The revival of the “America First” strategy of Trump 2.0 has brought the topic of trade war back into the forefront of international discourse. As his administration entered its second term, economic nationalism has gained more prominence, reshaping US trade policies and increasing tensions with key allies and trading partners. The central belief driving this shift is the idea that trade deficits pose a national security risk. This belief has led Washington to impose broad tariffs on the EU, Canada, Mexic, and especially China. In response, these countries have retaliated quickly, while some have proposed negotiations for a trade deal, further testing the already fragile international trade mechanisms.

At the start of March, President Trump ordered another round of tariff increases, including raising tariffs on Chinese goods from 10% to 20% and imposing a 25% tariff on imports from Mexico and Canada. Not to mention, it goes to its closest friend as well: the EU is treated the same way. The goal of these policies is to decrease America's reliance on its trading partners, particularly China. However, the forces of globalisation make complete decoupling unrealistic, if not impossible. Instead, multinational companies are not merely reshuffling supply chains; they are incentivising the relocation of operations to more restricted locations.

Take Cambodia, for example. Despite its small market size, for years, the nation has been a strategic base for businesses seeking to avoid trade barriers while still penetrating global markets. The "China+1" strategy, whereby companies diversify their manufacturing away from China but maintain a presence in its massive economy, has gained popularity from the effect of Trump 1.0. Cambodia was seen as gaining benefits from it as well.

But this shift has not gone unnoticed. American policymakers, concerned about trade evasion, are now scrutinising emerging Asian economies with growing export surpluses. Now, things have become more complex. Earlier this month, reciprocal tariffs of 11% to 50% were imposed on 57 countries, effective April 9, leading to a market crash in the US. Later, the tariffs were suspended for 90 days for all those countries, with a minimum of 10% and 25% sector-specific tariffs in place, excluding China, at 145%.

The specter of the Trump administration tariffs, potentially reaching 49% on Cambodian goods, looms large. While these tariffs are paused until July, ongoing negotiations between Cambodian officials and the US Trade Representative have yet to yield a breakthrough. Since Cambodia’s garment sector relies heavily on Chinese inputs (fabric and cotton) that are assembled in Cambodian factories, the tariffs effectively penalise Cambodia for being part of China’s extended supply chain.

Cambodia now finds itself at a critical crossroad. The imposition of US tariffs introduces a new layer of complexity. This raises an important question: Can Cambodia leverage these circumstances to emerge as a manufacturing powerhouse in its own right, or will it simply serve as a conduit for Chinese companies to bypass trade restrictions?

As tensions in the trade war escalate, Cambodia's role in the emerging global supply chain will be scrutinised. Will the country seize this opportunity to solidify its industrial base, or will it remain a temporary pawn in the geopolitical trade war?

Cambodia in the China+1 shift: Land of opportunity or false hope?

For decades, Cambodia has been a destination for low-cost labour, particularly in the textile sector, which accounts for about 705 of the country's total exports. While Vietnam has leveraged global trade shifts to diversify into electronics and high-value manufacturing, Cambodia has only seen only modest growth, primarily in equipment production. As the current trade war intensifies and tariffs force supply chains to relocate abroad, Cambodia is unlikely to see significant benefits or major shifts in its economic landscape.

Despite its narrow domestic market, Cambodia continues to attract foreign investment. In just two months, the Council for the Development of Cambodia approved 104 projects worth a total of $1.069 billion, spanning sectors such as electronics, stee, and textiles. A large portion of these investments comes from Chinese firms seeking to bypass tariffs by establishing manufacturing bases in Cambodia. Moreover, the Cambodia-China Free Trade Agreement (CCFTA) has cemented these relations by removing over 97% of tariffs on Cambodian exports to China and 90% on Chinese imports. This enhanced the trade relationship is expected to reach $15 billion by 2025. However, the trade balance heavily favors China. In December 2024, China posted a $1.28 billion trade surplus, exporting $1.53 billion worth of commodities to Cambodia and importing only $247 million. This underscores Cambodia’s weak bargaining position.

