Myanmar’s Economy in Peril as EU Weighs Trade Punishment Over Rohingya

Myanmar’s Economy in Peril as EU Weighs Trade Punishment Over Rohingya

Laurence Norman,
Workers use sewing machines to manufacture shirts at the Kaung Aunt Garment Manufacturing Co. factory in Yangon, Myanma. Garments account for 72% of Myanmar’s exports to the EU. PHOTO: TAYLOR WEIDMAN/BLOOMBERG NEWS

The European Union is considering re-imposing tariffs on imports from Myanmar and Cambodia, a top official said Friday, a step that would hit both economies hard as the bloc intensifies pressure over human rights violations and democratic backsliding.

The EU has been weighing for months how far to go in cutting economic and political ties with Myanmar following the military’s reported expulsion of 700,000 ethnic minority Rohingya over the last year. Relations blossomed before that as the country edged towards democracy and the EU’s zero-tariff import regime encouraged a flood of investment in the developing country and helped build a manufacturing hub for the EU.

A final decision on suspending the zero-tariff regime is likely to be months away.

The EU has imposed sanctions on seven military and police officials it says were involved in the expulsions and banned the sale of some equipment to Myanmar’s armed forces. An arms embargo remains in place.

Brussels has been wary about taking steps that could further cut ties or hurt economic conditions for citizens in Myanmar.

Speaking in Austria on Friday, EU Trade Commissioner Cecilia Malmström said the bloc would send a fact-finding mission to Myanmar “in the coming days.” That’s a first step towards what she said could be a decision to potentially withdraw the EU’s zero-duty regime for most of the country’s exports.

“Of course, our trade policy is value-based. These are not just words,” she said. “We have to act when there are severe violations.”

The EU in 2013 removed duties on most exports from Myanmar under an “Everything but Arms” initiative, designed to boost the economies of under-developed nations. As labor costs rose in China, East Asian investors opened scores of garment factories in Myanmar, taking advantage of Myanmar’s cheap labor and the new trade benefits, to sell directly to the EU.

Europe quickly overtook Japan as Myanmar’s largest garment export market, purchasing 47% of the garments produced in 2017, according to the Myanmar Garment Manufacturers Association. The garment industry posted double-digit growth since 2013 and today employs roughly 550,000 workers, according to the garment association.

Myanmar has emerged as a manufacturing hub for European brands like H&M Hennes & Mauritz AB and Adidas AG. H&M sources from over 30 factories in Myanmar.

Myit Soe, chairman of Myanmar’s garment association, said removing the trade preferences would badly damage Myanmar’s industry.

“If they take that decision towards the Myanmar garment industry, 300,000 laborers will go jobless,” he said.

Garment factories could decamp to manufacturing rival Bangladesh, which exports to Europe under its “Everything But Arms” agreement.

Jared Bissinger, an independent consultant who studies Myanmar’s garment industry, said that withdrawing trade preferences would deter foreign investors, especially from China.

Trade between the EU and Myanmar last year totaled €2.09 billion ($2.41 billion) according to the EU. Garments accounted for 72% of Myanmar’s €1.5 billion in exports to the bloc.

The EU could suspend zero-duties in only certain sectors, according to people familiar with discussions, which might exempt the garment sector. The EU procedure allows time for extensive consultations, with the aim of changing countries’ behavior. EU member states and the European Parliament must also be consulted.

EU capitals are separately considering targeting additional people or companies with asset freezes and travel bans, although those discussions are preliminary.

Concerned about undercutting Myanmar’s democratic reforms and pushing it closer to China, the EU has refrained from sanctioning top military officials or civilian leaders under Nobel Peace Prize winnerAung San Suu Kyi.

Also Friday, Ms. Malmström said the bloc was launching a procedure to eventually suspend trade benefits for Cambodia over Prime Minister Hun Sen’s moves against the opposition. A final decision on whether to end the zero-duties trade regime would only come after consultations with Cambodia and within the EU.

Cambodia exports to the EU last year reached €5 billion. Its garment sector, which employs almost 1 million people and supplies brands including Gap Inc., Nike Inc., Puma SA, could be badly hit.