The EU’s Reform in Rules of Origin and International Trade:
Evidence from Cambodia †Kiyoyasu Tanaka §(Institute of Developing Economies)
July 2019
Abstract
The European Union (EU) introduced the Everything But Arms (EBA) initiative in 2001 to grant
duty-free quota-free access to exports in least developed countries. Since stringent rules of origin(ROO) discouraged exports to EU requesting preferential access, the EU simplified the ROO in2010. Exploiting the EU’s reform as a natural experiment, I estimate the causal effect of simple
ROO on garment exports in a beneficiary country, Cambodia, and consequent impacts onimported intermediate input and inward foreign direct investment (FDI). I adopt a difference-indifferences method and provide evidence to support the parallel trends assumption. I find thatgarment exports from Cambodia to EU markets increased by 112% after 2011. Textile imports
from China and inward FDI in garment industry increased sharply after 2011. Thus, the EU’s
reform produced substantial impacts on trade and FDI in Cambodia.
Keywords: Rules of origin, GSP, EBA, trade, FDI, Cambodia, EU
JEL Classification: F13, F14, F15, O14, O24†

I acknowledge the financial support of JSPS Grant-in-Aid for Young Scientists (B) Grant Number
16K17129 and for Scientific Research (A) 18H03637. For useful comments and suggestions, I would
like to thank Fukunari Kimura, Hisamitsu Saito, Jaerim Choi, Kazunobu Hayakawa, Kozo Kiyota,
Tadashi Ito, Takahiro Fukunishi, Tatsufumi Yamagata, Theresa Greaney, Toshihiro Okubo, Toshiyuki
Matsuura, Yoko Asuyama, and seminar participants at Keio University, Hiroshima University,
Hokkaido University, IDE-JETRO, Kushiro Public University of Economics, and University of
Hawaii at Manoa. All remaining errors are my own.
§
Research fellow, Institute of Developing Economies, JETRO; address: 3-2-2 Wakaba, Mihama-ku,
Chiba-shi, Chiba 261-8545, Japan; e-mail: kiyoyasu_tanaka@ide.go.jp
11.

Introduction
Preferential trade access to developed economies helps to promote export industry indeveloping economies. By reducing duties on import in developed economies in favor ofdeveloping economies, trade preferences may increase export earnings and investment, thereby
contributing to poverty reduction and sustainable development. Since the Generalized System ofPreferences (GSP) had been introduced in the 1970s, the GSP programs were considered to
produce uneven effects on export success in favor of richer developing economies (Brenton,2003). To support least developing countries (LDCs), the European Union (EU) introduced theEverything But Arms (EBA) initiative in 2001. However, expected benefits were not fully
realized at the outset. In 2001, exports to EU from EBA beneficiary countries were 6.18 trillion
EURO, but exports to EU requesting preferential access were merely 4.20 trillion EURO. Only
68.0% of exports from EBA beneficiaries requested duty-free access (EUROSTAT). 1
Stringent rules of origin (ROO) in the EU GSP had been considered as a key reason for the
low utilization rate of trade preferences. The cost of complying with the origin requirements may
exceed the benefit of using preferential access for the restrictive use of imported inputs from thelowest-cost third countries and the administrative costs of proving origin (Brenton and Manchin,2003). In 2003, the European Commission (EC) launched consultation processes on origin
requirement issues to assess various interests at stake from EU members, private sectors, industry
associations, and civil society. Following a series of internal debates with stakeholders, the EC
adopted a new regulation to simplify the ROO for the EU GSP on November 18, 2010. The new
regulation came into effective on January 1, 2011. Consequently, exports from EBA beneficiaries
to EU requesting preferential access increased substantially from 9.41 trillion EURO in 2010 to
13.3 trillion EURO in 2011, with a sharp increase in the utilization rate from 84.3% to 93.7%.
In this paper, I seek to assess the effects of the EU’s reform on trade and direct investment
in a beneficiary country by addressing three interrelated questions. (i) Do simply ROO has acausal impact on exports to the EU markets? (ii) What is the consequent impact on imports ofintermediate inputs? (iii) How did the reform affect inward foreign direct investment (FDI)?
These questions are critical to assess the policy objectives in preferential trading arrangements(PTA) because preferential market access is aimed to support developing economies to integrate
into the world trading system (Cadot and de Melo, 2007). However, there is limited empirical
work to assess how simple ROO in trade preferences promote trade and investment in LDCs.
Based on a rigorous econometric framework, this paper provides a formal assessment on the roleof ROO in determining the economic effects of PTA on the beneficiary country.

1

Using the Eurostat data, I aggregate the import of good for final use in the EU eligible for
GSP/preferential tariffs from EBA beneficiary countries except for Myanmar and calculate a share of
the import actually entered under preferential regimes.
2

To examine these questions, I focus on garment exports because knitted and woven garments
are major export products from EBA beneficiaries to EU markets. For instance, these products
accounted for 61.0% of the total exports to EU requesting preferential access in 2010. Moreover,I focus on Cambodia for analysis because the previous ROO would be restrictive for garment
exports in Cambodia. In general, the EU GSP rules of origin before the reform stipulates thatgarment producers in Cambodia must use domestically produced fabric and/or imported fabricfrom EU/ASEAN countries in certain conditions to qualify for duty-free access to EU markets.
Meanwhile, garment producers used mainly imported fabric from China, Hong Kong, Taiwan,
and South Korea because domestic textile production was severely limited (Asuyama et al., 2013;
Bargawi, 2005; Yamagata, 2006). Under the new ROO, the use of imported fabric produced
anywhere was allowed for garment products originating in Cambodia. Because fabricmanufacture is not required, the origin requirement was relaxed from two-stage processing to
one-stage processing (UNCTAD, 2013). These changes in origin requirements imply significant
implications for garment exports in Cambodia. Additionally, the reform processes of origin rules
applicable to EU GSP suggest that Cambodia had no direct influence in determining specificrevisions in the EU ROO. The reform can be reasonably taken as an exogenous policy change inorigin requirements for garment exporters in Cambodia. Thus, the EU’s reform provides an ideal
natural experiment to identify the causal effect of simple ROO on exports in Cambodia.
My empirical strategy is to adopt a difference-in-differences (DD) method based on astandard gravity model of international trade. For identification, I exploit two sources of variations
in garment exports: (i) a difference between exports to EU markets (treatment groups) and exports
to non-EU markets (control groups); (ii) a difference in exports before and after the EU’s reformin 2011. By comparing changes in exports to EU markets before and after 2011 with changes inexports to non-EU markets before and after 2011, I seek to identify a causal effect of simple ROO
on garment exports. The identification for the DD method relies crucially on the assumption thatboth exports to EU markets and to non-EU markets would exhibit parallel trends in the absenceof the reform. Without the reform, export trends would need to move in tandem between treatment
and control groups. To assess this assumption, I describe garment export trends for treatment andcontrol groups. In the pre-reform period before 2011, both treatment and control groups exhibit
similar export trends. After 2011, the treatment group shows a sharp increase in the export trend
whereas the control group does not exhibit any apparent change in the export trend. Thus, thegraphical evidence supports the validity of the parallel trends assumption for identification.
To shed light on consequent effects of export expansion driven by the EU’s reform, I also
examine imported intermediate inputs and inward FDI in Cambodia. In the wake of the reform,
garment producers in Cambodia could use imported fabric from any market to qualify for
preferential access to EU markets. As described in Natsuda et al. (2010) and Staritz (2011), China
3

is a key import market for yarn, fabric, and accessories used for garment production in Cambodia.
This suggests that the reform could bring about a large expansion of sourcing from highly
competitive textile industries in China. To examine this implication, I describe a change inimported textiles in Cambodia and estimate the extent to which textile imports from China
increased after 2011.
In terms of investment effects, the EU’s reform may encourage foreign investors in a garment
sector, but discourage those in a textile sector. The reform improved input sourcing flexibility forgarment manufacture in Cambodia to benefit from preferential market access. As discussed in
Krishna (2006), the removal of the binding ROO allows producers to use the best mix of inputs
to minimize the level of production costs. A decline in the unit cost of local production may
strengthen an incentive for foreign investors to produce garment products in Cambodia. On theother hand, the improved sourcing flexibility implies that locally produced textiles need not be
used to qualify for preferential access. While the binding ROO provided an incentive for local
textile production, the removal of the origin requirement should weaken an incentive for foreign
investors to produce textile inputs in a local market. Thus, I predict that inward FDI flows after
2011 would increase for the garment sector and decrease for the textile sector.
Main findings are summarized as follows. First, the total export in knitted and woven
garments to the EU markets increased significantly by 112% after 2011. Focusing on the major
EU markets, the result shows an increase in garment exports by 219%. Robust to alternative
specifications, the results support the positive causal impact of the EU’s reform on garment
exports in Cambodia. The identification of the causal impact is supported by the graphicalassessment of the parallel trends assumption for export trends in treatment and control groups. I
also show that redirection of exports to non-EU markets would not account quantitatively for theexport expansion driven by the EU’s reform. Second, textile imports such as yarn and fabric from
China increased significantly by 90% after 2011. The result is consistent with the hypothesis that
simplifying ROO in the EU GSP encouraged the use of intermediate inputs imported from third
markets to qualify for preferential market access. Additionally, FDI inflows in a garment sector
increased by 153% after 2011, whereas FDI inflows in a textile sector decreased by 68%. These
results support the hypothesis that greater flexible sourcing to obtain preferential access improves
an investment climate for foreign investors in the garment sector, but removes an incentive forforeign investors to engage in local textile production. Taken together, the EU’s reform in ROO
brought about a substantial impact on international trade and inward FDI in Cambodia.

