Cambodia clampdown threatens Chinese interests

Western trade sanctions imposed against Prime Minister Hun Sen’s political clampdown would tangentially hit China’s substantial investments in the country

Originally published by Asia Times (October 30, 2017)

 

Hu Xijin, editor-in-chief of the Global Times, claimed in an interview last year that the Chinese state-owned tabloid often says what party officials secretly think. “They can’t speak willfully, but I can,” he told Quartz.

If true, it raises questions about why last week, during the height of the Chinese Communist Party’s Congress, the newspaper ran a story with the headline: “Political turmoil may threaten Cambodia’s hard-won economic achievements.”

Many have speculated that China has backed, if not prompted, Cambodian Prime Minister Hun Sen’s governmet’s recent assault on opposition politicians and civil society, including sections of the independent media.

Kem Sokha, leader of the main opposition Cambodia National Rescue Party (CNRP), was charged with treason on allegations he conspired with the United States to topple Hun Sen’s government. If found guilty he could be jailed for decades.

By the end of the month, the CNRP could be formally dissolved on related charges, a move that would render elections scheduled for July 2018 a democratic sham and raise the prospects of punitive Western sanctions. Hun Sen has said it is a “fact” that the party will be dissolved.

Enter China, currently Cambodia’s largest financial backer in terms of investment, aid and soft loans. As such, Hun Sen is likely less concerned about disciplinary cuts in aid by America or the European Union (EU).

US President Donald Trump’s government, after all, had pledged to deeply cut development aid to several developing countries, including Cambodia, even before recent political tensions mounted.

But the US and EU remain Cambodia’s largest trading partners and possible economic sanctions on the Southeast Asian nation, which have been broached by individual American and European politicians, would also harm Chinese export-oriented firms operating in Cambodia as well as the broad economy.

Sweden became the first country to promise a “rethink” of its relationship with Cambodia if the CNRP is formally dissolved. The EU, the largest importer of Cambodian goods, could follow afterwards, some speculate. In Washington, there are also reports that Congress is considering economic sanctions.

Barbara Lochbihler, vice-chair of the EU’s subcommittee on human rights, told Voice of America that the EU will “very soon” make a decision on possible sanctions. Half of all CNRP politicians are now thought to have fled the country fearing arrest, many heading to Europe where they are known to be busy lobbying EU policymakers.

One extreme, though for now unlikely, possibility is that the EU and US impose blanket sanctions on all trade with Cambodia. A more realistic option is that they reconsider Cambodia’s inclusion in preferential trade schemes, including America’s Generalized System of Preference (GSP), a tariff exemption under which about 80% of Cambodia’s exports enter the US.

Washington is set to review the scheme by the end of the year. Likewise, the EU might reconsider Cambodia’s place on the list of countries which enjoy tariff and tax-free trade with the bloc, currently accounting for 99% of goods from Cambodia.

Exports to the EU are classified under the “Everything but Arms” treaty, but Cambodia’s inclusion in the scheme was already under debate before recent political developments because of alleged state-sponsored forced evictions and land seizures committed in recent years.

A third punitive option, according to Lochbihler, would be to impose “specific targeted sanctions against individuals in the [Cambodian] government.” Although she did not go into more detail, this more feasible response could include trade sanctions on businesses owned by ruling Cambodia People’s Party (CPP) members or with known ties to the party.

Some commentators think the international community will resist sanctions, however, given that Cambodia’s neighbors are also less-than-democratic and sanctions on Phnom Penh might prompt greater demands for sanctions of junta ruled Bangkok and authoritarian Hanoi.

But Cambodia is “low hanging fruit” for the international community, said Sophal Ear, associate professor of diplomacy and world affairs at Occidental College at Los Angeles. Whereas Vietnam is “economically powerful” and Thailand is “too big a market to mess with,” Cambodia is just the “right size and vulnerability,” he added.

“We are concerned about only one thing – that there is a push in the US Congress to impose economic sanctions,” Ouch Borith, second-in-charge at Cambodia’s foreign ministry, said in September. “If the US goes, the US will take the EU with it as well.” He also said that faced with possible sanctions Phnom Penh is now finding “new markets to replace the US and EU.”

Last year Cambodia exported more than US$4 billion worth of goods to the EU, and US$2.1 billion to the US. But Cambodian exports to Japan, up 45% from the previous year, were only worth US$827 million, while trade with China, up 50% year on year, was worth US$609 million. Exports to neighboring Thailand, in comparison, were worth US$937 million.

Possible sanctions will do little to directly affect Cambodia’s tourism, energy or mining industries, all of which enjoy considerable Chinese investment. However, they would likely be ruinous to its export industries, in which Chinese firms are also heavily invested. Between 1994 and 2016 Chinese private and public capital investment in Cambodian industries was worth almost US$15 billion, according to official estimates.

Garment manufacturing employs more than 700,000 people in Cambodia and is far and away the country’s largest export industry. The EU imported US$3.8 billion worth of garment goods produced in Cambodia last year, up 14% from 2015.

According to the Garment Manufacturers Association in Cambodia, an industry body, of the ten biggest employers in the industry three are Hong Kong-owned while the majority are Taiwanese-owned.

Indeed, many Chinese owners have moved operations to Cambodia in recent years due to lower labor costs and more favorable export conditions. However, the same business environment is also found in Vietnam and Myanmar, and Chinese investors could easily uproot from Cambodia, especially if US and EU tariff-free export conditions are rescinded.

There are also about 30 Chinese investment projects in Cambodian agriculture, with seven more directly involved in rice production, according to Chheang Vannarith, a visiting fellow at Singapore’s Institute of Southeast Asian Studies’ Yusof Ishak Institute. Last year the EU imported almost US$220 million worth of agricultural products from Cambodia.

Shortly after Kem Sokha’s arrest in September, Chinese foreign ministry spokesman Geng Shuang said Beijing “supports the Cambodian government’s efforts to protect national security and stability.” That stability, however, could be called into question by Chinese policymakers if the EU and US impose damaging trade sanctions.

Nor is it clear that the clampdown will not eventually stir social unrest, particularly if and when Hun Sen’s government moves to dissolve the CNRP. “[Prime Minister Hun Sen] needs to realize that what he has been doing and will be doing more will further radicalize Cambodians who are reluctant to be tamed nowadays,” a recent Bangkok Post editorial said.

To be sure, Phnom Penh has been geopolitically useful for China in the past, including as a willing pawn inside the Association of Southeast Asian Nations (Asean). But as Beijing curries favor with various Southeast Asian states, including the Philippines and Malaysia, Cambodia is arguably less important to China than previously.

And if Western sanctions are handed down, Cambodia would be less important economically as well.

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