Brexit fallout / Cambodia’s GDP to suffer ‘highest losses by far’, report states

By: Robin Spiess, Thomas Brent - Posted on: February 1, 2019 | Cambodia

A recent report has outlined the potentially damaging effects that the UK’s withdrawal from the European Union could have on Cambodia and other countries in Southeast Asia

An anti-EU campaigner outside parliament in London Photo: Will Oliver / EPA-EFE

The United Kingdom’s decision to leave the European Union (EU) could push more than 1.7 million people in the world’s least developed countries into poverty, a report by the German Development Institute (DIE) has found.

Several Southeast Asian nations are among the countries that will bear the brunt of this decision, with Cambodia – which relies heavily on preferential trade agreements to gain access to the UK market – expected to be hit hardest by the impending exit.

The report outlines two potential Brexit scenarios: one “soft” and the other “hard”. In the case of the former, the UK would sign an ambitious trade agreement with the EU that would greatly mitigate the negative economic effects of the Brexit decision. In the latter instance, a “hard” Brexit could see the country revert to World Trade Organisation (WTO) rules of trade, which are restrictive enough to cause significant damage to the local economy and to economies dependent on the UK market.

The UK is officially set to leave the EU on 29 March, but UK Prime Minister Theresa May is still battling to negotiate a deal that would satisfy the demands of both Brussels and the British parliament.

Broken promises

In February 2018, the British trade envoy visited Cambodia to once again assure the Kingdom’s minister of foreign affairs that the landmark Brexit decision would not have an impact on the two countries’ trade relationship.

“Mr Vaizey underlined that after the UK’s exit from the EU, the UK government will continue to strengthen bilateral trade with Cambodia,” a ministry spokesman told local reporters following the meeting last year.

But according to the DIE’s 1 February report, titled “How Brexit Affects Least Developed Countries”, Cambodia is likely to see the greatest negative impacts of the Brexit decision.

It’s no surprise that the countries who fall under the scope of the Everything but Arms (EBA) agreement – a policy that provides least developed countries with preferential access to European markets – should be hardest hit by the Brexit decision. These countries have found a profitable trade market in the UK, where their exports are able to enter duty- and quota-free.

In Southeast Asia, there are currently four countries with EBA status: Cambodia, Laos, Myanmar and Timor-Leste. According to the report, all four of these countries are likely to experience a “strong decrease in bilateral exports to the UK” in any instance of Brexit. As trade barriers go up, Southeast Asia’s trade is doubtless going to take a hit.

But no other country will see as great an impact as Cambodia, which has the highest dependence on the UK market. With 7.7% of its total exports currently going straight to the UK, a hard Brexit scenario could see Cambodia’s overall gross domestic product (GDP) fall by a harsh 1%.

Cambodia is especially vulnerable to the effects of Brexit because the Kingdom still relies heavily on its garment and textiles sector, which is likely to see a decline in aggregate exports of nearly 3%. The food trade is also going to be hit, with an aggregate decline of 4.14% across all least developed countries.

And these predictions, which show economic losses worldwide, are actually fairly moderate.

“These are conservative estimates of Brexit’s negative impacts,” the report read. “They do not take into account the additional implications of uncertainty, depreciation of the pound sterling, reduced aid spending, remittances and investments.”

Poverty implications

The report goes on to explain the poverty implications for countries with EBA status, of which Cambodia is highlighted as being one of the two most affected countries alongside Ethiopia.

In the hard Brexit scenario, Cambodia will suffer the largest fall in total exports among the least developed nations, triggering a trickle-down effect that could see Cambodia’s household income fall by up to 0.79% as the nation’s production and trade flag.

Cambodia’s poverty rate was 13.5% in 2014, according to a World Bank report. That number was drastically lower than in 2007, when the rate climbed as high as 47.8%. The World Bank report goes on to warn that while Cambodia had taken great strides in recent years to reduce the number of people living in poverty, up to 4.5 million Cambodians are still “vulnerable to falling back into poverty when exposed to economic or other shocks.” Brexit, with its uncertain global economic impact, could well be that shock.

“Brexit poses an extraordinary challenge to the global community as such high-level economic disintegration is unprecedented,” said the report. “The UK must act to mitigate the adverse effects on economically vulnerable countries.”