Cambodia will face significant challenges to its exports and economic growth following its graduation from least developed country (LDC) status in 2029. The hardest-hit export sectors are expected to be textiles, agriculture and bicycles, according to a policy brief prepared by UNDP and government authorities.

The brief, released on November 11 and titled “Cambodia’s Graduation from LDC Status: Preparedness and Potential Economic and Social Impacts”, stated that tariffs will increase from zero under the EU’s Everything but Arms (EBA) treaty and Generalised System of Preferences Plus (GSP+) to 8.8% under the standard GSP. 

Additionally, tariffs on most exports could rise to 11.5% under most-favoured nation (MFN) rates, with specific increases expected for bicycles (10.1%) and other cycles (14.5%).

There will also be considerable tariff increases for rice under the GSP and MFN schemes, from zero to €175 ($186.07) per tonne and €65 ($69.11) per tonne for broken rice.

“Rice exports are projected to decrease by 13.8% ($57.3 million), bicycles by 18.2% ($243 million) and garments, footwear and travel goods (GFT) by 8.6% ($1.5 billion). Consequently, the gross domestic product (GDP) growth rate would be reduced by 2.0%, equivalent to $750.4 million,” the brief stated.

Using the Dynamic Global Trade Analysis Project (GTAP) model, the brief highlighted potential negative trade-related impacts of LDC graduation in 2030, as compared to 2027 (the base year), forecasting a 2.4% decrease in aggregate exports (both goods and services), equivalent to $771.8 million.

Cambodia will also face reduced access to development cooperation funding, as grants shift to loans with less favourable terms.

While the government and its partners are developing the Smooth Transition Strategy (STS), the brief recommended that the country enhance its competitive environment for investment and implement a well-prepared STS to ensure continued support from preference-granting countries as it adapts to a new trade dynamic.

It noted that the country should also diversify its goods and services by exploring new markets such as Japan, BRICS, Latin America and the Middle East. Engagement with the EU and Canada to maintain existing preferences and facilitate a smoother transition is also advised.

As most of Cambodia’s trade and investment partners transition to net-zero economies, the brief urged the country to seize new opportunities for sustainable trade by manufacturing and exporting low-carbon goods and services, renewable energy technology and deforestation-free products. It also recommended expanding social protections.

The brief highlighted the country’s strengths, including political and macroeconomic stability, liberal trade and investment policies, free trade agreements (FTAs) with regional and bilateral partners, a young workforce, natural resources and high female labour force participation.

However, it stressed that the country still faces several challenges, such as high costs of finance, production, inputs, energy and logistics, a shortage of highly skilled and productive workers, weak institutions and inconsistent law and regulation enforcement.

“Policy measures should focus on improving economy-wide productivity, investing in human capital, reducing capital and energy costs and enhancing transport logistics,” the brief recommends.