Thailand will lose its beneficial tax treatment on exports to the European Union next year, and Cambodia’s manufacturing sector could be set to capitalise.

Following three consecutive years of upper-middle income status as defined by the World Bank, Thailand will on January 1 lose its Generalised System of Preferences (GSP) privileges, which reduce or entirely remove duties on the export of selected products to EU member states.

As some countries migrate to higher income levels and lose their trade preferences, those that continue to receive duty-free access to the EU, such as Cambodia, are expected to become more attractive investment destinations.

“Reducing GSP to fewer beneficiaries has resulted in a further improvement of the competitive position of Least Developed Countries on the EU market and provided for additional opportunities for both exports of products already produced, and for the diversification in to new products,” Alain Vandersmissen, minister-counselor of the EU Delegation to the Kingdom of Cambodia, said in an email yesterday.

As an example, Vandersmissen pointed to Cambodia’s garment and footwear industry, for which trade benefits helped achieve a record €2.4 billion ($3.2 billion) in exports to the EU in 2013, a 30 per cent increase on the previous year.

Hiroshi Suzuki, chief economist at the Business Research Institute for Cambodia, said Thailand’s change of status will accelerate a regional trend already under way.

“Recently, many companies are seeking a next destination for investment. Especially companies in countries such as China, Thailand and Vietnam – which are facing a drastic increase in costs, including labour costs – are very keen to shift their production bases to new emerging countries, including Cambodia,” he said.

Observers say that Cambodia’s economy could stand to benefit most from Thailand losing its preferential status in export areas such as garments and auto parts.

Chartchai Singhadeja, executive director of the Thai Garment Manufacturers Association (TGMA), told the Post that the loss of GSP privileges meant Thai garment producers were looking to expand regionally to locations where EU tax benefits were still available.

“We have already begun to move, and in the future it may be much more than this,” Chartchai said.

Labour shortages and buyers seeking to diversify production in multiple countries were additional reasons for at least 22 Thai garment factories relocating in recent years, he went on to say.

TGMA has asked for an extension on the apparel-related GSPs, but the EU is waiting for a democratically elected Thai government to be installed before considering the request, Chartchai said.

Ken Loo, secretary-general of the Garment Manufacturers Association in Cambodia, said that Thailand’s GSP loss was more likely to impact the Kingdom’s higher-value exports, such as auto parts.

“[Thai garment makers] weren’t really enjoying many benefits for exports going out to the EU, so Cambodia had the advantage over Thailand from the beginning,” he said, referring to the benefits Cambodia receives under the Everything But Arms agreement.

“So this maybe won’t impact the apparel industry too much, but it will impact other industries,” he said.

At the Phnom Penh Special Economic Zone, however, where several Japanese manufactures are leading the way in Cambodia’s higher-value manufacturing sector, including auto parts, the removal of Thailand’s GSP status has not raised any eyebrows.

The zone’s CEO, Hiroshi Uematsu, said that most Japanese manufacturers based in Thailand were exporting auto parts throughout Asia and thus did not expect any sudden changes as a result of the rule change, which will only affect EU-bound exports.

“So far, no one from auto parts industries talked about this to me,” he said.

Independent economist Srey Chanty also did not expect the move to trigger any immediate investment in value-added manufacturing, saying the government was not prepared to respond quickly to changes in the investment landscape.

“Cambodia has to have implementable, actionable industrial strategy, to take advantage of these things – and at the moment we don’t have this kind of strategy,” he said.