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Cambodia & Economy and more: The Trump effect in the Kingdom, economy, diplomacy, cooperation

Writer's picture: Christophe GargiuloChristophe Gargiulo

At first glance, the Cambodian manufacturing sector should benefit from the restrictive American measures against China, but it's not that simple and certainly not guaranteed, just like American diplomacy and aid towards Southeast Asia and Cambodia, which may undergo some changes.

Donald Trump in a textile factory. AI Photo
Donald Trump in a textile factory. AI Photo

Economic risks

During a webinar organized by the Institute of Directors of Cambodia early last week, Stephen Higgins, co-founder of the Phnom Penh-based investment and consulting firm Mekong Strategic Capital, stated that he expected economic benefits for Cambodia related to the American hardening against China, also mentioning Vietnam. The expert mentioned that Trump had already initiated a process targeting Vietnam as a "currency manipulator" towards the end of his first term.

Following his swearing-in upon January 20, 2025, and now in his second term, Trump's emphasis on China will result in a heightened relocation of manufacturing industries to Cambodia," he stated.

At the same time, Mr. Higgins mentioned the possibility of American crackdowns on companies that move their production from China to other countries. Another possibility is that Chinese inputs - in clothing manufacturing - could be subject to U.S. tariffs. Which would likely result in heavy administrative burdens for export procedures. Nearly 90% of garment factories in Cambodia are owned by Chinese investors or companies, and the clothing is primarily exported to Western countries, the European Union (EU), and the United States. It is therefore not impossible (probable?) that the USA wants to impose tariffs on Chinese products manufactured in third countries. Cambodia could thus unfortunately be affected, as these numerous Chinese companies that have transferred their activities to Cambodia have given a significant boost to the country's economy for many years. The textile and garment sector in Cambodia has experienced remarkable growth in its export market since the 1990s. This dynamism is largely attributed to a significant competitive advantage that Cambodia has in this sector. Despite the increase in wages, the country remains quite competitive in terms of labor costs, also thanks to the local benefits and exemptions offered by the investment law.

This sector occupies a central place in the Cambodian economy. It is the most important source of export revenue and accounts for more than 40% of the country's total merchandise exports

Moreover, it constitutes an important component of Cambodia's GDP. The volume of industrial exports has continued to grow over the years, with garment companies becoming the main non-agricultural employers, providing jobs to more than 750,000 workers in over 600 factories.

Nevertheless, the industry is facing challenges in terms of high energy costs and low productivity, which somewhat affects its competitiveness within the region. Moreover, Cambodia was one of the largest beneficiaries of the Generalized System of Preferences (GSP) - which allowed for the elimination of tariffs on thousands of products - and which ended in December 2020 due to the U.S. Congress's postponement of the law's revalidation.

The Kingdom is therefore currently taxed according to the rates of the most favored nation (MFN) status, and clothing products benefiting from this status are taxed at rates ranging from 12% to 33%. A change for which Cambodian industry professionals have repeatedly expressed their concern and called on the American Congress to reconsider their (lack of) decision. With the NPF status, goods exported from Cambodia to the United States are taxed at 10 to 30%, and this change occurred when Cambodia no longer benefited from the European Union's "Everything But Arms" preferential trade system.

However, contrary to what has been published and republished for partisan reasons, the withdrawal of the TSA did not affect all Cambodian textile items, only a part, and not the most interesting in terms of export volumes and added value.

The garment companies are the main non-agricultural employers, providing jobs to over 750,000 workers in more than 600 factories
The garment companies are the main non-agricultural employers, providing jobs to over 750,000 workers in more than 600 factories

These trade preferences have largely boosted Cambodian exports to the United States, and it is likely that new, higher tariffs on Cambodian textiles and travel goods would have quite a negative effect, even though the sector has largely demonstrated its resilience to the "shocks" from the end of preferential measures and those related to the Covid-19 pandemic.