4This paper contributes to related literature in several manners. Prior work on a relationshipbetween ROO and trade flows is closely related to this paper. 2 Augier et al. (2004) exploit the
Pan-European Cumulation System (PECS) in 1997 as a natural experiment to estimate the impactof greater sourcing flexibility on textile exports in the southern Mediterranean countries. Augier
et al. (2005) adopt a DD method to examine whether the introduction of cumulation rules affects
bilateral trade flows in manufacturing and intermediate goods. Additionally, Andersson (2016)
exploits the introduction of southern Mediterranean countries in the PECS for the middle 2000s
to investigate the impact of better access to foreign intermediate inputs on final-goods export in
the southern Mediterranean countries. These studies generally show that more liberal ROO
promote trade flows. A plausible concern in these studies is an endogeneity issue because
countries and industries with greater economic interests could influence an institutional change
in rules of cumulation, which may lead to the overestimated impacts of cumulation rules. By
contrast, I argue that Cambodia had no direct influence in the reform processes of origin rules
applicable to EU GSP, which enables me to consider the EU’s reform as an exogenous policy
shock to garment exports in Cambodia. By addressing the endogeneity issue due to a change in
ROO, I can identify a causal effect of ROO on trade flows. 3
An alternative approach in the literature is to measure the restrictiveness of ROO as acategorical index (Estevadeordal, 2000; Estevadeordal and Suominen, 2004). Such an index isconstructed at the product level based on the origin-conferring criteria such as change in tariffclassification, a regional value content, and technical requirements, with the larger values
indicating more stringent origin requirements. Based on this approach, Anson et al. (2005) showsthat the ROO index correlates negatively with trade flows. Extending this approach, Conconi etal. (2019) show that the NAFTA ROO on final goods decreased the growth rate of intermediate
inputs in Mexico from third countries relative to NAFTA partners. However, Inama (2009) points
out difficulties in quantifying the restrictiveness of specific origin requirements because similardrafting styles of rules may imply considerably different levels of restrictiveness for actual
production. Specifically, the specific origin requirements may be restrictive for exporting
countries that rely heavily on imported inputs, but may be unrestrictive for other countries withextensive domestic supply chains. As compared with these works, I examine a clear change in theorigin requirements from two-stage processing to one-stage processing for garment production in
Cambodia, where the previous origin rules were binding for limited domestic supply chains. By

2

Inama (2009) provides a comprehensive account of ROO issues from both academic and policy
perspectives. Cadot et al. (2006) provide a collection of related papers on ROO issues in regional trade
agreements.
3
Curran and Nadvi (2015) argue that a change in ROO was a key reason for a sharp increase ingarment exports from Bangladesh to EU after 2011. However, their analysis is limited to descriptive
statistics.
5

focusing on garment ROO, this paper does not suffer from possible measurement errors inherently
involved in mapping the complex origin-conferring criteria into the categorical index.
My empirical strategy exploiting a change in ROO is similar to the analysis in de Melo andPortugal-Perez (2013), but differs in an important dimension. 4 Specifically, they exploit a
difference in ROO between U.S. and EU preferential regimes during the period 1996-2004; some
African countries could use fabric of any origin to obtain preferential treatment under the U.S.
Africa Growth Opportunity Act (AGOA), but must meet double transformation for preferential
access to the EU. 5 However, it is well known that Asian firms made substantial direct investment
in African countries to access the U.S. market under the AGOA (Lall, 2005; Phelps et al., 2009).
By sourcing inputs from Asia, they export the large volume of simple garment products toimprove manufacturing efficiency (Morris and Staritz, 2014). This implies that the difference inpreferential regimes may induce an endogenous export response in garment products acrossexporting countries and destination markets, suggesting that African exporters to the U.S. market
may not be a valid control group for counterfactual African exporters to the EU markets. In
contrast, I focus on aggregate garment exports in Cambodia to examine a change in ROO under
the EU EBA. This research design alleviates a possible endogeneity bias arising from acomparison of different exporters under different preferential regimes.
Taken together, the main contribution of this paper is to identify a causal impact of ROO on
trade by exploiting the EU’s reform as a natural experiment. My empirical strategy helps toalleviate an endogeneity bias in ROO arising from a political-economy motivation of ROO
changes and a measurement error in quantifying the restrictiveness of ROO. Additionally, I extend
the literature by demonstrating that the export expansion driven by simple ROO has consequent
impacts on intermediate input imports and inward FDI flows in a beneficiary country. Thus, thispaper presents credible evidence from Cambodia to assess the policy objectives in PTAs granted
by developed countries for development.
The rest of this paper is organized as follows. Section 2 presents background on the EU’s
reform in ROO, including the EU’s trade preferences, the reform processes in ROO for the EU
GSP, and implications for garment exports in Cambodia. Section 3 provides an empiricalframework to estimate the impact of the EU’s reform in ROO on exports. Data sources are also
explained. In section 4, I describe export trends in treatment and control groups to check a parallel
trends assumption for the identification in a DD method, followed by the main estimation results
and robustness checks. Section 5 discusses the impact on imported intermediate inputs for4

Hayakawa (2019) exploits relaxing ROO for knitted garments in 2015 under the Japanese GSP to
investigate the impact on a share of import flows entered in Japan under multiple preference regimes.
5
Related studies such as Frazer and Van Biesebroeck (2010) and Ito and Aoyagi (2019) estimate theimpact of duty-free access on imports in the U.S. and Japan, respectively. However, they do not
explicitly analyze origin requirements.
6

garment manufacture in Cambodia. Section 6 discusses the impact on inward FDI in Cambodia.
Section 7 concludes.
2.

Background
This section presents a brief summary of the EU GSP and the origin-conferring criteria forpreferential market access. The EU’s reform processes in ROO are reviewed to summarize majorchanges in the EU GSP. Finally, I discuss implications of the reform for garment export inCambodia.
2.1. The European Union’s Trade Preferences
The EU has unilaterally granted developing countries with preferential access to EU markets
under the EU GSP since 1971. The provision of preferential market access aimed to promotesustainable development and good governance in developing countries through international trade.
To be consistent with a multilateral trading agreement, the GSP was introduced under the Enabling
Clause, which allows an exception to the Most-Favored Nation (MFN) principle in the WTO law.
The EC describes three PTAs under the EU GSP as of December 2015 (EC, 2016). 6 First, thestandard GSP grants low or lower-middle income countries with duty reductions for 66% of all
EU tariff lines. Second, the special incentive arrangement for sustainable development and good
governance, the so-called ‘GSP+’, grants duty-free access in the same 66% tariff lines as thestandard GSP for countries with vulnerable economic structures. Beneficiary countries are in
return required to follow international conventions such as human and labor rights, environmental
protection, and good governance. Third, the EBA arrangement was introduced in 2001 to grant
LDCs with duty-free and quota-free access for all tariff lines except for arms and ammunition. 7
Brenton (2003) highlights that trade preferences under the EBA are granted for an unlimited
period and not subject to periodic review, thereby substantially improving the certainty ofpreferential market access for beneficiaries.
While preferential trade access is given only to products originating from beneficiary
countries, it may cause trade deflection in which products originating from non-beneficiary
countries are transshipped to EU markets through beneficiary countries. Traders can avoid thepayment of higher tariffs imposed on products originating from non-beneficiary countries. To
prevent such trade deflection, preferential arrangements stipulate the conditions under which a
product must meet to qualify for preferential access. ROO are established to address a legitimate
6

In addition to the GSP regime, the EU has granted trade preferences to African, Caribbean, andPacific (ACP) countries and Mediterranean countries. See Persson and Wilhelmsson (2016) for a brief
review of these regimes.
7
Liberalization came into effect immediately except for gradual reductions to zero tariffs for bananas
in 2006 and for rice and sugar for 2009.
7

concern of the trade deflection.
Under the EU GSP, there are general conditions to determine origin of products (UNCTAD,
2013). First, products wholly obtained in a beneficiary country are considered as originating in
the country. Examples include mineral products extracted from its soil, plants and vegetableproducts grown there, and live animals born and raised there. Wholly obtained products areproduced without using imported input. Second, if products are manufactured using imported
inputs, these non-originating materials must be sufficiently worked or processed to satisfy origindetermining criteria. Origin-determining requirements for not wholly obtained products are in
general based on change of tariff heading, addition of domestic value, and specific processing
requirements. Additionally, rules of cumulation are stipulated to allow beneficiary countries toconsider inputs from other countries as originating content. 8
The previous ROO under the EU GSP had been considered as restrictive, thereby leading to
the low utilization rate of EU trade preferences. Brenton and Manchin (2003) argue that productspecific origin requirements are stringent by restricting the use of imported input from the lowestcost third countries. Such stringent rules may be further complicated by the potentially high costsof proving origin, including documentation procedures and accounting systems. In the case ofgarment products, the previous ROO stipulated that garment products must be made fromdomestically manufactured fabric or imported fabric from EU. Although rules of cumulation
allow for the use of qualifying inputs from other countries, two-stage processing requirements
generally restricts the use of imported fabric from third countries. Thus, stringent origin
requirements could substantially increase the cost of complying with the ROO, which may exceed
the benefits of using preferential access.
2.2. The EU’s Reform in Rules of Origin
In 2003, the EC adopted a Green Paper on ‘the future of rules of origin in preferential tradearrangements’ to evaluate the issues in the previous ROO. The consultation process was launched
to assess various interests at stake from EU members, private sectors, industry associations, andcivil society. The findings show that the previous ROO were too complex and restrictive to fit
global manufacturing processes, thereby giving a call for simplification and relaxation of theorigin rules and procedures. In 2005, the EC adopted a communication on ‘the rules of origin in
preferential trade arrangements: orientations for the future’. By setting general principles ofsimplification and development-friendliness, the EC supported a draft regulation for a reform of
the ROO in the EU GSP.

8Other provisions stipulate the conditions of origin determination related to insufficient working orprocessing, working or processing outside the territory of beneficiary countries, and non-manipulation
principle.
8

In summarizing the background of the reform processes, Inama (2011) explains that the EC
proposed a value-added criterion in the origin-determining criteria as a method to evaluate
sufficient processing across the board for most products. This approach was in contrast with thepreviously used criteria based on change of tariff heading, a maximum allowance of nonoriginating materials, and specific processing requirements. However, this proposal was met bystrong oppositions from stakeholders such as the consulted European Federations representing
agricultural and industrial interests. Consequently, the reform processes followed a series ofinternal debates and discussions with stakeholders for a long period.
On November 18, 2010, the EC adopted a new regulation on the ROO for EU GSP. This
regulation came into effective on January 1, 2011. 9 Three major changes in the new regulation
are pointed out by Inama (2011). First, product-specific origin requirements are relaxed for anumber of products, with more lenient treatment for LDCs than developing beneficiary countries.
The tolerance rule is relaxed with an increase from 10% to 15% for agricultural products in termof the weight and for manufacture products in terms of the ex-works price. Second, rules ofcumulation include Mercosur and the allocation rule of origin among regional partners is relaxed.
Extended cumulation is applied to EU free trade agreement (FTA) partner countries under certain
conditions. Finally, the system of registered exporters and self-certification are introduced, whichbecame effective on January 1, 2017.
2.3. Implications for Garment Export in Cambodia
Garment product has been a leading export commodity in the Cambodian economy for recent
decades. Garment exports in HS Chapters 61 and 62 accounted for 69.3% of total commodity
exports in 2000, which subsequently increased to 77.7% in 2014. The garment exports amounted
to 5.31 billion USD in 2014, where the EU and U.S. markets accounted for 40.7% and 34.3% of
the total garment exports, respectively (UN COMTRADE).
Cambodia is a beneficiary country under the EBA regime since 2001. In the previous ROO,
originating status is given to garment products manufactured using domestically produced fabricin Cambodia. Manufacturing fabric from yarn or natural fibers is required. Although rules ofcumulation allowed for the use of imported fabric from EU or ASEAN, garment producers in
Cambodia must add the larger value added in garment production than the highest customs valueof any of imported materials to benefit from regional cumulation. 10 Since domestic production
9

