European Union tariffs are tailor-made for garments

via CAAI

Friday, 26 November 2010 15:01 Steve Finch

IN many ways the European Union’s recent revision of its own rules on preferential tariffs for least-developed countries is tailor-made for Cambodia’s all-important garment industry.

The new tariff system announced last week offers far greater leeway on country-of-origin status – meaning that countries that import raw materials before adding value, such as Cambodia, can still enjoy significant tax breaks when exporting to the EU.

From next year, added value needs be just 30 percent, down from 70 percent previously, which overly discriminated against countries unable to supply their own raw materials. The Garment Manufacturers Association of Cambodia estimates that the vast majority of garments to the EU will enjoy zero tariffs as a result of the new measures compared to less than half at the moment.

Although Cambodia’s main rivals Vietnam and Bangladesh will also benefit from the change in rules they do not rely so heavily on imported raw materials – Vietnam imports about 70 percent of its materials for garment production, for example, whereas Cambodia sources almost all required fabric from overseas.

The revision of these regulations, which better reflect a world economy that has diversified in terms of sourcing materials, allows Cambodia increased competitive advantage in a market with significant room for growth.

Whereas, Bangladesh sends nearly 60 percent of its total exports to EU countries already, for Cambodia this market represents less than a quarter of all shipments, according to official data for the first nine months of this year.

Greater access to the EU remains of paramount importance for Cambodia given the bloc’s size and scope, which is increasing all the time. Croatia, Macedonia, Montenegro, Albania, Iceland and Serbia are all currently in negotiations to join the EU.

On the downside Cambodia has to make sure the EU’s relaxation of country-of-origin rules does not promote lethargy in terms of developing all-important light industry that can help provide raw materials for the domestic garment sector.

Economic analysts regularly cite the lack of fabric producers in Cambodia as one of the main structural weaknesses within the country’s garment export supply chain.

The EU’s revision of rules on tax preferences reduces the motivation for Cambodia to establish fabric production capacity when the longer term health of the sector is surely reliant on greater self-sufficiency.

The most mature garment exporting nations such as China, India and Taiwan have all developed supporting fabric industries – to follow suit should remain a target for Cambodia.

What the EU rule change does do is exactly what it was supposed to achieve all along: Afford least-developed countries lacking a wide export base the chance to enjoy zero or low tariffs on their goods so that they can build these industries.

It took Europe a long time to get this policy right but from January 1, when the new regulations take effect, Cambodia will be in a prime position to take full advantage.