"A study by the US Fashion Industry Association indicates almost 67 per cent respondent’s expected value or volume of goods sourced from China to decrease over the next two years. A striking example of this is Steven Madden, which expects to source 15 per cent of its handbags from Cambodia this year, with this percentage doubling in 2019. Similarly, Tapestry, the luxury company behind Coach and Kate Spade handbags, is boosting Vietnamese production and sourcing only 5 per cent from China. Vera Bradley, meanwhile, is planning to shift its manufacturing operations to Cambodia and Vietnam from China."

Increasing tariffs on Chinese products has led to the rise of countries like Cambodia and Vietnam as attractive investment destinations from consumer-goods like Steven Madden and Tapestry Inc.’s Coach. And while the Trump administration has slapped duties on goods from many of its largest trading partners this year, it has allowed some Cambodian products to continue duty-free access to the US market.

A study by the US Fashion Industry Association indicates almost 67 per cent respondent’s expected value or volume of goods sourced from China to decrease over the next two years. A striking example of this is Steven Madden, which expects to source 15 per cent of its handbags from Cambodia this year, with this percentage doubling in 2019. Similarly, Tapestry, the luxury company behind Coach and Kate Spade handbags, is boosting Vietnamese production and sourcing only 5 per cent from China. Vera Bradley, meanwhile, is planning to shift its manufacturing operations to Cambodia and Vietnam from China.

Cambodia gains with changing dynamics

This move to shift production has impacted China severely. Stocks of Hong Kong-based Stella International Holdings, developer and manufacturer of footwear brands like Prada SpA and Guess has dropped to its lowest point since 2009.

On the other hand, according to an annual report by the National Bank of Cambodia, the country’s footwear exports rose 25 per cent in 2017, while its garment exports increased 8 per cent in the same period. Vietnam, meanwhile, has enjoyed a foreign investor-led economic boom for years, attracting billions of dollar investments from the likes of Samsung Electronics and Intel Corp. It is transforming from mainly an exporter of agricultural commodities, such as rice and coffee, to a Southeast Asian manufacturing hub.

Even before China and the US escalated their trade tensions, Cambodia enjoyed duty-free privileges for products such as handbags, suitcases and wallets, part of a US program to help boost development in low-income countries. This designation has so far been maintained by the Trump administration. Cambodia also is one of the lowest-cost countries when it comes to labor. Oxford Economics estimates labor cost in Cambodia to be a quarter of China’s.

The down side

However, the country’s productivity rates are low compared to China, making it a challenge to manufacture more elaborate products. A survey by the Hong Kong Development Council, which promotes trade and investment for the territory, suggests average labor productivity of Cambodian workers was about 50 to 60 per cent that of Chinese workers. Cambodia’s infrastructure also lags behind China’s. The nation’s infrastructure was ranked 106 out of 137, behind Vietnam and Laos, in the World Economic Forum’s Global Competitiveness Report. This can cause difficulties in getting merchandise out of the country.

As per the US government, the recent Cambodian elections held in July, where the ruling party won all 125 seats in the National Assembly, were ‘flawed’. As a result, the US and Europe are likely review their trade policies and potentially stop giving tariff preference to Cambodia’s garment industry. This can prove to be a fatal blow for the nation, where garments make up 64 percent of total exports.