For details, see Commission Regulation (EU) No. 1063/2010 of 18 November 2010 amending
Regulation (EEC) No. 2454/93 laying down provisions for the implementation of Council Regulation(EEC) No. 2913/92 establishing the Community Customs Code.
10
The EC granted the derogations from the GSP ROO for certain textile products originatingCambodia, which allowed for the use of woven fabric (woven items) or yarn (knitted items) imported
from countries belonging to the South Asian Association for Regional Cooperation (SAARC) or to theAfrican, Caribbean and Pacific (ACP)-EC Partnership Agreement under certain quantitative
9

capacity of textiles was limited, most garment producers exploited mainly imported materials
from major textile exporters such as China, Hong Kong, South Korea, and Taiwan (Bargawi,
2005; Yamagata, 2006). The garment products manufactured from fabric in these countries were
not qualified for EU preferential access under the previous ROO.
The new regulation in the ROO came into effective on January 1, 2011. The use of imported
fabric produced anywhere is allowed for garment products originating in Cambodia. Because
local manufacture of fabric is not required, the origin requirement is relaxed from two-stage
processing to one-stage processing (UNCTAD, 2013). These changes are summarized in Table 1.
The new ROO in EU GSP imply significant implications for garment exports to EU in Cambodia.
As a simple check, Figure 1 presents the utilization rate as measured by a share of duty-free importin the total import that entered EU markets under duty-free and MFN rate (EUROSTAT). The
utilization rate increased sharply from 72% in 2010 to 89% in 2011 for knitted garments, whereas
it also sharply increased from 56% in 2010 to 89% in 2011 for woven garments.
[Table 1 and Figure 1 here]
Another implication for analysis is that Cambodia played little role in the reform process oforigin rules applicable to EU GSP. While the low utilization of EU trade preferences in export
from developing countries provided a motivation for the reform, it is documented that domestic
stakeholders in the EU yielded a dominant influence on the reform process, as described in Inama(2011). Cambodia could not yield a strong political influence on policy-making processes in theEU, and thus played a little role in the reform processes in the EU ROO. This view is indeed
reflected in the policy report by the Royal Government of Cambodia (2014, p. 44) as follows.
“The rules of origin applicable to GSP and DFQF (duty-free quota-free) programs are determinedunilaterally by the countries offering Cambodia those programs. Cambodia has no influence overthese rules.”Moreover, the reform in product-specific origin requirements is not confined to garment
products in HS chapters 61 and 62, which are the most significant export commodities in
Cambodia. Origin-conferring criteria are also relaxed for other products, including fisheryproducts, leather products, electrical machinery, motorcycles, and bicycles. In this respect, it isreasonable to consider that Cambodia had no direct influence in determining the product-specificorigin requirements in EU GSP. Thus, I argue that the EU’s reform in ROO is an exogenous policy
shock to garment exports in Cambodia, providing an ideal natural experiment to identify a causal
effect of simple ROO on exports.

restrictions. For details, see the Commission Regulations (EU) No 1063/2010 of 18 November 2010.
10

3.

Empirical Framework
In this section, I discuss a relationship between liberal origin requirements and export, anddescribe an empirical framework to assess the causal impact of the EU’s reform in ROO on
garment exports from Cambodia. Finally, data sources are explained.
3.1. Liberal Rules of Origin and Export
To examine a linkage between liberal ROO and export, a starting point is to distinguishbetween non-binding and binding ROO for garment export in the pre-reform period. Under the
non-binding ROO, garment producers can satisfy the ROO to qualify for duty-free access to the
EU markets. This implies that simplifying ROO in the post-reform period would not affect export
decisions. As explained previously, the non-binding case would not apply to garment manufacture
in Cambodia.
Specific origin requirements in the pre-reform period are binding for garment producers when
they are prevented from using the most competitively priced inputs from third markets. As
discussed in Krishna (2006), the binding ROO constrain the choice of inputs used in garment
manufacture. When the choice of inputs is not restricted, garment producers can use the best mix
of inputs to minimize the level of production costs. By restricting the use of inputs, the unit costof production must increase with the restrictiveness of the specific origin requirements.
Additionally, garment producers must obtain a certificate of origin to prove that their garment
products satisfy the specific origin requirements. This procedure involves documentation ofsourcing to keep track of the origin of inputs and their usage. Thus, the binding ROO would
generally increase the production costs for garment producers.
In the binding case, the decision to export to EU markets under preferential treatment depends
not only on the cost of meeting ROO, but on the margin of preference for garment products in the
EU markets, i.e., the absolute difference between the MFN rate of duty and the preferential rateof duty. 11 As is formally modelled in Demidova et al. (2012), exporters can choose not to use
preferential access, but to pay the MFN tariff. While they do not need to incur the costs of meeting
ROO, they do not benefit from the preferential margin. If the costs of meeting ROO exceed thebenefit of the preferential margin, they simply pay the MFN tariff to export. As a result,simplifying ROO in the post-reform period would induce a higher fraction of potential exporters
to use preferential access. 12
These discussions suggest that liberal ROO after the EU’s reform in 2011 allowed garment
producers to use the most competitively priced inputs from third markets, thereby reducing
11

As the average tariff rates on garment products in the EU are 11.5%, duty-free access implies thepreferential margin of 11.5%.
12Since firm-destination-level data on export in Cambodia are not available, this paper does notevaluate trade adjustments at the extensive and intensive margin.
11

production costs of garment manufacture in Cambodia. Because garment producers in Cambodia
were likely to face the binding origin requirements in the pre-reform period, simplifying ROO
should increase garment exports from Cambodia to EU markets under duty-free treatment, as isobserved in the sharply increased the utilization rate of duty-free access for garment imports in
EU markets from Cambodia after 2011 in Figure 1.
3.2. Empirical Specification
To formally estimate the impact of the EU’s reform on export, I specify a following modelfor export market i, export product j, and year t:
ln 𝐸𝐸𝐸𝐸𝐸𝐸𝑖𝑖𝑖𝑖𝑖𝑖 = 𝛽𝛽1 𝐸𝐸𝐸𝐸𝑖𝑖 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 + 𝒁𝒁′𝑖𝑖𝑖𝑖 𝜷𝜷2 + 𝑓𝑓𝑖𝑖 + 𝑓𝑓𝑗𝑗𝑗𝑗 + 𝜀𝜀𝑖𝑖𝑖𝑖𝑖𝑖(1)

where 𝐸𝐸𝐸𝐸𝐸𝐸𝑖𝑖𝑖𝑖𝑖𝑖 is the value of knitted or woven garment exports from Cambodia to export market

i. 𝐸𝐸𝐸𝐸𝑖𝑖 is a dummy variable that takes on unity for EU markets, and zero otherwise. 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 is adummy variable that takes on unity after the year 2011, and zero otherwise. An interaction term
between 𝐸𝐸𝐸𝐸𝑖𝑖 and 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 takes on unity for EU markets after 2011, and zero otherwise. 𝒁𝒁′𝑖𝑖𝑖𝑖 isa vector of variables on export-market characteristics, such as GDP, GDP per capita, and productspecific tariff rates. Since Cambodia participated in regional trade agreements (RTAs) during thesample period, a dummy variable for new RTAs is included. 13 𝑓𝑓𝑖𝑖 is a country-level fixed effectto control for unobserved time-invariant country characteristics. 𝑓𝑓𝑗𝑗𝑗𝑗 is a time-varying product-level fixed effect to control for time-varying product-specific unobserved characteristics andaggregate shocks of global and domestic economies on exports across years. Finally, 𝜀𝜀𝑖𝑖𝑖𝑖𝑖𝑖 is anerror term.

The coefficient of the variable 𝐸𝐸𝐸𝐸𝑖𝑖 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 , 𝛽𝛽1 is of main interest. As explained previously,

the EU introduced new ROO in 2011 to grant duty-free access to EU markets for garment
producers in beneficiary countries that manufacture garment products using imported fabric fromanywhere. Given that imported fabric from the lowest-cost markets helps to reduce the cost ofgarment manufacture in Cambodia, the change in EU ROO is predicted to increase garment
exports from Cambodia. Thus, 𝛽𝛽1 should be positive in sign.

To identify the impact of simplifying ROO on export, my specification is based on a standard

difference-in-differences (DD) method. Specifically, I exploit two sources of variations in exports
from Cambodia. The first is a difference between exports to EU markets (a treatment group) andexports to non-EU markets (a control group). The second is a difference in exports before andafter the 2011 reform in ROO. By comparing changes in exports to EU markets before and after
the year 2011 with changes in exports to non-EU markets before and after the year 2011, the DD
method allows me to estimate the causal impact of origin-rules liberalization on exports from
13

These include ASEAN-Australia-New Zealand in force from 2010, ASEAN-India in force from2010, ASEAN-Japan in force from 2008, and ASEAN-Korea RTAs in force from 2010.
12

Cambodia. Additionally, potential confounding factors are controlled for in my empirical modelby including time-varying country characteristics, country fixed effects, and time-varying productfixed effects. These control variables help to isolate a variety of confounding factors from theimpact of the reform on exports. Finally, the identification strategy relies on the assumption thatboth exports to EU markets and to non-EU markets would exhibit parallel trends in the absenceof the EU’s reform in 2011. In section 5, I provide a graphical assessment to support the validityof the parallel trends assumption.
3.3. Data Sources
Data on export in Cambodia come from the UN Comtrade Database. I use trade statistics
reported by Cambodia. Data on GDP and GDP per capita come from the World Development
Indicator by the World Bank. Data on simple average tariff rates are taken from UNCTADTRAINS database. From the World Integrated Trade Solution (WITS) database by the World
Bank, I use data on effectively applied tariff rates, which are the lowest available tariffs such aspreferential tariff rates. Otherwise, the MFN applied tariff rates are used. Information on RTAs
are taken from the RTA database by the World Trade Organization (WTO).
4.

