. 83.5 in 2019).