The EU's Tariff Threats Against Asia's Autocrats Risk Backfiring

(Bloomberg) -- The European Union is threatening to slap tariffs on Asian leaders who abuse their power, a move that risks upending several key garment-producing nations in the region.

Last month, the EU told Cambodia it would start the process of withdrawing tariff-free access for most goods under the “Everything But Arms” initiative, saying its July election was “marked by harassment and intimidation.” The bloc is threatening to do the same for Myanmar due to genocide allegations, and a Reuters report said Sri Lanka may be next on the list.

If the EU follows through, the moves risk hurting garment sectors that employ nearly two million laborers, most of whom are women. In all three countries, the initiative has made the EU as one of their biggest export markets for garments, generating billions of dollars in revenues annually.

Human-rights activists have applauded the EU, which is increasingly taking a leadership role on humanitarian issues from a more inward-looking U.S. under President Donald Trump. At the same time, some in the business community see the moves as counterproductive, and analysts doubt they will lead to major changes.

EU Marginalized

China, in particular, could step in to offset any export losses from nations hit with new EU tariffs, according to Murray Hiebert, a senior associate of the Southeast Asia Program at the Center for Strategic and International Studies in Washington.

“Putting pressure on governments to respect human rights is very important, but to use sanctions as one size fits all will risk marginalizing the EU in giant swaths of Asia,” Hiebert said. “The best the EU can hope for is that it will feel better about punishing gross violations of human rights.”

Sri Lanka has also suddenly come under scrutiny after the president abruptly fired the prime minister, triggering a political crisis that has yet to be resolved. The country's garment sector employs some 600,000 people and accounts for about a third of manufacturing employment.

Tung-Lai Margue, the EU ambassador to Sri Lanka, told Reuters last week the bloc would consider withdrawing duty-free tariff benefits if the government wasn't meeting its commitments. The embassy declined to comment when contacted.

African Alternative

The situation is more worrying for Cambodia and Myanmar.

In Myanmar in particular, the news is a setback for many foreign companies that moved in after the country transitioned to democracy from military rule over the past decade. EuroCham Myanmar said the move may put as many as 450,000 of the country's garment workers out of a job within four years.

Some European companies have indicated they would move their operations to Africa or other nations if the EU puts tariffs on Myanmar goods, according to Filip Lauwerysen, the executive director at Eurocham Myanmar and Secretary General of the European Business Organizations Network.

The bloc has “completely lost any sense on how to address these issues,” Lauwerysen said. “Myanmar is heavily backed by China and Russia and there is not much we in Europe can do with our current status in the global landscape of things.”

Preferential exports to the EU from Myanmar have more than doubled in recent years to $1.48 billion in 2017, according to EU data. Aung Ko Ko, an independent economist who also sits on the ruling NLD party's economic committee, said that Myanmar had not done anything wrong and was confident the EU wouldn't stop preferential treatment.

“Myanmar isn't doing any harmful actions to EU members,” he said, noting the government has invited European officials to see the “true story.”

‘Stiff Competition'

In Cambodia, the garment sector is by far its biggest export, a $5 billion industry that employs about 750,000 Cambodians. Prime Minister Hun Sen, whose party won every seat in a July election boycotted by the main opposition party, has struck a defiant tone toward the EU and failed to win a reprieve from the bloc in talks last month.

In an Oct. 20 letter to the trade commissioner of the European Commission, the Garment Manufacturers Association in Cambodia said a suspension of duty-free access or unilateral sanctions would hurt garment workers and their families.

“All the progress that Cambodia has achieved over the past two decades through the efforts of all stakeholders, including development partners like the EU, could be destroyed very quickly,” it said.

Eric Tavernier, the chief executive officer of textile firm We Group Ltd. which has a factory that employs about 700 workers in the Cambodian coastal town of Sihanoukville, said the subsequent EU tax burden would likely mean the end of his business there.

"Cambodia is going to face some stuff competition from elsewhere now that they are no longer the cheapest option," he said. Still, he understands why they acted. "Why should we keep helping countries if they don't follow basic democratic rules."

To contact the reporter on this story: Philip Heijmans in New York at pheijmans13@gmail.com

To contact the editors responsible for this story: Ruth Pollard at rpollard2@bloomberg.net, Daniel Ten Kate

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