Estimation Results
This section presents the estimation results for exports in Cambodia. I start to describe export

trends in treatment and control groups to check a parallel trends assumption. I discuss the main
estimation results and robustness checks.
4.1. Export Trends in Treatment and Control Groups
By employing a DD method in a regression model, I can disentangle a variety of confounding
factors from a causal impact of the EU’s reform in 2011. Nevertheless, the identification strategy
relies crucially on the assumption that both exports to EU markets and to non-EU markets would
exhibit parallel trends in the absence of the EU’s reform. Without the EU’s reform, export trends
would need to move in tandem between treatment and control groups. If export trends are different
between treatment and control groups in the absence of the EU’s reform, the DD method may not
produce a valid estimate because export trends in non-EU markets may not well represent
counterfactual export trends in EU markets that would have prevailed in the absence of the EU’s
reform. Although the parallel trends assumption is critical for the DD method, it is not possible toprove the validity of the assumption because the counterfactual export trends in EU markets are
not observable.
To assess the empirical validity of the parallel trends, it is useful to describe export trends intreatment and control groups. We plot trends in total garment exports from Cambodia between
13treatment and control groups, which are normalized to take on a value of 100 in year 2010. Figure
2 shows export trends for knitted garments in HS chapter 61. Before the EU’s reform in 2011,
both treatment and control groups exhibit similar export trends during the period 2007-2010. After
2011, the treatment group shows a sharp increase in the export trends over time. Although thecontrol group also shows an upward export trend after 2011, the export growth is substantiallyhigher in the treatment group than in the control group only after 2011. Additionally, Figure 2
presents export trends for woven garments in HS chapter 62. Before 2011, there is no apparent
difference in export trends between both treatment and control groups. After 2011, the treatmentgroup exhibits a substantially larger increase in the export trend than the control group does. Taken
together, the graphical analysis lends considerable support for the parallel trends assumption,suggesting that export trends should be likely to move in tandem between treatment and control
groups in the absence of the EU’s reform.
[Figures 1 and 2 here]
A plausible critique is that the export trends may simply capture an unobserved positive shock
to imported consumer goods in EU markets after 2011. If there were unobserved shocks to
consumers’ tastes for apparel goods or consumer movements to buy import products fromdeveloping economies, these shocks might sharply increase garment exports to EU markets from
Cambodia after 2011. To check this issue, I show export trends for footwear products in HS
chapter 64. Since garment and footwear products are similar consumer goods, the unobserved
positive shocks in EU markets should also affect Cambodian footwear exports. On the other hand,the EU’s reform made little change in the product-specific origin-conferring criteria for footwear,
implying that the EU’s reform should not have any discernable impact on footwear exports. Thus,
I can use footwear exports as a fake treatment group to check the presence or absence of theunobserved positive shocks.
Figure 3 shows trends in footwear exports to EU and non-EU markets, respectively. If there
were unobserved positive shocks to similar consumer goods in EU markets, footwear exports
would exhibit a sharp increase in EU markets only after 2011. An alternative prediction is thatexport growth would be higher in EU markets than in non-EU markets after 2011. Figure 3 showsthat footwear exports appear to move in tandem for the period 2007-2010. After 2011, thetreatment group exhibits an upward export trend, but does not show a sudden rise over time.
Moreover, the export growth is smaller in the treatment group than in the control group after 2011.
These findings are not consistent with the hypothesis that unobserved positive shocks in EU
markets brought about a sharp increase in imported consumer goods such as garments andfootwear. While garment exports from Cambodia to EU markets sharply increased after 2011, theobserved export patterns would not be driven by the unobserved positive shocks to imported
consumer goods in EU markets. Thus, the export trends in footwear goods provide supportive14

evidence for the parallel trends assumption in garment exports.
[Figure 3 here]
4.2. Main Results
This section presents the results of equation (1) estimated by an Ordinary Least Squares(OLS) method. The summary statistics of the sample for garment exports are provided in Panel A
of Table 2. The baseline sample includes 28 EU countries in a treatment group and 85 non-EU
countries in a control group. A list of these countries is presented in Appendix Table 1. I report
standard errors that are corrected for clustering within the export market.
Column (1) of Table 3 shows the baseline result for knitted and woven garment products. The
coefficient of 𝐸𝐸𝐸𝐸𝑖𝑖 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 is significant and positive, consistent with the hypothesis that

simplifying ROO in the EU GSP promoted significantly exports from a beneficiary country. The
estimated coefficient suggests that garment exports to EU markets increased by 112% after
2011. 14 The impact of the EU’s reform is substantially large in magnitude. Additionally, thecoefficient of real GDP is not significant, but the coefficient of GDP per capita is significant andpositive. The coefficient of tariff rates in export markets is significant and negative. The
coefficient of RTAs is significant and positive. These results imply that garment exports are larger
in higher income markets with RTAs and lower tariff rates. 15[Table 3 here]
Among EU member countries in the sample, Croatia participated in the EU for 2013. Since
exports from Cambodia to Croatia may capture the effects of the EU membership, I exclude
Croatia from the sample. The result in column (2) shows that the coefficient of 𝐸𝐸𝐸𝐸𝑖𝑖 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 issignificant and positive. Next, there might be a potential attrition issue caused by the differential
loss of export observations between treatment and control groups. In column (3), I remove theobservations in which export data are missing at least one year in each country and product pair.
The specification is estimated for only country and product pairs with non-missing export data.
The coefficient of 𝐸𝐸𝐸𝐸𝑖𝑖 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 remains significant and positive. Additionally, some small EU
markets do not appear to support the parallel trends assumption. 16 In column (4), I estimate thespecification by excluding these small EU markets from the sample. The coefficient of 𝐸𝐸𝐸𝐸𝑖𝑖 ×

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 remains significant and positive, suggesting that garment exports increased by 219% in

the rest of EU markets. As the equality of the coefficients of 𝐸𝐸𝐸𝐸𝑖𝑖 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 is statistically rejected
between columns (1) and (2), the EU’s reform would have the larger positive impact on exports

A marginal effect in percentage changes is calculated by 100 × (exp(0.75) − 1).
The results are robust to using trade-weighted tariff rates, as reported in Appendix Table 2.
16
These countries include Luxembourg, Netherlands, Ireland, Greece, Cyprus, Estonia, Hungary,
Latvia, Lithuania, Malta, and Bulgaria. Their export trends are shown in Appendix Figures 1 and 2.
These markets accounted for 8.3% of total garment exports from Cambodia to EU in 2010.
14
15

15

to the larger EU markets that imported a majority of garment products from Cambodia. Taken
together, the main results support the positive impact of the EU’s reform on garment exports in
Cambodia. 17
Table 4 shows the estimation results for exports by product. Specifically, I distinguishbetween knitted and woven garments and estimate the regression model separately for theseproducts. Column (1) for knitted garments shows that the coefficient of 𝐸𝐸𝐸𝐸𝑖𝑖 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 issignificant and positive, suggesting that knitted garment exports to EU increased by 166% after
2011. Column (2) for woven garments indicates that the coefficient of 𝐸𝐸𝐸𝐸𝑖𝑖 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 is significant

and positive, suggesting that woven garment exports to EU increased by 310% after 2011.
Although the parameter equality of these estimated coefficients between columns (1) and (2) is
not rejected, the larger marginal effect for woven garments is consistent with the prior findingthat woven exports to EU in Bangladesh increased more rapidly than knitted garments (Curranand Nadvi, 2015).
[Table 4 here]
As discussed previously, a possible concern is that the positive impact of the EU’s reform on
garment exports may capture unobserved positive shocks to imported consumer goods in EU
markets, possibly leading to the positive coefficient of 𝐸𝐸𝐸𝐸𝑖𝑖 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 . To address this issue, I

estimate the regression model for footwear exports, which were not affected by the EU’s reformin terms of origin requirements. Column (3) shows that the coefficient of 𝐸𝐸𝐸𝐸𝑖𝑖 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 is not

significant, implying that footwear exports to EU markets did not increase significantly after 2011.
Additionally, I estimate the model for cereal products such as rice, which are major agricultural

export products in Cambodia. Since the EU’s reform made little change in origin requirements
for wholly obtained products such as domestically produced rice, agricultural exports should not
be affected by the EU’s reform. Column (4) shows that the coefficient of 𝐸𝐸𝐸𝐸𝑖𝑖 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 is positive,
but not significant. Taken together, these results support that the positive impact of the EU’s

reform on garment exports is not likely to represent unobserved positive shocks in EU markets.
4.3. Robustness Checks
For a robustness check, I estimate the impact of the EU’s reform using triple difference-indifferences (TD). An endogeneity critique may be made for a standard DD method to exploit only
country-by-country differences in exports for unobserved determinants of garment imports in EU(Besley and Case, 2000). By carefully documenting the EU’s reform processes, I argue that thepolicy change is plausibly exogenous to garment producers in Cambodia. Nevertheless, it is usefulto check the robustness of main results to alternative specifications.
17

The results are robust to including country-product-level dummy variables, as reported in Appendix
Table 3.
16

Specifically, I estimate a following model for export market i, export product j, and year t:
ln 𝐸𝐸𝐸𝐸𝐸𝐸𝑖𝑖𝑖𝑖𝑖𝑖 = 𝛾𝛾1 𝐸𝐸𝐸𝐸𝑖𝑖 × 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝑗𝑗 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 + 𝑓𝑓𝑖𝑖𝑖𝑖 + 𝑓𝑓𝑖𝑖𝑖𝑖 + 𝑓𝑓𝑗𝑗𝑗𝑗 + 𝜀𝜀𝑖𝑖𝑖𝑖𝑖𝑖(2)

where 𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝐺𝑗𝑗 is a dummy variable that takes on unity for knitted and woven exports, andzero otherwise. 𝑓𝑓𝑖𝑖𝑖𝑖 is country-product-level fixed effects. 𝑓𝑓𝑖𝑖𝑖𝑖 and 𝑓𝑓𝑗𝑗𝑗𝑗 are time-varying country
and product fixed effects, respectively. 18 While garment exports are treated products, similar

consumer products in HS chapters 63 and 64 are included as unaffected products in terms of ROO
changes in the EU’s reform. The coefficient of the triple interaction term, 𝛾𝛾1 , measures a change
in garment exports to EU markets after 2011 as compared to a baseline level of country-byproduct exports for the pre-reform period.
Column (1) of Table 5 shows that the coefficient of the triple interaction is significant andpositive. A marginal effect of the reform for garment exports is 84%. In column (2), I estimate
equation (2) for the sample excluding small EU markets, as explained above. The result showsthat the coefficient of the triple interaction remains significant and positive. Consistent with theresults in Table 3, garment exports to the larger EU markets increased more significantly after
2011. Taken together, I find that the baseline results are robust to a wide range of unobserved
determinants of garment exports from Cambodia across products, export markets, and years.
[Table 5 here]
The previous results measure the average effect of the EU’s reform during the post-reformperiod. By interacting a dummy variable for EU markets with year dummy variables in equation(1), I can examine the timing of the effects. Column (3) shows that the coefficients of theinteraction between EU markets and year dummies are positive, and also significant for 2013,2014, and 2015. In column (4), small EU markets are excluded from the sample. The coefficientsof the interaction terms remain positive, and also significant after 2012. Comparing the magnitudeof the effects across years, the results indicate that the positive impacts grow significantly overtime. Column (4) shows that the positive impact increases from 148% in 2012 to 381% in 2015.
4.4. Trade Substitution Effects
An implicit assumption in a DD method is that there is no interference between units(Rosenbaum, 2007). Specifically, it is assumed that the EU’s reform did not affect Cambodian
exports to non-EU markets, implying that exports to EU markets were not replaced by exports to
non-EU markets in the wake of the reform. If there were substitution effects, an increase in exports
to EU markets might partly originate from redirection of exports to non-EU markets. As a result,the estimated impact of the reform measures a causal impact of ROO changes on exports to EU
markets as well as the substitution effects of exporting between EU and non-EU markets. From18

