US tariffs: Cambodia comes out ahead, but its dependence on Chinese textiles threatens the windfall

Since July 24, a new US tariff regime has governed trade with 60 economies, from Brazil to Vietnam to the European Union. For Cambodia, the verdict is almost unexpectedly good: Phnom Penh avoids the heaviest rate and finds itself, for once, better treated than its main regional textile rivals. But the tariff relief does not dissolve a far older structural problem — the kingdom's near-total dependence on Chinese fabric.

Workers at a garment factory

A new tariff round, a different legal basis

The regime taking effect this month is not simply an extension of the surcharges already in place. After the US Supreme Court struck down, in February, the so-called "reciprocal" tariffs imposed under emergency economic powers, the Trump administration had to change legal footing. It turned to Section 301 of the Trade Act of 1974 — a tool historically reserved for practices deemed unfair — this time targeting forced labour in supply chains. Sixty investigations were opened in March, leading to a final USTR determination on July 23 that took effect the following day, replacing the temporary 10% Section 122 surcharge imposed in January, which had reached the end of its legal shelf life.

The new schedule sets two rates: 10% for countries judged to have made progress on banning imports linked to forced labour, and 12.5% for the rest. Cambodia falls into the first group, alongside Bangladesh, Indonesia, Malaysia, Canada and the United Kingdom — a ranking secured through a bilateral reciprocal trade agreement with Washington. Vietnam, Thailand, the Philippines, Singapore and China, by contrast, face the higher 12.5% rate, having neither adopted legislation Washington deems sufficient nor signed an equivalent agreement.

A relative advantage, not a gift

For a country where nearly half of export earnings depend on the garment, footwear and travel goods sector — worth $15.7 billion in 2025, up 15.8% year-on-year according to Cambodia's Ministry of Labour — the 2.5-point gap with Vietnam and Thailand is not trivial. The United States absorbed roughly $4 billion of Cambodian exports in 2025, making it the kingdom's second-largest market after the European Union. A tariff differential of this size, layered onto margins already squeezed by years of price competition among Asian suppliers, can be enough to redirect orders.

Washington has also exempted a list of Cambodian products not manufactured domestically, including cashews, along with several hundred additional tariff lines across all 60 covered economies following the public comment period. But this relative leniency should not be read as a political endorsement: several trade law firms note that the new duties, born of an unprecedented legal workaround, carry no expiration date — unlike the Section 122 surcharge they replace, which was statutorily capped in time. Cambodia is therefore now negotiating with a more permanent regime, and one potentially harder to overturn through legal challenge.

The textile mechanism: a carrot tied to American cotton

The most consequential element for the garment industry is not the base rate but an instrument still on the drawing board: a tariff-rate quota (TRQ) reserved for four countries — Bangladesh, Cambodia, Indonesia and Malaysia. The principle, set out in a presidential memorandum attached to the USTR decision, is simple on paper: the more a country buys American cotton and textiles, the more finished garments and textiles it will be allowed to ship to the United States free of the new Section 301 duty. The stated aim is to steer supply chains away from inputs seen as most exposed to forced-labour risk — a barely veiled reference to Xinjiang cotton.

The mechanism is not yet operational, however. USTR still has to determine its "feasibility" before publishing a separate notice setting its terms and launch date; in the meantime, the flat 10% rate applies to all Cambodian textile exports. Once activated, its initial duration would be three years.

The Achilles' heel: a cut-and-sew industry with no upstream base

This is where Cambodia's position is weakest. The kingdom's textile sector has been built, since the 1990s, on a cut-make-trim model: factories assemble garments from almost entirely imported fabric, without any real domestic spinning or weaving capacity. That dependence has not eased over time — it has deepened. Cambodian imports of fabric and yarn rose again in 2025, with China remaining by far the top supplier, well ahead of Taiwan and Hong Kong, according to sourcing data compiled by Fibre2Fashion.

Building a "Made in USA" cotton and textile supply chain at the scale needed to benefit from the future TRQ requires an investment push Cambodia has not yet made — unlike competitors such as Bangladesh or Indonesia, which already have domestic spinning capacity and can pivot more quickly toward American inputs. Without that shift, the kingdom risks a double penalty: unable to qualify its exports for the preferential quota, while still exposed to intensifying competition if Hanoi and Bangkok, despite their 12.5% rate, manage to capture more US orders on the strength of more integrated supply chains.

A window to seize before the next round

The Cambodian equation is further complicated by another Washington process under way: a separate Section 301 investigation into structural manufacturing overcapacity across sixteen economies, Cambodia included. Its findings, expected by year-end, could translate into additional duties layered — not substituted — on top of the current regime.

The tariff advantage Phnom Penh currently enjoys is thus less an achievement than a conditional reprieve. Turning it into a durable competitive edge will require Cambodia to convince investors to build the textile-processing capacity it structurally lacks today — and to do so before its rivals close their own regulatory gap with Washington.