Balancing geopolitics
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Balancing geopolitics

Thailand must tread carefully as the nation seeks to benefit from shifting global trade dynamics

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The trade war between China and the US and EU has prompted Beijing to find ways to offload its excess production capacity to other trading partners, including Thailand, negatively affecting local industries.
The trade war between China and the US and EU has prompted Beijing to find ways to offload its excess production capacity to other trading partners, including Thailand, negatively affecting local industries.

Geopolitics has the potential to significantly influence global trade dynamics, particularly as tensions rise and alliances shift among nations.

Since 2018, geopolitical tensions, notably between the US and China, have led to a surge in trade restrictions. The average tariffs on goods traded between these two nations have increased significantly, contributing to a decline in trade volume.

The Russian invasion of Ukraine further exacerbated geopolitical tensions, leading to a dramatic collapse in trade between Russia and Western countries. This conflict not only disrupted direct trade, but also prompted a reconfiguration of supply chains, with countries aligning their trade policies based on geopolitical proximity.

Geopolitical alignment is increasingly dictating trade relationships. Countries are forming blocs based on shared interests, leading to a decrease in trade between geopolitically distant nations.

KEY FACTOR

Benjarong Suwankiri, senior executive vice-president of the Export-Import Bank of Thailand, said geopolitics has become a crucial factor in strategic planning.

This discussion is not limited to management, but is also happening in boardrooms, focusing on how to develop strategies, he said.

"Conflicts in various regions around the world pose 'country risks', affecting debt repayment capabilities and exchange rates in countries involved in geopolitical issues, or those that are vulnerable to such situations," said Mr Benjarong.

"The Russia-Ukraine conflict and tensions in the Middle East are affecting international shipping, raising costs related to trade and investment."

For Thailand, where exports account for around 60% of GDP and tourism another 10%, conflicts in various regions across the globe can have an adverse impact on the country, he said.

According to Mr Benjarong, geopolitics is a critical factor in determining how external environments impact Thai businesses and the economy. No one knows how long this balancing act will last, he said.

TECHNOLOGY WAR

"The nature of the conflict has shifted from a trade war to a technology war between the US, Japan, South Korea, Taiwan and the Netherlands, which have allied, and China, which is striving to develop its technology and catch up, in particular producing semiconductors smaller than 5 nanometres," said Mr Benjarong.

"This technology war has led to a supply chain war and decoupling, with the relocation of production bases. Thailand, which has positioned itself as neutral in these conflicts, is trying to attract multinational companies to set up production bases here, aiming to be part of the high-tech supply chain, such as in the semiconductor industry."

Thai products benefiting from geopolitical issues are mostly those that can replace products from conflicting countries, he said.

For example, Thailand exports rubber products and electrical appliances to the US as substitutes for Chinese goods.

However, this substitution is limited, as the products the US imports from China are not the same as those Thailand exports.

With the Russia-Ukraine war, Thailand's palm oil exports have benefited from rising prices related to disruptions in sunflower oil supplies from Russia and Ukraine, leading to an increase in global vegetable oil prices.

Some raw materials and intermediate goods that Thailand used to export to China are now being redirected to new production bases, such as Vietnam. These goods include electronic components, parts for electrical appliances, processed rubber, processed wood and chemicals.

CAUTION ADVISED

Mr Benjarong said foreign investors are choosing Thailand partly because of its neutral stance in geopolitics, allowing it to benefit from trade and investment being diverted from conflicting countries.

However, he advises caution, especially regarding products for which China has expanded investment in Thailand to use as a manufacturing base for exports to the US, in order to avoid a trade war.

One example is solar panels, as shipments from Thailand increased to the US recently. However, the US initiated an anti-dumping and countervailing duty investigation on solar panels from Thailand, and penalties could be applied to Thai exports, said Mr Benjarong.

Another impact from geopolitical tensions on Thai exports is rising shipping costs as conflicts continue in the Middle East between Israel and Hamas, Hezbollah in Lebanon and Houthi rebels in Yemen.