As product-specific tariff rates in export markets are found to be insignificant, they are excluded
from the specification.
17

an assessment perspective, this issue indicates that the estimated impact should be interpreted
more broadly. 19 However, it still raises a question of whether trade substitution effects arequantitatively important.
I address this question in two ways. First, prior surveys on garment exporters in Cambodia
show that exporters were not likely to shift their export markets over time, as shown in Appendix
Table 4 (Asuyama et al., 2013; Yamagata, 2006). Any firm exporting to only Europe in 2002 did
not export to North America in 2008, whereas any firm exporting to only North American in 2002
did not export to Europe in 2008. Alternatively, firms exporting to multiple markets might shift
the relative volume of their exports between markets for a boom in demand. Given that capacity
constraints were binding, they might replace product orders across markets to increase profits.
However, the capacity expansion was unlikely to be binding because of small-scale capital
investment in garment factories and an abundant supply of unskilled workers in Cambodia. Thus,
firm-level surveys suggest that the EU’s reform would not strongly induce exporters to eliminate
their product orders from non-EU markets.
A second approach is to test the hypothesis that garment exports from Cambodia to non-EU
markets would decrease after the EU’s reform in 2011. Specifically, I estimate a following modelfor export market i, export product j, and year t:
𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛
ln 𝐸𝐸𝐸𝐸𝐸𝐸𝑖𝑖𝑖𝑖𝑖𝑖= 𝛿𝛿1 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 + 𝛿𝛿2 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑡𝑡 + 𝒁𝒁′𝑖𝑖𝑖𝑖 𝜹𝜹3 + 𝑓𝑓𝑖𝑖 + 𝑓𝑓𝑗𝑗 + 𝜀𝜀𝑖𝑖𝑖𝑖𝑖𝑖

𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛
where 𝐸𝐸𝐸𝐸𝐸𝐸𝑖𝑖𝑖𝑖𝑖𝑖(3)

is the value of garment exports from Cambodia to non-EU export market i.

𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 is a dummy variable that takes on unity after the year 2011, and zero otherwise. 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑡𝑡

is a time-trend variable. 20 If there were substitution effects, redirection of exports from non-EU
to EU markets should lead to a relative decrease in exports to non-EU markets after 2011. Thissuggests that the coefficient of 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 , 𝛿𝛿1, should be negative in sign.

Table 6 presents the estimation results of equation (3). In column (1) for knitted and woven

garments, the coefficient of 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 is positive, but not significant. The coefficient of 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑡𝑡 issignificant and positive, implying that exports to non-EU markets increased generally over time.

Column (2) for knitted garments shows that the coefficient of 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 is not significant. In column(3) for woven garments, the coefficient of 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 is negative, but not significant. These results

suggest that exports to non-EU markets did not decline significantly after 2011. Taken together, I

conclude that a sharp increase in garment exports to EU after 2011 should not be caused
importantly by the redirection of exports that had been previously going to non-EU markets.

19

In a similar sense, other EBA beneficiary countries affected by the EU reform might influencecompetition effects in EU markets for garment exports from Cambodia, implying that such effects
should be included in the measured impact on Cambodia.
20This specification is similar to an empirical strategy in Heilmann (2016) to examine trade
substitution effects of boycott.
18

5.

The Impact on Imported Intermediate Inputs
Discussions up to this point have demonstrated that Cambodian garment exports to EU

markets significantly increased after the EU’s reform in ROO for 2011. A main channel isconsidered as the flexible use of intermediate inputs imported from any market, which should
reduce the costs of garment manufacture in Cambodia to obtain EU preferential treatment. Thisfinding raises a question of how the EU’s reform affects international sourcing patterns ofintermediate inputs for garment manufacture in Cambodia. This section sheds light on this issue.
5.1. Descriptive Analysis
I start to describe an import pattern of textiles in Cambodia. Table 7 presents the value of
textile imports to Cambodia from major exporters, including China, Hong Kong, South Korea,
Taiwan, ASEAN, and EU. Among these markets, China accounted for the largest textile imports
in Cambodia. For instance, fabric imports from China increased from 695 million USD in 2010
to 2,161 million USD in 2015. The share of fabric imports from China increased from 42.1% in2010 to 62.6% in 2015. Also, the share of yarn imports from China increased from 24.9% in 2010
to 76.3% in 2015. As Staritz (2011) argues that Cambodia depends largely on imported textiles,
China is a key market for imported intermediate inputs used to manufacture clothing in Cambodia.
On the other hand, there is an increase in fabric imports from other markets such as Hong Kong,
South Korea, and Taiwan. However, the relative importance of these markets declined over time,suggesting that textile industries in China might be more competitive in supplying textile inputs
in terms of price, quality, and lead time.
[Table 7 here]
The findings suggest that the EU’s reform in 2011 would bring about a sharp increase in
textile imports from China. In the previous ROO, duty-free access to EU markets had also been
granted in certain conditions to garment products manufactured using imported textiles from EU
and ASEAN markets. The reform in ROO should have a weak impact on textile imports fromthese markets. By contrast, preferential treatment is granted to garment products manufactured
using imported textiles from third markets such as China. Thus, a sharp increase in garment
exports to EU markets would lead to a larger increase in textile imports from China than thosefrom other markets applicable to rules of cumulation.
To check this implication, I plot trends in textile imports to Cambodia, with the value ofimports being normalized at a value of 100 in 2010. Figure 5 shows import trends for fabric.
Fabric imports from China increased sharply after the EU’s reform in 2011. This change is instark contrast with a moderate change in fabric imports from Hong Kong, South Korea, Taiwan,and ASEAN. Additionally, Figure 6 shows a rapid increase in yarn imports from China. While theEU’s reform should reduce a demand for yarn imports to produce textiles at a local plant, an
19

increase in yarn imports may be due to the fact that yarn and fabric are jointly used to manufacture
clothing. Taken together, the descriptive analysis suggests that the EU’s reform would lead to a
substantial increase in textile imports from China.
[Figures 5 and 6 here]
5.2. Regression Analysis
To formally assess the role of China in textile imports for Cambodia, I estimate a following
model for import market i, textile product j, and year t:ln 𝐼𝐼𝐼𝐼𝐼𝐼𝑖𝑖𝑖𝑖𝑖𝑖 = ∑𝑚𝑚 𝜃𝜃1𝑚𝑚 𝐷𝐷𝑖𝑖𝑚𝑚 + ∑𝑚𝑚 𝜃𝜃2𝑚𝑚 𝐷𝐷𝑖𝑖𝑚𝑚 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 + 𝑿𝑿′𝑖𝑖𝑖𝑖 𝜽𝜽3 + 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝑗𝑗 + 𝑓𝑓𝑡𝑡 + 𝑒𝑒𝑖𝑖𝑖𝑖𝑖𝑖(4)

where 𝐼𝐼𝐼𝐼𝐼𝐼𝑖𝑖𝑖𝑖𝑖𝑖 is the value of imports in Cambodia from import market i; m indicates major

import markets including (i) China, (ii) Hong Kong, South Korea, and Taiwan, (iii) ASEAN, and(ⅳ) EU. 𝐷𝐷𝑖𝑖𝑚𝑚 is a dummy variable that takes on unity for import market m. 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 is a dummy

variable that takes on unity after 2011. 𝑿𝑿𝑖𝑖𝑖𝑖 is a vector of variables on import-market

characteristics, including GDP, GDP per capita, RTAs, geographic distance, and geographic
contiguity. 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝑗𝑗 is a dummy variable that takes on unity for fabric goods, and zero for yarn

goods. 𝑓𝑓𝑡𝑡 is a year fixed effect. Finally, 𝑒𝑒𝑖𝑖𝑖𝑖𝑖𝑖 is an error term.

The coefficients of interest are 𝜃𝜃1𝐶𝐶ℎ𝑖𝑖𝑖𝑖𝑖𝑖 and 𝜃𝜃2𝐶𝐶ℎ𝑖𝑖𝑖𝑖𝑖𝑖 . The former measures the relative sizeof textile imports from China, and the latter measures a change in textile imports from China after

2011. Table 4 presents the results of equation (4) estimated by OLS for the sample period 20072015, with standard errors corrected for clustering in the import market. Appendix Table 5
presents the summary statistics of textile imports. Column (1) shows that the coefficient of
𝐷𝐷𝑖𝑖𝐶𝐶ℎ𝑖𝑖𝑖𝑖𝑖𝑖 is significant and positive. The coefficient of the interaction term 𝐷𝐷𝑖𝑖𝐶𝐶ℎ𝑖𝑖𝑖𝑖𝑖𝑖 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 is alsosignificant and positive. These results implies that China is a key market for textile imports in

Cambodia and accounted for a significant increase in textile imports after the EU’s reform in 2011.
The coefficient of the import market dummy for Hong Kong, South Korea, and Taiwan issignificant and positive, but the coefficient of the interaction term 𝐷𝐷𝑖𝑖𝐻𝐻𝐻𝐻𝐻𝐻 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 is not

significant. As the coefficients of the interactions for other markets are not significant, textile
imports from other markets did not increased significantly after 2011.
[Table 8 here]
Columns (2) and (3) present the results separately for fabric and yarn goods. The coefficientsof 𝐷𝐷𝑖𝑖𝐶𝐶ℎ𝑖𝑖𝑖𝑖𝑖𝑖 and 𝐷𝐷𝑖𝑖𝐶𝐶ℎ𝑖𝑖𝑖𝑖𝑖𝑖 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 are significant and positive in both specifications. The

estimated coefficients suggest that fabric and yarn imports from China increased by 90% and348% after 2011, respectively. Taken together, I find that imported textiles from China
significantly increased after 2011. The results are consistent with the hypothesis that simplifying
ROO in the EU GSP encouraged the use of intermediate inputs imported from third markets suchas China to qualify for preferential market access.
20

6.

