Drapers examines the future of Cambodian garment sourcing following the European Union’s decision to withdraw trade privileges.
Serious and systemic human rights violations have resulted in the European Union suspending Cambodia’s special trade preferences – a body blow for the country’s growing garment-making industry, which is now being exacerbated by the coronavirus outbreak.
Last month, the European Commission partially withdrew tariff preferences granted to Cambodia under the EU’s “Everything But Arms” (EBA) scheme. EBA grants “least developed countries”, such as Ethiopia, Bangladesh and Myanmar, duty- and quota-free access to the European single market.
The withdrawal of tariff preferences from Cambodia will affect selected garment and footwear products, as well as sugar and all “travel goods”. Unresolved criminal cases against trade unionists and the deterioration of democracy in the country were chief among the EU’s concerns. The preferences will be replaced with EU standard tariffs from August.
“The duration, scale and impact of Cambodia’s violations of the rights of political participation and to the freedoms of expression and association left the EU with no other choice than to partially withdraw trade preferences,” said Josep Borrell, high representative for foreign affairs at the European Commission. “The EU will not stand and watch as democracy is eroded, human rights curtailed, and free debate silenced.”
Cambodia has been growing as a garment manufacturing hub since the 1990s, thanks to foreign investment and preferential trade agreements – including EBA. Nike, for example, has 12 factories and employs 37,540 people in Cambodia. VF Corporation sources 11% of its products from Cambodia.
However, concerns about the treatment of workers within the Cambodian clothing industry have been building. There have been reports from the Observer of mass fainting, possibly as a result of high temperatures, hunger or exhaustion, among garment workers in Cambodian factories.
Brands that manufacture in the country, including Nike, Adidas, Levi’s, VF Corporation and Tommy Hilfiger owner PVH wrote an open letter to the Cambodian government last year urging it to improve labour standards or risk trade sanctions.
The Cambodia decision couldn’t hit the country at a more challenging time [amid the impact of coronavirus]
Tristan Haddow, chief executive of clothing supplier Haddow Group
Punishing Cambodia by withdrawing tariff preferences is likely to pose serious problems for its economy. The EU is the country’s largest trading partner, and accounted for 45% of its exports in 2018. Exports to the EU from Cambodia hit €5.4bn (£4.7bn) in 2018 – more than double the €2.5bn (£2.1bn) in 2013. Almost all (95.7%) of those exports entered the EU under the EBA tariff preferences.
Tens of thousands of workers – many of them women who support young families – are likely to lose their jobs as a result, the Garment Manufacturers Association in Cambodia (GMAC) has warned. It estimates the country’s clothing and travel good sectors account for about 75% of Cambodia’s total merchandise exports, and 90% of exports to the EU.
“Summarily pulling the rug from under the feet of hundreds of thousands of Cambodians is not the way to proceed,” the GMAC said in response to the ruling. “The EU’s decision will incentivise buyers to source from countries with far weaker legacies of trade union rights. It will increase poverty in our country and make it more difficult to improve wages and benefits for other workers.”
The impact will be felt more keenly in light of the coronavirus pandemic. Swathes of Cambodia’s garment sector are suspending operations or slowing production because of a lack of raw materials from China, as a result of supply chain disruption caused by the outbreak. Nearly 200 factories face a shortage of raw materials, Cambodia’s Labor Ministry spokesman Heng Sour warned last month.
Leonie Barrie, apparel analyst at GlobalData, warns that Cambodia’s clothing export sector will be “one of the biggest casualties” of the tariff changes: “The move was not unexpected, given that it follows a year-long process by the European Commission, and numerous warnings from fashion brands and retailers over the deteriorating labour and human rights situation in Cambodia,” she explains.
