Trump’s tariffs are forcing Cambodia Inc. to rethink its business model. But change needs to happen fast.
Cambodia’s economy is under pressure as the second half of 2025 gets underway. In April, the Southeast Asian nation faced the highest tariffs imposed by the Trump administration on any country as part of its April 2, “Liberation Day” announcement: a hefty and somewhat shocking 49%. Subsequent negotiation whittled the figure down to 19%, a rate shared with Association of Southeast Asian Nations (ASEAN) peers, including Indonesia, Malaysia, the Philippines, and Thailand. Yet, this slimmed-down number still casts a shadow.
Some $9.9 billion of goods manufactured in Cambodia were shipped to the US last year, according to the government’s General Department of Customs and Excise, accounting for 37% of the nation’s total exports and an 11% year-on-year boost. The lion’s share were textiles, garments, and footwear, which form the backbone of Cambodia’s export-driven economy. The surge continued in the first five months of this year, as $4.3 billion reached stateside for a 27% year-on-year boost, once again making the US Cambodia’s biggest trading partner.
But with the new tariff regime, Cambodia’s concentration risk with the US appears unsustainable and as a result, a major rethink of Cambodia Inc.’s business model is under way. Businesses must find alternative engines of growth as the nation seeks to recalibrate its supply chain, improve access to capital, and consolidate its banking sector.
“The push to reduce concentration risk predated the tariff episode,” says Kosalthanan Neth, research fellow at the China-ASEAN Studies Center (CASC) in Phnom Penh. “Diversification is a core focus of the government’s Pentagonal Strategy Phase I, spanning FDI, exports, and overall economic resilience.”
Up to now, Cambodia has thrived on low-skilled manufacturing, primarily garment factories “using a cut-make-trim model,” notes Anthony Galliano, director of OBOR Management and group CEO of Phnom Penh-based Cambodian Investment Management Holding. “Workers assemble imported materials into finished clothing products. Most of the imported materials are sourced from China, reworked in Cambodia, and exported to the US and EU.”
Now, Cambodia must upscale its manufacturing, Galliano says, which means tackling high electricity costs, a lack of mid- to high-skilled labor, limited transport and logistics networks, a modest domestic market, and limited technology transfer. “The garment sector is a sunset industry, and unless there is a shift to mid- to high-end manufacturing, Cambodia will compete with the likes of Bangladesh, Laos, Myanmar, Nepal, and African countries.”
Will Tariffs Spur Reform?
Some observers suggest the new US tariff regime will help facilitate needed reform.
“We think the revised ‘reciprocal’ tariff rate of 19% provides Cambodia with a competitive edge,” says Caroline Wong senior country risk analyst at BMI, a division of Fitch Ratings, in London.“Given that the 19% rate applies to semi-finished and finished goods, we think this will prompt Cambodian firms to move up their value chains and potentially transit from basic assembly to value-added manufacturing.”
Mixed Growth Forecasts
The ASEAN+3 Macroeconomic Research Office (AMRO) estimated in a May report that Cambodia’s GDP growth in 2025 will fall to 4.9% from last year’s 6% due to tariff-induced pressure. The World Bank is more pessimistic, estimating growth will fall to just 4%.
Still, it’s not all gloom. AMRO opined that Cambodia’s economy remains “resilient” and that growth can be preserved by a “coordinated and multifaceted policy” involving targeted fiscal support, market and industry diversification rooted in structural reforms and supported by financial risk mitigation via macroprudential policy, deposit insurance, and emergency liquidity assistance.
Perhaps indicating the future direction of travel for Cambodia Inc’s business model, some 56% of total registered FDI capital entering the country in the first quarter was from China, totaling $2.5 billion.
| VITAL STATISTICS |
|---|
| Location: Southeast Asia |
| Neighbors: Laos, Thailand, Vietnam |
| Capital city: Phnom Penh |
| Population: 17.64 million (2024) |
| Official language(s): Khmer |
| GDP per capital: $2,628 (2024) |
| GDP growth: 6% (2024) |
| Inflation: 1.7% |
| Currency: Riel |
| Credit Rating: B2 (Moody’s) |
| Investment promotion agency: Council for the Development of Cambodia (CDC) |
| Investment incentives available: Tax holidays, capital goods duty exemptions, real estate tax exemptions |
| Corruption Perceptions Index rank: (2024) 158th of 180 countries – where 180th is the most corrupt. |
| Political risk: C2 (2024) |
| Security risk: Level 2 |
| PROS |
|---|
| Young demographic |
| Economic restructuring underway |
| CONS |
|---|
| New, high US tariffs |
| Rising NPLs |
Sources: World Bank, Trading Economics, CDC, Transparency International, Allianz, US Department of State
China will remain Cambodia’s dominant source for FDI, according to Dave Chia, economist at Moody’s Analytics in Singapore. “Their longstanding diplomatic relationship, coupled with the Belt and Road Initiative and the 15-country Regional Comprehensive Economic Partnership, will underpin Chinese investment flows.”