The Impact on Inward FDI
The previous analysis highlights a sharp expansion of garment exports from Cambodia to EU

markets after the EU’s reform in 2011. The export expansion can be driven not only by existing
garment factories before 2011, but by newly-opened garment factories after 2011. Given thatmany garment factories were owned by foreign investors (Yamagata, 2006), it is a crucial
question whether the reform attracted inward FDI flows and how the impacts differ by sectors.
This section sheds light on the response of inward FDI in Cambodia.
6.1. Descriptive Analysis
The EU’s reform in ROO for 2011 removed restrictions on intermediate input sourcing for
garment manufacture in Cambodia. Garment producers could exploit a wide range of intermediate
inputs imported from most efficient markets after 2011. Since more flexible use of sourcing
should improve an investment climate in Cambodia, the reform would attract foreign investors ingarment sector. On the other hand, the previous ROO generally required the use of locallymanufactured fabric from yarn to qualify for preferential access, although rules of cumulation
allowed for the use of imported fabrics from certain markets such as EU and ASEAN. The content
requirement for local inputs provided an incentive for foreign investors to manufacture textiles at
a local production plant in Cambodia. However, the removal of the local input requirements
should reduce an incentive for foreign producers to invest in a textile sector. Consequently,
simplifying ROO should produce two contrasting effects on inward FDI flows across these
sectors; (i) FDI inflows should increase in the garment sector after 2011, and (ii) FDI inflows
should decrease in the textile sector after 2011.
To examine whether these hypotheses are consistent with a pattern of FDI inflows in
Cambodia, I use data on the factory registration by the Cambodian Ministry of Industry andHandicraft. There is information on registered factories after the year 1994, including main
products, the year of establishment, location, country of investors, and capital. Figure 7 presents
a trend in FDI flows for the period 2007-2015. The total amount of capital investment by foreign
investors is shown for garment and textile sectors, respectively. As a benchmark, I also show theaverage capital investment in all manufacturing sectors. As compared with the average FDI
inflows, FDI inflows in the garment sector increased sharply after 2011. By contrast, FDI inflows
in the textile sector remained at a lower level after 2011 than the average FDI inflows. Thesefindings are consistent with the predicted impacts of the reform on inward FDI.
[Figure 7 here]
6.2. Regression Analysis
To estimate the impact of the EU’s reform on inward FDI flows in garment and textile sectors,
21

I specify a following model for sector s, parent country p, and year t:
ln 𝐹𝐹𝐹𝐹𝐹𝐹𝑠𝑠𝑠𝑠𝑠𝑠 = 𝜌𝜌1 𝐺𝐺𝑠𝑠 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 + 𝜌𝜌2 𝑇𝑇𝑠𝑠 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 + 𝜌𝜌3 𝑀𝑀𝑀𝑀𝑠𝑠𝑠𝑠 + 𝑓𝑓𝑠𝑠 + 𝑓𝑓𝑝𝑝𝑝𝑝 + 𝑢𝑢𝑠𝑠𝑠𝑠𝑠𝑠(5)

where 𝐹𝐹𝐹𝐹𝐹𝐹𝑠𝑠𝑠𝑠𝑠𝑠 is the value of foreign capital inflows in sector s from parent country p to
Cambodia in year t. 𝐺𝐺𝑠𝑠 is a dummy variable that takes on unity for a garment sector. 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 is adummy variable that takes on unity after 2011. 𝑇𝑇𝑠𝑠 is a dummy variable that takes on unity for
FDI flows in a textile sector. 𝑀𝑀𝑀𝑀𝑠𝑠𝑠𝑠 is the level of statutory minimum wages for workers in sectors for year t. 𝑓𝑓𝑠𝑠 is an industry-level fixed effect, and 𝑓𝑓𝑝𝑝𝑝𝑝 is a time-varying parent-country fixed

effect. Finally, 𝑢𝑢𝑠𝑠𝑠𝑠𝑠𝑠 is an error term.

Data on minimum wages in Cambodia are taken from the Cambodian Garment and Footwear

Sector Bulletin by the International Labour Organization (ILO, 2016, Table 1). Cambodia’s
minimum wages apply only to textile, garment, and footwear manufacturing sectors. The
minimum wages were introduced in 1997 at 40 USD per month and have been adjusted several
times. In January 2015, the minimum wages increased to 128 USD per month. Because theminimum wages do not apply to other sectors, I set a value of zero in 𝑀𝑀𝑀𝑀𝑖𝑖𝑖𝑖 for the other sectors.

The coefficients of interest are 𝜌𝜌1 and 𝜌𝜌2 . I predict a positive sign for 𝜌𝜌1 if foreign

investors in a garment sector had responded positively to the EU’s reform. I predict a negative

sign for 𝜌𝜌2 if foreign investors in a textile sector had done negatively. Table 9 presents theestimation results of equation (5) by OLS, with the summary statistics of the sample given in
Appendix Table 6. The sample includes the registered investment projects by foreign investors
from 29 parent countries in 21 manufacturing sectors for the period 1994-2015. I report standard
errors corrected for clustering in sector and parent country.
[Table 9 here]
Column (1) shows that the coefficient of the interaction term, 𝐺𝐺𝑠𝑠 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 , is significant andpositive, suggesting that FDI inflows in a garment sector increased by 86% after 2011. By contrast,
the coefficient of the interaction, 𝑇𝑇𝑠𝑠 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 , is significant and negative, implying that FDI
inflows in a textile sector decreased by 75% after 2011. 21 Consistent with the hypothesis, theseresults show that simplifying ROO in the EU GSP encouraged FDI flows in the garment sector,
but discouraged foreign investors in the textile sector to engage in local production. Additionally,
the coefficient of minimum wage is negative, but not significant, suggesting that a gradualincrease in sector-specific minimum wages had little effect on FDI inflows.
As the previous section highlights a large role of China in textile imports in Cambodia, a
related question is whether Chinese investors responded more strongly to the reform. 22 To
Estimating a specification with an interaction term of leather/footwear-sector dummy and 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 , I
found the insignificant coefficient of the interaction, consistent with the fact that the EU reform madelittle change in ROO for leather and footwear products.
22
Appendix Figure 3 shows the total amount of capital investment in a garment sector by foreign
investors for major parent countries.
21

22

address this question, I re-specify an empirical specification in equation (5) by including tripleinteraction terms, 𝐺𝐺𝑠𝑠 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 × 𝐶𝐶ℎ𝑖𝑖𝑖𝑖𝑖𝑖𝑝𝑝

and 𝑇𝑇𝑠𝑠 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 × 𝐶𝐶ℎ𝑖𝑖𝑖𝑖𝑖𝑖𝑝𝑝 , separately in thespecification; 𝐶𝐶ℎ𝑖𝑖𝑖𝑖𝑖𝑖𝑝𝑝 is a dummy variable for Chinese investors. To account for other

determinants of FDI inflows by Chinese investors, I drop 𝑓𝑓𝑠𝑠 and 𝑓𝑓𝑝𝑝𝑝𝑝 from the specification, andinclude the following variables: 𝐺𝐺𝑠𝑠 , 𝑇𝑇𝑠𝑠 , 𝐶𝐶ℎ𝑖𝑖𝑖𝑖𝑖𝑖𝑝𝑝 , 𝐶𝐶ℎ𝑖𝑖𝑖𝑖𝑖𝑖𝑝𝑝 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 , 𝐺𝐺𝑠𝑠 × 𝐶𝐶ℎ𝑖𝑖𝑖𝑖𝑖𝑖𝑝𝑝 , and 𝑇𝑇𝑠𝑠 ×
𝐶𝐶ℎ𝑖𝑖𝑖𝑖𝑖𝑖𝑝𝑝.

Column (2) shows the result for the specification with an interaction, 𝐺𝐺𝑠𝑠 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 × 𝐶𝐶ℎ𝑖𝑖𝑖𝑖𝑖𝑖𝑝𝑝.

The coefficient of 𝐺𝐺𝑠𝑠 × 𝐶𝐶ℎ𝑖𝑖𝑖𝑖𝑖𝑖𝑝𝑝 is significant and positive. The estimated coefficient suggeststhat Chinese direct investment in a garment sector is significantly larger by 371% as comparedwith other investors from different nationalities. However, the coefficient of 𝐺𝐺𝑠𝑠 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 ×
𝐶𝐶ℎ𝑖𝑖𝑖𝑖𝑖𝑖𝑝𝑝 is not significant, implying that the response of Chinese investors to the reform was notpronounced among parent countries. Additionally, column (3) presents the result for the
specification with an interaction, 𝑇𝑇𝑠𝑠 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 × 𝐶𝐶ℎ𝑖𝑖𝑖𝑖𝑖𝑖𝑝𝑝 . The coefficient of 𝑇𝑇𝑠𝑠 × 𝐶𝐶ℎ𝑖𝑖𝑖𝑖𝑖𝑖𝑝𝑝 isnegative and insignificant. The coefficient of 𝑇𝑇𝑠𝑠 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑡𝑡 × 𝐶𝐶ℎ𝑖𝑖𝑖𝑖𝑖𝑖𝑝𝑝 is positive, but notsignificant. The estimated coefficient suggests that Chinese direct investment in a textile sector isnot significantly larger as compared with other investors. There is little evidence to indicate
Chinese investors in the textile sector strongly and negatively responded to the EU’s reform for2011. Taken together, I find that textile imports increased significantly only from the Chinese
market after 2011, but there was not a pronounced surge in Chinese FDI inflows in the garment
sector. This finding suggests that both Chinese and other countries’ investors established new
garment factories and would use imported textiles from China to obtain duty-free access to the
EU markets.
7.

Conclusion
Stringent origin requirements in the EU GSP had been considered as a key reason for the low

utilization rate of trade preferences for beneficiary countries because imported inputs from thelowest-cost third markets are generally restricted to obtain preferential treatment. After the EC
adopted a new regulation to simplify ROO for the EU GSP on November 18, 2010, there was a
sharp increase in exports from beneficiaries to EU requesting preferential access. This paper seeks
to evaluate the impact of the EU’s reform in ROO on international trade and FDI in a beneficiary
country, Cambodia. Specifically, this paper focuses on a clear change in origin-conferring criteria
for garment products in LDCs from two-stage to one-stage processing, which should produce asignificant influence on garment sectors in Cambodia that largely relied on imported textiles forthe limited domestic supply capacity.
The empirical analysis demonstrates that garment exports from Cambodia to EU markets
increased significantly by 112% after 2011. The positive impact is larger for garment exports to23

the major EU markets. Textile imports such as yarn and fabric from China increased significantly
by 90% after 2011, suggesting that simplifying ROO in the EU GSP encouraged the use ofcompetitively priced inputs from third markets to qualify for preferential market access. Moreover,the expansion of garment exports was likely to be driven not only by existing garment factories
before 2011, but by newly-opened garment factories after 2011. As FDI inflows in a garment
sector increased by 86% after 2011, more flexible use of sourcing should improve an investment
climate for foreign investors in the garment sector. However, FDI inflows in a textile sector
decreased by 75%, suggesting that the EU’s reform removes an incentive for input suppliers toengage in local textile production. Taken together, the EU’s reform in ROO brought about asubstantial impact on international trade and inward FDI in Cambodia.
The findings provide crucial policy implications for preferential trade access given by
developed economies to promote an export industry in developing economies. While duty-freeaccess is a key element to support the rapid growth of manufactured exports in developing
economies, specific origin requirements in preferential schemes would have a significant impact
on whether developing economies can use preferential access. Specifically, origin-conferring
criteria should be liberal for beneficiary countries with limited domestic supply capacity. To
deliver the expected benefits of preferential access, policy makers must carefully design origin
requirements to reflect local and global supply chains involved in an export industry. However,liberal ROO may also produce a negative impact on local supplying industry by removing an
incentive to use locally produced inputs. It is crucial to take into account a negative consequence
on a local industry for setting appropriate origin requirements in preferential schemes.