However , unlike the US, China is regarded as a reliable trading partner, and President Xi Jinping’s recent further cemented Cambodia’s position as China’s closest ally, significantly enhancing their economic and strategic cooperation in the new era. Notably, President Xi’s tour to Southeast Asia underscores the growing risk of US isolation amid China’s ascent as a global trade leader. This case shows how the equal treatment of friends and foes by the US compels nations to reconsider their trading partner and look for more stable, diversified partners.

Consequently, in addition to Chinese firms, Western and Japanese firms are possibly looking for new markets in which to base themselves and keen to expand their supply chains. This could potentially pave the way for Cambodia to attract more investment by offering incentives such as tax holidays, 100% foreign ownership and relief from import duties in its Special Economic Zones (SEZs), along with access to a young and growing labour force.

However, investors from countries with a stable level of rule of law remain cautious. Why? Cambodia's business environment still faces structural challenges. First, there are concerns over the rule of law and governance. The Kingdom ranks 141st out of 142nd countries in terms of governance, a major red flag for investors. Second, the cost of energy is one of the highest in ASEAN, undermining Cambodia’s competitiveness. Third, there is a shortage of skilled labour. While the workforce is young, it lacks proficiency in crucial areas like supply chain management and sophisticated manufacturing. According to data from Eurocham in 2024, 74% of companies operating in Cambodia struggled to find qualified staff, with 60% of respondents citing area-specific labour shortage and overall skills gaps. Lastly, while infrastructure is improving, transport and logistics links remain underdeveloped compared to regional competitors. Given these challenges, Cambodia may not be the ideal choice for companies that prioritise stability, efficiency and long-term certainty.

The Vietnameselesson: Scaling the value chain

In terms of manufacturing development, Vietnam serves as a valuable example for Cambodia in attracting high-quality investment. Once known for low-cost, low-quality production, Vietnam made a deliberate effort to leverage global trade trends to revamp its industries, demonstrating that economic upgrading is possible with the right policies and investments. By focusing on industrial upgrading, human capital development and strategic policy design, Vietnam successfully advanced its value chain and is now a regional manufacturing powerhouse, producing everything from machinery to electronics.

Cambodia also has potential, but realising it will take time and focused effort. The country currently has a relatively high Product Complexity Index (PCI) for its exports, including electric motors, semiconductor components and plastic-products. However, these industries remain undeveloped. To avoid falling into the trap of low-skill, low-wage manufacturing, it must prioritise investment in education, vocational training, and research and development (R&D).

Policy recommendations

For Cambodia to become a true manufacturing hub, it needs a rebranding campaign. It must position itself as more than just a low-cost labour market. Rebuilding its international reputation is imperative, starting with enhancing the rule of law to foster investor confidence. Furthermore, expanding infrastructure and improving energy efficiency are crucial. Lowering electricity costs and improving logistics networks will make Cambodia more competitive by reducing lead times and enabling more cost-effective production.

Developing technical training programmes and fostering university collaboration will help build the talent pool required for high-value production and digital economy integration. Additionally, Cambodia must diversify its trade partnerships. The country’s overreliance on traditional partners will not guarantee growth. To secure sustainable industry development, Cambodia should leverage its ties with ASEAN countries and expand partnerships through the RCEP agreements, moving beyond its current trade partners.

Conclusion

Cambodia stands at a crossroads, with the opportunity to become a manufacturing hub within reach—if it takes the necessary steps. The “China+1” strategy offers a promising path forward, especially as foreign investment, particularly from Chinese firms, seeks alternatives to circumvent trade restrictions. However, Cambodia's journey to manufacturing excellence will not be easy and will require addressing several key challenges.

There is, nevertheless, cause for optimism. By learning from Vietnam’s economic evolution and focusing on strategic sectors such as education, infrastructure and diversified trade relationships, Cambodia can move forward. With the right vision, targeted investments and commitment to building a quality skilled workforce, Cambodia can reposition itself as a dynamic player in the global supply chain.

Sao Sovan Panha is a young fellow of the Adenauer Young Scholars for Excellence (AYSE), a public policy training programme co-organised by the Konrad Adenauer Stiftung (KAS) Cambodia and the Institute for International Studies and Public Policy of the Royal University of Phnom Penh (RUPP). The views and opinions expressed are her own.