Chinese investments in Cambodia also extend to solar panels and the electronics industry. Solar panel exports from Cambodia to the United States increased dramatically in 2023 after the United States extended the high Trump-era tariffs on Chinese solar panel exports. Chinese investors attempted to redirect their exports to the United States via Cambodia after the Biden administration announced tariff exemptions on solar panels from Southeast Asia (from Cambodia, Malaysia, Thailand, and Vietnam) in 2022.

More Chinese investors were encouraged to invest in the solar panel industry in Cambodia. In 2022, the Chinese company L-Q New Energy Co Ltd began investing approximately 84 million dollars in the manufacturing of solar panels in Cambodia for export, primarily to the United States.

Overall, President Trump has threatened to impose tariffs of 60% on products exported by China and tariffs of 10 to 20% on all countries. The goal is to protect the American economy, as he believes that the economic development of China and other countries is "to the detriment of the American economy."

Whether President Trump will be inclined to adopt a less or more protectionist attitude towards Cambodia and ASEAN countries remains an unknown, as the new American leader is known for his brutal decisions. However, the USA's trade position is likely to remain closely connected to diplomatic relations involving the American giant's defense strategy and its desire to counter Chinese influence in this region, the ASEAN, which has become the 5th largest economy in the world.

Complicated diplomacy

It is no secret that the relations between Cambodia and the United States have had a chaotic historical journey. Ranging from military support for Long Nol's forces in the 1970s to the intensive bombing of Cambodian provinces during the Vietnam War to an ambiguous relationship after the fall of the Khmer Rouge regime.

Relations significantly improved after 1991, with the United States promoting economic ties and granting Cambodia those trade preferences that catalyzed a period of rapid growth. Diplomatic relations were sometimes rocky due to issues related to the war debt demanded by the USA, not to mention American irritation over the Ream naval base, which led to some sanctions targeting Cambodian businessmen, and the recurring issues of human rights, and finally, according to some sensationalist media, due to the issue of cybercrime that had "reached alarming proportions" in the country. The relations between ASEAN and the United States during the first Trump administration (2017-2021) were not very smooth. Donald Trump withdrew from the Trans-Pacific Partnership shortly after taking office, and the president did not show any direct personal interest in exchanges with ASEAN, largely disappointing the region's expectations by hardly participating in any major summit during his term and not appointing any ambassador to ASEAN.

ASEAN

And, while the American president remained equally indifferent to the continuation of bilateral relations with ASEAN members, including Cambodia, he nonetheless negotiated agreements to demand the correction of trade imbalances, including with the smallest economies in the bloc. Security agreements could certainly be up for negotiation.

The continuation of American military engagement is not guaranteed with certain countries in the bloc, despite the fact that Washington will undoubtedly adopt a tougher stance towards Beijing and perhaps towards its unconditional allies; and even if diplomatic language calls for more cooperation between the region and Washington, as in the case of Cambodia, which a few weeks ago requested "the continuation and development of diplomatic, economic, and cooperation relations with the USA," nothing is truly straightforward in this multi-faceted configuration.

Not entirely aligned

There are other components in this complicated situation: it is unlikely that ASEAN as a whole will fully align with China. Countries like Laos, Cambodia, and Myanmar are already inclined to draw closer, and this trend will likely intensify, but there are also coastal states that have serious territorial disputes with China regarding the South China Sea. There is therefore no real consensus within the community of countries on the appropriateness of a strong Chinese presence in the region, at least for military and strategic issues.

The South China Sea, a subject of disputes for several years
The South China Sea, a subject of disputes for several years

For some ASEAN countries, the military engagement of the United States is still considered necessary, and "investments from American companies will remain essential for the economic development of the region."

Having clearly sidestepped the issue regarding ASEAN - probably preferring to tackle the "big issues" that more clearly illustrate his desire to reaffirm the USA as the world's leading power - Donald Trump tasked US Secretary of State Marco Rubio with addressing US policy towards the bloc and Asia. The latter warned, from his first day of work, against coercive actions in this region, in a veiled but clear warning to China about its actions in the South China Sea.

Reassuring statements

ERegarding the relations between the United States and ASEAN. Mr. Rubio made it clear that he was familiar with ASEAN and that "flexibility was needed in relations with the countries of the region." Remarks likely to calm growing concerns about a potential increase in tariffs.

