Industry insiders say that the looming Vietnam-EU free trade agreement, which gives Cambodia’s neighbour duty-free exports to the European market, may not have an immediate impact, but will potentially eat into similar advantages the Kingdom enjoys in the longer-term.

Yesterday’s in-principle agreement, which still needs to be passed by the EU Council and Parliament, will, over time, eliminate 99 per cent of tariffs for selected Vietnamese sectors, including in the garment and rice industries – mainstays of Cambodia’s economy.

Ken Loo, secretary-general at the Garment Manufacturer Association of Cambodia (GMAC), said the new free trade agreement (FTA) was sure to impact Cambodia’s garment sector, however, he said it would take time.

He said that this impact will not be in the short-term, given the experience of the Singapore-EU FTA, which after being agreed to in 2012 is yet to be ratified by the EU Parliament.

“The duty preference for Vietnam is also to be phased in over a period of seven years. They will enjoy the full duty-free exports only in seven years [after ratification],” Loo said.

Loo said that while Cambodian garment exporters can source fabric from anywhere, the Vietnamese agreement stipulates that garment exports to the EU only use Vietnam-made fabric.

“I think for [Vietnamese] items that can make use of Vietnam fabric the impact will be huge,” he added.

Given the seven year period for these changes to take effect, Loo said relevant stakeholders – the government, exporters and trade unions – need to work to improve the sector’s price competitiveness and productivity to maintain export levels to the EU.

Piet Holten, president of Pactics Cambodia, a manufacturer of fabric cases for sunglasses in Siem Reap, said Vietnam’s existing advantage of having locally made raw materials will be amplified given the dearth of local supply in Cambodia.

He added that increasing competitiveness with Vietnam on the logistical front would require a review of customs administrative fees and the export management fee charged by the Ministry of Commerce, which, he said, are nullifying the benefits of not having to pay duty.

“The lack of duty should offset these costs, but these costs are so high it doesn’t,” he added.

Cambodia currently exports duty-free to the EU under the Everything But Arms scheme, which is accorded to least-developed countries.

Exports for the first three months of this year, according to the International Labour Organizations bulletin on Cambodia, reported $1.5 billion worth of garments and footwear exports.

For 2014, the bulletin shows that the EU became the major garment export destination for the Kingdom, rising to 42 per cent of total exports, with the US dropping 6 per cent to 34 per cent.

Srey Chanthy, an independent economic analyst, said yesterday’s FTA will have a negative impacts across all sectors that Cambodia currently competes with Vietnam.

“If you look at the Vietnamese export sector and what is produced, such as seafood and so on, they have been very good at [producing] those things, as well as garments,” he said.

Meanwhile, in the rice sector, which sent 60 per cent of its shipments to the EU last year, Cambodian exporters are nervous of losing their already-thin margins to one of the world largest exporters of rice.

Amru Rice CEO Song Saran said, given these new circumstances, the sector will need to address a wide range of challenges, such high cost of fertiliser, lowering energy costs for millers and improving financing for warehousing facilities, to regain lost ground.

“The deal between Vietnam and EU will impact the Cambodian rice industry, but it still gives Cambodia the time to address these challenges on competitiveness.”