The bulk of FDI projects was in manufacturing, infrastructure construction, real estate, and agriculture. Aside from China, South Korea, Japan, Singapore, Malaysia, Thailand, Canada, and the UK have also have provided signficiant FDI.
“While China remains Cambodia’s largest foreign investor, accounting for 65.5% of 2024’s total net FDI inflows, there is room for other players to increase their presence,” says BMI’s Wong. “This includes South Korea, whose investment into Cambodia has grown steadily not least because of the Cambodia-Korea Free Trade Agreement (CKFTA), which has recently come into effect. But the establishment of a new FDI advisory center in Seoul to promote investment in ASEAN will probably pave the way for increased FDI into Cambodia.”
The CKFTA came into force in December 2022 and reduces tariffs on South Korean-Cambodian trade close to zero percent.
Cambodia received $5.8 billion in fixed-asset investment in the first half of this year, a 77% year-on-year increase, with 373 investment projects approved that are forecast to create 255,000 jobs, according to data from the Council for the Development of Cambodia: a stunning 94% increase over projects approved in the same period in 2024.
Tension With Thailand
A potential sticking point is tension with Thailand, which erupted in late May, prompting a border closure as the militaries of each side traded accusations of aggression. President Trump intervened in late July and facilitated a de-escalation. Prolonged tension has the potential to disrupt trade between the two countries, however, diminish tourism, and crimp overseas worker remittances from Thailand, which were worth $1 billion from 1.2 million Cambodians working in the neighboring country.
The settlement, notes Galliano, offered an opportunity for Prime Minister Hun Manet to establish a relationship with Trump. “The prime minister is frequently on the road touting the benefits of investing in Cambodia and is the nation’s ultimate champion. The efforts are slowly paying off. However, the new money is in cloud, data centers, high-tech manufacturing, digital infrastructure, and software and IT services—areas where Cambodia is underdeveloped and unlikely to benefit.”
A Financial Sector Overhaul
Meanwhile, Cambodia is taking steps to revamp its financial services sector, which a handful of banks dominate, and bring its capital markets up to global standards.
“Cambodia’s financial services sector is entering a transformative phase,” says Torsten Kleine Buening, chief risk officer at ABA Bank in Phnom Penh, “with digital innovation emerging as a key driver of growth, inclusion, and competitiveness. The primary opportunity lies in expanding financial inclusion through intuitive, accessible digital platforms, helping bridge the gap for underserved populations, especially in rural areas.”
But Cambodia’s banking and financial services sector is struggling with elevated levels of non-performing loans (NPLs) and sluggish credit demand, he notes. Regulatory forbearance on loan restructuring has been in place since August 2024, allowing banks to restructure loans twice without changing their classification or making capital provisions against them, potentially concealing a hornets’ nest of distress that could activate when forbearance ends in December.
“Strengthened credit risk management to address NPLs and improve asset quality is required as part of targeted reform,” Kleine Buening argues. “But looking ahead, the medium- to long-term outlook remains broadly positive, supported by Cambodia’s strong demographic profile, ongoing economic development, and increasing demand for financial services.”
If the capital required to unlock this potential is to be accessed and deployed optimally, however, Cambodia’s equity and debt markets must be developed.
“Developing capital markets to diversify funding sources and reduce reliance on traditional lending is required if Cambodia’s financial sector is to evolve into a more robust, inclusive, and innovation-driven pillar of the national economy,” says Galliano.
Cambodia’s capital markets—particularly its debt markets—are profoundly underdeveloped, lacking a government bond yield curve: the crucial input for appropriately pricing offerings from corporate and other bond issuers. But change is on the way, laid out with apparent urgency in their 10-Year Securities Development Master Plan that the country’s securities regulators unveiled in mid-July.
“Fortunately, the government recognizes the critical importance of the capital markets to the economy,” says Galliano. “I am strongly confident in the regulator’s competency and capabilities to develop the capital markets and believe this will be a catalyst for the financial future of the country.”
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