Mr. Rubio also emphasized a "pragmatic" and "realistic" approach of the United States towards ASEAN. It should be noted that both Democrats and Republicans are in favor of closer cooperation with ASEAN, which could, from certain angles, seem contradictory to Trump's statements and his explicit threats towards China and its allies.

The question - very complicated - is therefore whether the American approach towards the Southeast Asian countries will remain the one that has prevailed since the 90s, namely extensive cooperation, trade agreements, and diplomatic ties, sometimes mixed with a few well-publicized and well-reported clashes, some rapprochements, brief separations, but ultimately with very little impact on the continuity of a continuous and still strong relationship with the USA. This option might be the ideal situation for Cambodia and could certainly open the door to initiatives allowing several ASEAN states to find American support as an alternative to China in their economic growth.

The other option would be for the Trump administration to adopt a more individual approach by negotiating directly with each member state, not impossible, but unlikely as it risks complicating the situation and creating additional tensions. In this case, Cambodia, as China's "iron friend," would not be in the best position. However, in his recent flip-flops, the President has shown that he has little regard for communities of countries by refusing to deal with European authorities, but Europe is not Asia...

Another alternative would be a hardening - a global distancing from the countries of the community, also unlikely because Trump needs strategic allies and trade partners to counter China's influence, he claims it often enough.

Cooperation and NGOs

By decree on January 20, the new American president ordered the temporary suspension of all foreign aid from the United States for 90 days. During this suspension, no new funding will be committed or distributed. Approved and ongoing programs will not be affected, and those that have been approved but have not started are on hold. According to the decree, "it is a matter of conducting a comprehensive review of the effectiveness of each program and its alignment with the priorities of U.S. foreign policy." The document specifies:

“Foreign aid and the American bureaucracy are misaligned with American interests and, in many cases, contradict American values. These programs destabilize world peace by promoting ideas in foreign countries that conflict with internal and international harmony.”

The initiative is clear, the president wants to clean up the development aid policy, and it's a real kick in the anthill that is causing quite a bit of concern in the NGO sector. A major concern is the fate of gender-inclusive programs in USAID-funded sectors regarding federal policies on diversity, equity, inclusion, and acceptability.

On the same day, Trump signed another executive order dismantling all federal initiatives and programs from these programs, placing the concerned staff on immediate paid leave. Not surprisingly, this follows Trump's statements on diversity and his desire that only "biological genders" be considered. In this perspective, it is therefore likely that inclusion programs and support for sexual minorities will be canceled or deprived of all funding.

But, in Cambodia, development aid has been substantial, around three billion dollars, and USAID programs cover several sectors: agriculture, food security, health, democracy, human rights, environment and governance, as well as support for economic growth. Development aid is a vast subject that has sparked quite a bit of criticism, particularly regarding large NGOs operating in so-called sensitive areas such as human rights, democracy, or governance. In Cambodia, over the years, numerous rather virulent reports from these organizations have been widely criticized by the royal government and considered as attempts at interference. Another criticism: the lifestyle of NGOs, often perceived as indecent and considered incompatible with the spirit of the missions entrusted to them.

Many suggest that NGOs have found in Cambodia the ideal country to exert their influence while living like princes. Knowing to what extent the "housekeeping" desired by Trump will be able to distinguish between abusive NGOs and those that are effective - there are probably a few - knowing what the concrete reactions of these NGOs will be and their possibilities for protest and/or lobbying, we will have to wait three months, but there will be drastic changes if Trump maintains his position and some "initiatives" will have to seek funding elsewhere.

Anticipating the unpredictable

The direct effect on Cambodia of the announcements clearly stating the new president's intentions is not yet being felt, with the exception of American aid. Trump is not stingy with decisive, brutal, often unpredictable decisions, but sometimes contradictory.

One thing is clear, he does not hide his ambition to first defend America's interests and strengthen its hegemony - America First, right? - It is therefore very difficult to precisely predict his intentions and decisions regarding ASEAN and Cambodia, but changes are certainly to be expected.


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