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26

Table 1. Rules of Origin under EU GSP for Cambodia's Garment Products
Old Rules
Periods to apply new regulation

New Rules
1st January 2011

Origin requirements
Products

Garment products in HS chapters 61 and 62

Beneficiary country

Cambodia (Least developing country status)

Processing stages

Two stages

Single stage

Manufacture of yarn

Not required

Not required

Manufacture of fabricRequired

Not required

Manufacture of clothing

Required

Required

Use of imported fabricFrom European Union

Conditionally allowed

From ASEAN

Conditionally allowed(a)From other markets

No restriction on the useof imported textiles from

China
Hong Kong
TaiwanNot allowed

any markets

South Korea
Notes: (a) indicates rules of regional cumulation, which allow for the use of imported textiles
if garment producers in Cambodia add the larger value than the highest customs value of input
fabric originating in any one of the other countries in ASEAN, except for Myanmar; the EC
granted the derogations from the GSP ROO for certain textile products originating from
Cambodia, which allowed for the use of woven fabric (woven items) or yarn (knitted items)
imported from countries belonging to the South Asian Association for Regional Cooperation(SAARC) or to the African, Caribbean and Pacific (ACP)-EC Partnership Agreement undercertain quantitative restrictions.
Source: Author's compilation based on UNCTAD (2013) and Commission Regulations (EU)No 1063/2010 of 18 November 2010.

27

Table 2. Summary Statistics of Garment Exports
Variable

No. of Obs.

Mean

Std. Dev.

Min

Max

Log Export

1,169

6.08

3.30

0

14.48

EU × Post

1,169

0.20

0.40

0

1

Log Real GDP

1,169

5.51

1.73

0.16

9.72

Log GDP per capita

1,169

9.58

1.19

5.74

11.63

Tariff rates

1,169

8.31

11.75

0

50

Regional trade agreements

1,169

0.05

0.21

0

1

28

Table 3. Estimation Results of Garment Exports
Dependent variable: log of exports
(1)

(2)

(3)

(4)

0.75*

0.71*

0.81*

1.16**(0.32)(0.32)(0.35)(0.34)

-0.14

0.33

2.62

-0.97

(2.04)(2.08)(2.15)(1.99)

3.54+

3.29

1.32

3.57*

(1.95)(1.99)(2.01)(1.76)-0.035**-0.035**-0.038**-0.036**(0.012)(0.012)(0.011)(0.012)

1.36**

1.37**

1.39**

1.33**(0.35)(0.35)(0.34)(0.35)Country dummy

Yes

Yes

Yes

Yes

Product-year dummy

Yes

Yes

Yes

Yes

No. of observations

1,169

1,156

850

1,043

R-squared

0.88

0.88

0.89

0.89

EU × Post
Log Real GDP
Log GDP per capita
Tariff rates
Regional trade agreements

Excluding
SampleAll

Excludingpanel units

Croatiawith missing
exports

Excludingsmall EU
markets

Notes: Garment exports include knitted and woven garment products in HS chapters 61 and62; small EU markets include Luxembourg, Netherlands, Ireland, Greece, Cyprus, Estonia,
Hungary, Latvia, Lithuania, Malta, and Bulgaria; parentheses report standard errors corrected
for clustering in export markets; constant is not reported; **, *, and + denote significance atthe 1%, 5%, and 10% level, respectively.

29

Table 4. Estimation Results of Exports by ProductDependent variable: log of exports
(3)

(4)

Footwear

Cereal

62

64

10

0.98*

1.41**

-0.55

0.51

(0.39)(0.48)(0.34)(0.69)

0.27

-1.32

5.00*

2.72

(2.96)(2.83)(2.46)(6.69)

1.61

4.76*

-4.24+-2.49(2.78)(2.19)(2.49)(7.81)-0.038**-0.032-0.0095-0.0065(0.010)(0.023)(0.025)(0.011)0.93**

1.77**-0.029-0.031(0.25)(0.55)(0.55)(1.45)Country dummy

Yes

Yes

Yes

Yes

Year dummy

Yes

Yes

Yes

Yes

No. of observations

591

452

568

279

R-squared

0.94

0.88

0.88

0.82

SampleHS Chapter
EU × Post
Log Real GDP
Log GDP per capita
Tariff rates
Regional trade agreements

(1)

(2)

Knitted

Woven

Garment

Garment

61

Notes: Columns (1) and (2) exclude small EU markets, including Luxembourg, Netherlands,
Ireland, Greece, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, and Bulgaria;
parentheses report standard errors corrected for clustering in export markets; constant is notreported; **, *, and + denote significance at the 1%, 5%, and 10% level, respectively.

30

Table 5. Estimation Results of Alternative Specifications
Dependent variable: log of exports
(1)

(2)

(3)

(4)

61-64

61-64

61, 6261, 62

0.61+

0.97*

(0.35)(0.39)
0.43

0.59(0.36)(0.41)

0.57

0.91*

(0.36)(0.38)

1.05**

1.60**(0.37)(0.36)

0.85*

1.51**(0.40)(0.41)

1.06**

1.57**(0.36)(0.40)

Control variables

Yes

Yes

Country dummy

Yes

Yes

HS Chapter
EU × Garment × Post
EU × Year 2011
EU × Year 2012
EU × Year 2013
EU × Year 2014
EU × Year 2015

Country-product dummy

Yes

Yes

Country-year dummy

Yes

Yes

Product-year dummy

Yes

Yes

Yes

Yes

No. of observations

2,145

1,962

1,169

1,043

R-squared

0.94

0.94

0.88

0.90

Excluding
SampleAllsmall EU
markets

ExcludingAllsmall EU
markets

Notes: Control variables include GDP, GDP per capita, tariff rates, and new RTAs;
parentheses report standard errors corrected for clustering in export markets; constant is notreported; **, *, and + denote significance at the 1%, 5%, and 10% level, respectively.

31

Table 6. Estimation Results of Export Substitution Effects
Dependent variable: log of exports to non-EU markets
(1)

(2)

(3)

61, 62

61

62

0.041

0.10

-0.029(0.18)(0.12)(0.40)

0.17**

0.15*

0.18*

(0.048)(0.059)(0.080)

-0.36

1.28

-1.26

(2.27)(3.44)(3.00)

3.47+

0.75

5.83*

(1.94)(3.04)(2.37)-0.035**-0.039**-0.028(0.013)(0.011)(0.026)

1.25**

0.92**

1.55**(0.33)(0.25)(0.50)Country dummy

Yes

Yes

Yes

Product dummy

Yes

No. of observations

767

442

325

R-squared

0.89

0.95

0.87

HS Chapter
Post
Time Trend
Log Real GDP
Log GDP per capita
Tariff rates
Regional trade agreements

Notes: Parentheses report standard errors corrected for clustering in export markets; constantis not reported; **, *, and + denote significance at the 1%, 5%, and 10% level, respectively.

32

Table 7. Textile Imports in Cambodia
Textile Type
Exporter
China
Hong Kong
South Korea
Taiwan
ASEAN
EU
Total

Fabric

Yarn

2010

2015

2010

2015

694.5

2,161.2

36.0

174.3

(42.1)(62.6)(24.9)(76.3)

325.4

383.9

71.3

19.0

(19.7)(11.1)(49.2)

(8.3)

69.6

104.3

1.0

1.5

(4.2)

(3.0)

(0.7)

(0.6)

267.0

375.0

14.1

4.0

(16.2)(10.9)

(9.8)

(1.7)

225.1

302.7

8.3

19.6

(13.6)

(8.8)

(5.7)

(8.6)

10.0

27.1

0.6

2.0

(0.6)

(0.8)

(0.4)

(0.9)

1,650.8

3,449.7

144.8

228.5

Notes: Figures indicate the value of imports in million USD; parentheses show a percentage
share of the corresponding import in the total import; fabric indicates the commodities in HS
5208-12, 5309-11, 5407-08, 5512-16, 56, 57, 58, 59, and 60; yarn includes the commodities
in HS 50, 51, 5201-07, 5301-08, 5401-06, and 5501-11.
Source: UN COMTRADE and Taiwan Trade Statistics Search

33

Table 8. Estimation Results of Textile Imports
Dependent variable: log of imports
(1)

(2)

(3)

Fabric & Yarn

FabricYarn

3.86**

5.04**

2.43**(0.86)(1.17)(0.87)

0.95**

0.64*

1.50*

(0.28)(0.32)(0.66)

3.97**

5.08**

2.55**(0.65)(0.74)(0.90)-0.27-0.029-0.26(0.41)(0.37)(0.84)

-1.06

-0.20

-2.30*(0.97)(1.29)(1.08)

0.25

0.80

-0.15

(0.45)(0.52)(0.92)

-0.47

-0.76

0.27

(0.67)(0.83)(0.97)

0.49

0.98

-0.55

(0.58)(0.61)(1.31)

Control variables

Yes

Yes

Yes

Year dummy

Yes

Yes

Yes

Fabric dummy

Yes

No. of observations

679

455

224

R-squared

0.56

0.57

0.62

SampleChina
China × Post
HKG/KOR/TWN
HKG/KOR/TWN × Post
ASEAN
ASEAN × Post
EU
EU × Post

Notes: Parentheses report standard errors corrected for clustering in import markets; control
variables include log real GDP, log GDP per capita, RTAs, geographic distance, andgeographic contiguity; constant is not reported; **, *, and + denote significance at the 1%,5%, and 10% level, respectively.

