On July 7, Cambodia received a significant communication from the administration of U.S. President Donald Trump regarding trade negotiations. The U.S. set an urgent deadline for August 1 to renegotiate trade terms, a move poised to impact Cambodia’s economy deeply. While a recently revealed duty rate of 36% is notably lower than the previously threatened 49%, it still presents a substantial challenge for Phnom Penh, which had entered what it believed was a preliminary trade agreement framework with the U.S. just days prior. This complex interplay of trade dynamics showcases the delicate balance Cambodia must maintain amid evolving global geopolitics.
The U.S.-China-Cambodia Triangle: A Complex Relationship
The trade relationship between Cambodia and the U.S. exists within a larger geopolitical context, particularly its increasingly close ties with China. Over recent years, Cambodia has solidified its position as China’s largest trading partner and investor, leading to an expansion of partnership in defense and security matters. This growing relationship, coupled with the benefits Phnom Penh has derived from the ‘China + 1’ strategy—which encourages global manufacturers to diversify their production away from China—has drawn scrutiny from Washington. As a smaller, export-driven economy, Cambodia faces unique challenges in navigating the crosscurrents of U.S.-China tensions, with its reliance on both economies becoming a pivotal issue.
Trade Exposure: An Asymmetrical Relationship
Cambodia’s economic ties with the U.S. and China present a striking asymmetry. China holds the position of Cambodia’s largest trading partner, with bilateral trade reaching approximately C$21 billion in 2024. However, this trade is heavily skewed toward imports, primarily comprising machinery, electronics, and consumer products. In stark contrast, only about 15% of Cambodia’s total exports are directed toward China.
On the other hand, trade with the U.S., while slightly smaller in volume—in 2024 totaling around C$18 billion—is more balanced. The U.S. accounts for nearly 40% of Cambodia’s garment exports, making it a crucial market for the Kingdom’s economy. The surge in exports to the U.S. during Donald Trump’s first term can be attributed to rising tensions with China, driving manufacturers to seek lower-cost alternatives like Cambodia. However, the impending tariffs raise the stakes, as Cambodia’s exports face a looming trade deficit resulting from its trade relationships.
Cambodia’s Strategic Response to U.S. Trade Pressures
In light of escalating trade pressures, Cambodia has adopted a strategic approach combining limited reforms with efforts to diversify its economic ties. Early negotiations between U.S. and Cambodian officials included proposals for tariff reductions on American imports. The July 4 announcement of a trade agreement framework offered a glimpse of progress, but subsequent revelations regarding the impending tariffs clouded the outlook.
Historically, Cambodia benefited from the U.S.’s Generalized System of Preferences (GSP), providing duty-free access for thousands of products. However, the GSP expired in 2020, exacerbating trade hurdles due to U.S. concerns over Cambodia’s human rights practices and democratic backsliding. Hence, any potential recovery of favorable trade terms hinges on meaningful reforms, which the Cambodian government appears reluctant to pursue.
The Dual-edged Sword of Closer Ties with China
As Cambodia’s ties with China deepen, the implications for its sovereignty and economic stability grow more complex. Recent upgrades to Cambodia’s Ream Naval Base, funded by China, have triggered suspicions of military exclusivity. Furthermore, the rerouting of Chinese goods through Cambodia to evade tariffs has raised alarms in Washington, although recent Cambodian regulations aim to enhance compliance and prevent mislabeling.
Contrarily, Chinese investments have fueled critical infrastructure developments, enhancing Cambodia’s connectivity and energy capacity. However, this growth contributes to rising public debt to China, surpassing C$5.5 billion, raising concerns about Cambodia’s economic autonomy.
Cambodia’s Diversification: Seeking Alternative Markets
In pursuit of a balanced trade portfolio, Cambodia is actively exploring economic diversification. The European Union emerges as a potential market, having previously granted preferential access through the “Everything But Arms” initiative. However, the partial withdrawal of this scheme in 2020 affected approximately C$1.6 billion in annual exports, highlighting the need for Cambodia to reform its political landscape to regain access.
Moreover, Cambodia is keen to strengthen intra-ASEAN trade relations. As part of the Regional Comprehensive Economic Partnership (RCEP), Cambodia sees opportunities for growth in agricultural exports to Asian markets. However, inconsistent agricultural standards across ASEAN nations pose barriers, complicating Cambodia’s aspirations for greater regional integration.
Opportunities for Canada: A Collaborative Future
As Cambodia confronts significant trade challenges with the U.S. and its reliance on China, Canada presents a unique opportunity for strengthening ties. Bilateral trade has shown promising growth, reaching about C$2.4 billion in 2024. Canadian exports to Cambodia, although limited, focus primarily on vehicles and machinery.
Canadian expertise aligns well with Cambodia’s development goals, particularly in sustainable agriculture and renewable energy—two sectors poised for growth given the country’s evolving energy landscape. As negotiations progress for a Canada-ASEAN Free Trade Agreement, pathways for collaboration in these key areas can amplify Cambodia’s economic resilience.
However, the extent to which Cambodia can cultivate ties with Western partners depends largely on how effectively it manages its relationship with China, striving for diversification without jeopardizing vital partnerships.
In conclusion, as Cambodia navigates the tumultuous waters of U.S.-China trade dynamics, the Kingdom stands at a crossroads. Balancing its relationships with these major powers while exploring alternative markets and reinforcing partnerships, like those with Canada, will be crucial for sustaining its economic growth in the years ahead.