Garment, textile and footwear
A vital sector for the Cambodian economy
Cambodia’s garment and footwear industry has become one of the pillars of the Cambodian economy, along with tourism, construction, and agriculture. In 2016, the garment industry accounted for 16 % of the national gross domestic product (GDP). Since the 1990s, exports from the garment, textile and footwear sectors have grown significantly. The growth of this labor-intensive sector has been encouraged by low labor cost, intensive industry (it requires large amounts of manual labor), the signing of international trade agreements and the presence of favorable investment conditions.
In 2018, the garment and footwear sector accounted for 74% of Cambodia’s export earnings. According to Cambodia’s Ministry of Commerce (MOC), by the end of 2018, there were a total of 625 exporting garment and exporting 83 footwear factories in Cambodia in effective operation. As a result, the sector has become the main non-agrarian employer in the country, with over 754,000 workers.
In 2018, according to the National Bank of Cambodia, the total exported value exceeded 10 billion US$. Footwear has also been increasing its share of the export mix since this sector grew more rapidly than garments in recent years. In 2016, Cambodia joined the ranks of the top 10 countries producing footwear in 2016, for the first time. In 2017, with a share of 1.5% of the world’s export value, Cambodia became the 9th largest garment producer in the world. In 2018, the Cambodian export value of garments had a share of 82 percent in the garment, textile, and footwear sector, footwear of 11 percent, and textiles of 7 percent.
Share of export value of the garment and footwear sector in Cambodia
Cambodia’s garment factories are generally based on the principle of cut-make-trim (CMT) model. Under this method of production, the raw materials, machinery, and design of the garments are imported from abroad, while the assembly of the product is carried out in labor-intensive factories in Cambodia. The CMT model implies cutting and sewing material according to the clothing brands’ specifications. In most cases raw materials are imported from China, Hong Kong, Taiwan, Japan, Vietnam, and Korea. Under this mechanism, famous garment and footwear brands have chosen to outsource their production to Cambodia, such as Adidas, H&M, Zara, Puma, and several others.
Cambodia is also benefiting from its strategic location at the center of the East-West corridor of the Greater Mekong Sub-region (GMS), providing the country with access to key regional markets. This has contributed to businesses taking advantage of low-cost manufacturing in Cambodia, as well as hugely boosting demand for Cambodian-made products across Asia.
The garment industry in Cambodia is essentially based on low-skilled, labor-intensive activities. Most of the workers are women with low education from rural areas. Their income from the factory jobs provides financial support to them and their families, contributing greatly to the reduction of the national poverty rate and Cambodia’s emerging economic status as a low-middle income country, according to World Bank classifications. Over 60 percent of Cambodia’s garment factories are located within – or in close proximity to – Phnom Penh. The finished products are transported from the factories in Phnom Penh by truck or train to the seaport of Sihanoukville (the only deep-water port in Cambodia), from where they are shipped to other countries.
The EU and the US continue to be Cambodia’s most important trading partners in the sector, accounting for a combined 69 percent of Cambodia’s sectoral exports. However, new trends indicate Cambodia is having considerable success in reaching new markets. The share of Cambodian exports to Japan increased from 2.7% in 2010 to 9% in 2016; in 2016, Canada was the destination of 8% of Cambodian garment and footwear exports, compared to less than 1% in 2010.
Cambodia garment and footwear export destinations 2000-2018:
Preferential trade agreements boosted the sector
Cambodia has successfully established trade agreements or preferential schemes with importing countries.
- The European Union’s ‘Everything But Arms’ scheme was introduced in 2001 giving Cambodia duty- and quota-free access to the European Union’s single market for all products manufactured in Cambodia except weapons.
- The ASEAN-China Free Trade Area (ACFTA) enables export of goods to China at a very low rate (almost zero percent of import tax) in 2015-2017.
- Canada’s Market Access Initiative for Least Developed Countries came into force in 2003, since then allowing quota-free and duty-free access to the Canadian market to Cambodian products (except dairy, poultry and eggs) ects.
- The ASEAN-Japan Comprehensive Economic Partnership (AJCEP) Agreement was signed in 2008. Japan eliminated 92% of its tariff rates on garments and textiles from ASEAN countries.
- The US has granted Cambodia tariff-free access for travel goods exports to the US under the Generalized System of Preference (GSP) status. Products eligible for the customs tariff removal include suitcases, handbags, wallets, vanities and other similar products.
On February 12th, 2020, the European Commission announced the partial suspension of Cambodia’s preferential trade preferences (EBA) with the EU, citing the Cambodian government’s failure to address ongoing human rights concerns in the country. The withdrawal of these tariff preferences will affect selected garment and footwear products, all travel goods and sugar. The suspension will take effect on 12 August 2020.
Employers in the sector hope to see a boost in exports, thanks to a potential future bilateral trade agreement between the UK and Cambodia, following the former’s exit from the EU. The UK is currently the largest market for the Cambodian garment sector in Europe. However, no official governmental announcements have been made yet on the subject.
The outbreak of COVID-19 and its consequences have affected the sector badly. In June, more than 120 factories suspended their operations in the country. In addition, there are serious concerns over the long-term financial viability of many factories and the annual wage negotiations might be postponed to 2022.