These conflicts have disrupted key shipping routes, such as the Bab-el-Mandeb Strait and the Suez Canal, which are crucial for transporting goods from Asia to Europe. As a result, some ships have opted to bypass these routes by sailing around Africa, increasing shipping costs.

The trade war between China and the US and EU has prompted Beijing to find ways to offload its excess production capacity to other trading partners, including Thailand.

This shift had a negative impact on Thai industries, including the automotive and auto parts sectors, as Thailand's internal combustion engine vehicle segment was disrupted by an influx of Chinese electric vehicles.

Similarly, Thailand's steel industry continues to be affected by Chinese dumping, he said.

Mr Benjarong said since the onset of the trade war, exports to the US have grown at double-digit rates, making the US Thailand's top export market, surpassing China since 2019.

Thailand is also diversifying its exports to markets with good growth prospects, while benefiting from the relocation of production bases out of China to other countries, such as India, Saudi Arabia and South Africa.

SLOW TO ACT

Somjai Phagaphasvivat, an independent political and economic analyst, said Thailand has been slow to respond in the geopolitical game.

In certain instances, policy shifts may have caused misunderstandings with some major powers, he said.

An example of Thailand's hesitancy is the country has yet to sign a free trade agreement (FTA) with developed markets such as the EU, while Vietnam already finalised a pact with the bloc.

FTA negotiations with the EU have been stalled since the 2014 coup. Thailand has a Partnership and Cooperation Agreement with the EU, signed two years ago.

Finalising the details on an FTA between Thailand and the EU is expected to take a considerable amount of time, said Mr Somjai.

Negotiations for the Thai-EU FTA are expected to begin next month. Vietnam signed its FTA with the EU many years ago, he said.

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) includes 11 countries and four Asean nations -- Vietnam, Brunei, Singapore and Malaysia -- but not Thailand.

This puts Thailand at a disadvantage to its competitors when exporting goods to Canada, Mexico, Chile and Peru, as CPTPP members enjoy zero tariffs when exporting to fellow members.

Although Thailand has bilateral FTAs with Peru and Chile, it lacks such agreements with Mexico and Canada.

CPTPP is a trade agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. It evolved from the Trans-Pacific Partnership, which faded after the US withdrew.

The combined economies of these 11 countries account for 13.4% of global GDP (around US$13.5 trillion), making the CPTPP the third-largest free trade zone in the world by GDP, after the North American Free Trade Agreement and the EU.

While Thailand is a member of the Regional Comprehensive Economic Partnership (RCEP), which includes economies representing 30% of global GDP, the standards set by RCEP are lower than those of the CPTPP.

As a result, if Thailand exports goods to Australia, New Zealand and Japan, which are CPTPP members, it may face trade barriers because of the CPTPP's higher product standards, said Mr Somjai.

RCEP is Thailand's 14th trade pact, initiated by Asean to promote trade among member states and with their FTA partners.

Asean member nations comprise Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam, while the five trading partners are Australia, China, Japan, New Zealand and South Korea.

RCEP aims to eliminate trade barriers and promote investment, helping emerging economies catch up globally.

RCEP developed from the Asean+3 and Asean+6 frameworks, part of a strategy under the AEC Blueprint to maintain centrality in driving larger economic integration in the region.

On Nov 15, 2020, RCEP ministers from 15 countries signed the RCEP Agreement during the 4th RCEP Summit via teleconference.

WALKING A TIGHTROPE

He said Thailand's memberships may raise questions about its alignment and whether it leans towards one bloc or another.

Thailand is a member of the Indo-Pacific Economic Framework for Prosperity, a 14-nation group led by the US, but it is also attempting to join BRICS, a group led by Russia and China that opposes the US.

This duality has led to a perception that Thailand may not be aligned with the US, said Mr Somjai.

For instance, Saudi Arabia wanted to join BRICS but hesitated, not wanting to be misunderstood by the US, he said.

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