It is likely that retailers will seek to move their production to other countries that still benefit from duty-free access – for example, Bangladesh and Vietnam
Adam Mansell, CEO of the UK Fashion and Textile Association
“Additional cost increases as a result of tariffs could undermine the price competitiveness of Cambodia’s garment exports, reduce the country’s attractiveness as a production base, potentially weaken foreign investment in the sector and even push orders to regional competitors such as Bangladesh. While the EC has clearly tried to strike a balance between commercial interests and ongoing pressure on Cambodian authorities, there’s a lot at stake.”
Adam Mansell, CEO of the UK Fashion and Textile Association (UKFT), says retailers are likely to shift production to other sourcing hubs: “As Cambodia has been temporarily removed from the Generalised Scheme of Preferences [the tariff agreements of which the EBA is part], clothing imports [from the country] will become 12% more expensive on average.
“Given the current state of the high street, it is likely that retailers will seek to move their production to other countries that still benefit from duty-free access – for example, Bangladesh and Vietnam.
“Cambodia’s removal highlights the need for the UK government to publish details of its own Generalised Scheme of Preferences, which will apply from the end of the [Brexit] transition period. It also highlights the need for the UK government to secure trading arrangements with close-to-market centres of manufacturing, such as Turkey.”
Tristan Haddow is chief executive of clothing supplier Haddow Group, which sources robes and pyjamas for some of its clients from Cambodia.
“The Cambodia decision couldn’t hit the country at a more challenging time [amid the impact of coronavirus],” he explains. “The advantage to sourcing from Cambodia is the duty relief, as all the fabrics and trims are still largely in-sourced from China and labour rates are largely comparable [to competing countries.]
“The marginal advantages are largely offset by the cost of doing business in Cambodia and the larger minimum order quantities required. It will be hit hard by the decision.”
If Cambodia had complied with the EU’s requirements, the country would be a very attractive sourcing destination
And indeed, there have already been consequences. High street heavyweight H&M swiftly announced that it will review its sourcing strategy in the country. The retailer has sourced from Cambodia since the 1990s, and currently works with around 50 factories and suppliers based in the country.
In a statement last month, the retailer said: “Due to the lack of adequate initiatives in developing the Cambodian textile industry and a partial withdrawal of the EBA privileges, we will now further evaluate how the EU’s decision will impact our business and production strategy in Cambodia.
“If Cambodia had complied with the EU’s requirements, the country would be a very attractive sourcing destination. Without an EBA, it will be difficult for Cambodia to create the necessary transformation of the textile industry. It will negatively affect future investments, as well as predictability and trust – two crucially important elements of a well-functioning industry.”
However, Laura Moroll, senior manager at consultancy BearingPoint, who specialises in retail, stresses the importance of Cambodia in sourcing: “The question for retailers looking for an alternative is: where else do they go? Cambodia has become a relatively important sourcing player, although not on the same scale as Vietnam or Bangladesh.
“There has been a lot of investment in factories and infrastructure in Cambodia, which makes it a more advanced option when it comes to sourcing capabilities than other countries which are still part of the EBA scheme.”
The onus is on retailers to guarantee labour conditions are of a high standard in their supply chains
Laura Moroll, senior manager at consultancy BearingPoint
She adds that retailers currently sourcing from Cambodia could take the opportunity to streamline their own processes in order to mitigate the cost impact of higher tariffs – as long as they ensure working conditions are up to scratch.
“The onus is on retailers to guarantee labour conditions are of a high standard in their supply chains. Smart retailers who are working in Cambodia could take the opportunity to make their own operations slicker, because there is so much wastage in the product development process – retailers over-sampling or not having a focused idea of what they want. Retailers could look at where they are eroding margins and quite quickly recoup some of the higher tariff costs.”
Cambodia’s garment industry is likely to be heavily hit by the EU’s withdrawal of trade preferences. Price-conscious retailers could look to shift production to other sourcing hubs, such as Vietnam – which agreed a free trade deal with the EU in February – and Bangladesh.
The top priority for those who plan to continue sourcing from Cambodia is ensuring fair and ethical treatment of factory workers – but there could also be opportunity to make working practices more efficient to offset higher tariffs.