34

Table 9. Estimation Results of Inward FDI
Dependent variable: log of capital
Garment × Post
Textile × Post

(1)

(2)

(3)

0.62+

0.61+

0.53+

(0.36)(0.32)(0.31)-1.39*-0.70*-0.72+(0.62)(0.33)(0.37)

-0.22

0.52

(0.25)(0.41)

0.92*

0.40

(0.37)(0.37)

0.054

0.32

(0.25)(0.26)

China
China × Post
Garment
Garment × China

1.55**(0.30)

Garment × Post × China

0.24(0.45)

Textile

-0.36

-0.22

(0.25)(0.29)

Textile × China-0.72(0.46)

Textile × Post × China

0.28(0.49)

Minimum wage

-0.00140.0062+0.0063+(0.0096)(0.0037)(0.0037)

Yes

Yes

Sector dummy

YesCountry-year dummy

YesYear dummy
No. of observations

456

456

485

R-squared

0.61

0.29

0.25

Notes: Parentheses report standard errors corrected for clustering in sector and country;
constant is not reported; **, *, and + denote significance at the 1%, 5%, and 10% level,
respectively.

35

Figure 1. Utilization Rate of Duty-Free Garment Imports in EU from Cambodia

Notes: Knitted and woven garments indicate the garments in HS chapters 61 and 62, respectively;
the utilization rate is computed as a share of duty-free import in the total import that entered EU
markets under duty-free and MFN rate.
Source: EUROSTAT36

Figure 2. Export Trends in Knitted Garments

Notes: The value of knitted garment exports is normalized to take a value of 100 for 2010; thetotal exports from Cambodia to EU markets and non-EU markets are shown, respectively.
Source: UN COMTRADE and Taiwan Trade Statistics Search37

Figure 3. Export Trends in Woven Garments

Notes: The value of woven garment exports is normalized to take a value of 100 for 2010; thetotal exports from Cambodia to EU markets and non-EU markets are shown, respectively.
Source: UN COMTRADE and Taiwan Trade Statistics Search

38

Figure 4. Export Trends in Footwear

Notes: The value of footwear exports is normalized to take a value of 100 for 2010; the totalexports from Cambodia to EU markets and non-EU markets are shown, respectively.
Source: UN COMTRADE and Taiwan Trade Statistics Search

39

Figure 5. Import Trends in FabricNotes: Fabric includes the commodities in HS 5208-12, 5309-11, 5407-08, 5512-16, 56, 57, 58,
59, and 60; the value of fabric imports are normalized to take a value of 100 for 2010; HKT
indicates the total fabric imports from Hong Kong, South Korea, and Taiwan.
Source: UN COMTRADE and Taiwan Trade Statistics Search

40

Figure 6. Import Trends in Yarn

Notes: Yarn includes the commodities in HS 50, 51, 5201-07, 5301-08, 5401-06, and 5501-11;
the value of yarn imports are normalized to take a value of 100 for 2010; HKT indicates the total
fabric imports from Hong Kong, South Korea, and Taiwan.
Source: UN COMTRADE and Taiwan Trade Statistics Search

41

Figure 7. Trends in Inward FDI Flows

Notes: Capital is measured in millions of U.S. dollars; garment and textile indicate the total
amount of capital by foreign investors in garment and textile sectors, respectively; Average
indicates the average amount of capital by foreign investors in all manufacturing sectors.

42

Appendix
Appendix Table 1. List of Sample Countries
Afghanistan
Czech Republic
Albania
Denmark
Algeria
Dominican Republic
AngolaEcuadorAntigua and Barbuda
Egypt, Arab Rep.
Argentina
El Salvador
Armenia
Estonia
Ethiopia (excludes
Australia
Eritrea)
Austria
Finland
Azerbaijan
FranceBahrainGermany
Belarus
GreeceBelgium
GuatemalaBelizeHaiti
Benin
Honduras
Bolivia
Hong Kong, China
Bosnia andHungary
Herzegovina
Brazil
Iceland
BruneiIndia
Bulgaria
Indonesia

KuwaitLatviaLebanonLesotho
Lithuania
Luxembourg
Macao

Qatar
Romania
Russian Federation
Saudi Arabia
Sierra Leone
Singapore
Slovak Republic

Macedonia, FYR

Slovenia

Madagascar
Malaysia
Malta
Mauritius
MexicoMoldova
Mongolia
MoroccoSouth Africa
Spain
Sri Lanka
Suriname
Swaziland
SwedenSwitzerland
Taiwan, China

Nepal

Thailand

Netherlands
New Zealand
Nicaragua

Tunisia
TurkeyUkraineUnited ArabEmirates
United Kingdom
United States

Cameroon

Ireland

NorwayCanadaChile

Israel
Italy

China

Jamaica

Colombia
Congo, Rep.
Costa Rica
Croatia
CyprusJapan
JordanKazakhstan
Kenya
Korea, Rep.

Pakistan
PanamaPapua New
GuineaParaguay
Peru
Philippines
PolandPortugal

43

Uruguay
Venezuela
VietnamAppendix Table 2. Estimation Results for Weighted Tariff Rates
Dependent variable: log of exports
(1)

(2)

(3)

(4)

0.75*

0.71*

0.81*

1.16**(0.32)(0.32)(0.35)(0.34)

-0.14

0.33

2.61

-0.97

(2.05)(2.08)(2.15)(2.00)

3.57+

3.32+

1.37

3.60*

(1.95)(1.99)(2.01)(1.77)-0.034**-0.034**-0.036**-0.035**(0.011)(0.011)(0.010)(0.011)

1.37**

1.39**

1.41**

1.34**(0.35)(0.35)(0.34)(0.35)Country-product dummy

Yes

Yes

Yes

Yes

Product-year dummy

Yes

Yes

Yes

Yes

No. of observations

1,169

1,156

850

1,043

R-squared

0.88

0.88

0.90

0.89

Excluding the

Excludingmarkets withsmall EUmissing exports

markets

EU × Post
Log Real GDP
Log GDP per capita
Trade-weighted tariff rates
Regional trade agreements

SampleAll

ExcludingCroatia

Notes: Garment exports include knitted and woven garment products in HS chapters 61 and62; parentheses report standard errors corrected for clustering in export markets; constant is
not reported; **, *, and + denote significance at the 1%, 5%, and 10% level, respectively.

44

Appendix Table 3. Estimation Results for Additional Fixed Effects
Dependent variable: log of exports
(1)

(2)

(3)

(4)

0.80*

0.77*

0.81*

1.18**(0.32)(0.32)(0.36)(0.35)

0.31

0.85

2.61

-0.12

(2.17)(2.17)(2.22)(2.23)

2.92

2.62

1.37

2.69

(2.07)(2.09)(2.07)(1.95)-0.034*-0.034*-0.037**-0.036**(0.013)(0.013)(0.012)(0.013)

1.34**

1.35**

1.39**

1.34**(0.37)(0.37)(0.35)(0.38)Country-product dummy

Yes

Yes

Yes

Yes

Product-year dummy

Yes

Yes

Yes

Yes

No. of observations

1,169

1,156

850

1,043

R-squared

0.92

0.92

0.93

0.93

EU × Post
Log Real GDP
Log GDP per capita
Tariff rates
Regional trade agreements

Excluding the
SampleAll

Excludingmarkets with

Croatia

missing
exports

Excludingsmall EU
markets

Notes: Garment exports include knitted and woven garment products in HS chapters 61 and62; parentheses report standard errors corrected for clustering in export markets; constant is
not reported; **, *, and + denote significance at the 1%, 5%, and 10% level, respectively.

45

Appendix Table 4. The Number of Garment Exporters by Destination Markets
Destination markets in 2008
North

North

North

America

America

America

EuropeOther

Destination markets
in 2002
North America

EuropeEurope

Other

Other

9

3

0

0

0

0

North America

Europe

6

10

0

1

0

2

North America

Other

0

0

0

0

0

0

0

1

0

1

0

0

0

0

0

0

0

0

1

0

0

0

0

0

EuropeEurope
Other

Other

Notes: Figures indicate the number of sample firms that can be linked between 2003 and 2009and show information on their export destination markets for these years; 164 and 122 firms
were surveyed in 2002 and 2008, respectively.
Source: Asuyama et al. (2013) and Yamagata (2006).

46

Appendix Table 5. Summary Statistics of Textile Imports
Variable

No. of Obs.

Mean

Std. Dev.

Min

Max

Log Import

679

-1.38

3.61

-10.64

7.68

China

679

0.03

0.16

0

1

China × Post

679

0.01

0.12

0

1

HKG/KOR/TWN

679

0.08

0.27

0

1

HKG/KOR/TWN × Post

679

0.04

0.21

0

1

EU

679

0.26

0.44

0

1

EU × Post

679

0.16

0.37

0

1

ASEAN

679

0.19

0.39

0

1

ASEAN × Post

679

0.10

0.30

0

1

Log Real GDP

679

5.67

1.95

-0.40

9.72

Log GDP per capita

679

9.31

1.49

5.93

11.63

Log Distance

679

8.41

0.96

6.25

9.89

Geographic contiguity

679

0.06

0.25

0

1

Regional trade agreements

679

0.07

0.25

0

1

Fabric dummy

679

0.67

0.47

0

1

47

Appendix Table 6. Summary Statistics of Inward FDI
Variable

No. of Obs.

Mean

Std. Dev.

Min

Max

Log capital

456

15.45

1.30

9.90

19.19

Garment × Post

456

0.12

0.33

0

1

Textile × Post

456

0.03

0.18

0

1

China

456

0.20

0.40

0

1

China × Post

456

0.13

0.33

0

1

Garment

456

0.32

0.47

0

1

Garment × China

456

0.04

0.21

0

1

Garment × Post × China

456

0.01

0.10

0

1

Textile

456

0.07

0.25

0

1

Textile × China

456

0.02

0.14

0

1

Textile × Post × China

456

0.01

0.10

0

1

Minimum wage

456

31.47

35.74

0

128

48

Appendix Figure 1. Garment Export Trends for Small EU Markets

Notes: The value of garment exports are normalized to take a value of 100 for 2010; the totalexports from Cambodia to Luxembourg, Netherlands, Ireland, and Greece are shown.
Source: UN COMTRADE and Taiwan Trade Statistics Search49Appendix Figure 2. Garment Export Trends for Very Small EU Markets

Notes: The value of garment exports are measured in thousand USD; the total exports from
Cambodia to Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, and Bulgaria are shown.
Source: UN COMTRADE and Taiwan Trade Statistics Search

50Appendix Figure 3. FDI Flows in Garment Sector from Major Countries

Notes: Capital is measured in millions of U.S. dollars; major parent countries for inward FDI ingarment sector accounted for 97.9% of the total capital investment during the period 1994-2015.

51

Reference
Asuyama, Y., Chhun, D., Fukunishi, T., Neou, S. Yamagata, T. 2013. Firm dynamics in the Cambodian
garment industry: firm turnover, productivity growth and wage profile under trade liberalization.
Journal of the Asia Pacific Economy, 18 (1), 51-70.
Yamagata, T. 2006. The garment industry in Cambodia: its role in poverty reduction through exportoriented development. Cambodian Economic Review, 2, 81-136.

52