How US-China trade impacts Thailand
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How US-China trade impacts Thailand

The hope is that Thailand can reap the windfall from relocation of China-based multinationals - but all Asean economies hope for the same gains.
The hope is that Thailand can reap the windfall from relocation of China-based multinationals - but all Asean economies hope for the same gains.

Perhaps the most apt saying to apply to the so-called "trade war" between the United States and China is "when elephants fight, it is the grass that suffers".

Those who suffer the most from further escalation between the two giants will be the smaller export-dependent countries. The latest US trade policy offensive earlier this month saw President Donald J Trump threatening to impose further tariffs on US$267 billion of imports from China, bringing the amount of Chinese exports that could be subject to higher tariffs to a whopping $517 billion -- nearly the entire value of China's exports to the US.

A number of other tensions rising from the North American Free Trade Agreement and the US-European Union automotive dispute have fanned the flames of trade tensions. Given all these seemingly worsening trade conflicts, what might be the impact on the economy of smaller and relatively open economies that have long relied on trade and investment, such as Thailand?

To discern possible impacts that could affect Thailand, we need to first understand the key features of today's global trade. Unlike earlier decades of the 20th century, today's trade from banana chips to computer chips are undertaken through the increasingly connected global value chain in various industries. The extent the global value chain has transformed the nature of trade and investment flows is so extensive and consequential that a 2010 World Bank Report on the subject saw it as the "backbone and central nervous system" of the global economy.

In plain words, a value chain refers to a full range of activities that firms and workers do to bring products and services from its conception to end use and beyond, covering activities from research, design, production, distribution, marketing, and support to consumers and their final consumption. This entire process extends beyond the physical aspects of production and distribution activities, often referred to as supply chains.

Trade and investment flows that are undertaken through the value chains of industries therefore cover both intermediate and final products. What this means is twofold.

First, products that are traded globally generally consist of parts that come from a complex chain of supply networks that extend beyond that particular industry. For example, only 32% of the value added in world exports of motor vehicles was derived from the motor industry while 68% originated in other industries, according to another 2016 World Bank report on value chains and economic development.

Second, these complex supply chains link industries, firms and workers across countries. One popular example that is normally given to highlight this aspect is Apple. Based on its published list of suppliers in 2018, Apple's top 200 suppliers are spread out over 10 countries. China and Taiwan together remarkably account for 78% of these suppliers at 27% and 51%, respectively.

Given these intricate and complex value chain relationships, the consequences from an escalating trade war are not limited only to immediate trade-specific impacts resulting from shifting flows of trade creation or diversion among countries.

Two other issues that need to be discussed in relation to subsequent repercussions from the escalating US-China trade tussle are the realignment and reconfiguration of global value chain activities and the uncertainties in the global business environment that could hamper Thailand's growth prospects going forward.

The first concern is whether and to what extent Thailand could be affected from the shift and change in global value chain activities of multinational firms that seek alternative locations away from China.

While it is likely that countries in Southeast Asia may actually benefit from inward investment of firms that need non-China export bases, setting up new supply chain networks is not a simple decision that can be taken lightly by those multinationals.

The hope in many circles around here is that Thailand could reap the windfall from the relocation of China-based multinationals firms that are facing tariff hikes, in sectors like robotics, aviation parts, automotive, computer parts and electronics. This could even generate more momentum for the Eastern Economic Corridor initiative.

On this point, Thailand faces strong competition from neighbours in Southeast Asia, particularly Malaysia and Vietnam.

Vietnam's advantages lie in its still relatively lower costs of production which make it more suitable as an assembly platform. Malaysia's strengths, on the other hand, are derived from the dense and well-established supplier networks in sectors like electronics that could form the necessary base for supply chain realignment.

Thailand's comparative advantages in its competitive neighbourhood lie in its geographical location as a gateway to the CLMV countries (Cambodia, Laos, Myanmar, and Vietnam) that represent a market of more than 170 million and a combined GDP of more than $300 billion.

Including Thailand itself, the entire "CLMVT" space beckons as a market of nearly 250 million and an overall GDP of over $700 billion. Moreover, this increasingly integrated mainland Southeast Asia area is relatively young and dynamic, one of the world's fastest-growing regions.

However, companies that have established supply chain networks in China are not only looking for access to markets alone. Sophisticated suppliers that can handle more advanced parts are also what make China attractive to leading multinational firms like Apple. In its annual disclosure of its supplier list, Apple showed that its China-based suppliers surged from 19 in 2017 to 27 a year later, making it the country with the biggest year-on-year leap, at 42% in the number of suppliers.

This does not come only from the lower cost of production or government incentives. Successive and continuous investment in improving the capacity of domestic suppliers by both the government and the private sector as well as reducing bureaucratic procedures are among the main factors that foreign investors look for when deciding on foreign investment destinations. In 2016, according to the World Intellectual Property Organisation, China harboured the world's second-highest patent applications per $100 billion of GDP, trailing only South Korea, whereas Thailand did not make it on the list.

The upshot here is that predicting the consequences of the US-China trade war on Thailand needs to look beyond immediate trade-specific impacts and focus more on repercussions that can be affected by investment decisions. Moreover, these impacts should not be viewed only at the aggregate country-level as they differ across industries and firms. Finally, the economic uncertainty that stems from this exacerbating trade war, coupled with Thailand's own political uncertainty, raises more risks that must be monitored and handled with alertness vigilance and foresight.

Pavida Pananond, PhD, is Associate Professor of International Business at Thammasat Business School, Thammasat University.

Pavida Pananond

Thammasat University Professor

Pavida Pananond, PhD, is Professor of International Business at Thammasat Business School, Thammasat University.

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