Tuesday, July 16, 2019

How Thailand is affected by US-China trade conflict

Jan 02. 2019
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By Jae Young Lee, Ruperto Pagaura Majuca
Special to The Nation

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Amid an escalating trade war marked by tariffs and counter-tariffs on exports, the United States and China are in the midst of a 90-day ceasefire to allow both sides to negotiate.  As a leading Asean economy, Thailand faces both challenges and opportunities from the trade war.

The Asean+3 region which also includes China, Japan and South Korea is being challenged by negative spillover from trade destroyed by the conflict. But it also has the potential to benefit as trade and investment is diverted away from the war zone. 

Potential damage, benefits

Possible impacts of the trade war on Thailand are multifaceted. On the one hand, destruction of trade could hit Thai industries supplying intermediate goods or those that are part of the global value chain. 

Meanwhile demand for Thai exports could fall if growth slows in the US and China. The impact of trade destruction could be large since the Thai economy is highly dependent on trade, although diversification of our exports over the years should cushion the blow.

At the same time, certain Thai industries may benefit from the conflict, as the US and China import more substitute products from Thailand. Likewise, Chinese or US firms may relocate their production to Thailand as a way of avoiding the additional tariffs on domestic exports.

 Overall, we estimate that the total net effect of the trade war on the Thai economy will be marginal. The potential winners are Thai industries that export finished products in competition with the US and China, while the potential losers are those who export intermediate goods for processing to either America or China. 

Preliminary results of our study analysing the impact of US tariffs on $50 billion worth of Chinese goods show that Thai producer-exporters of auto and transport equipment, as well machinery, will experience a marginally positive impact. On the other hand, chemical and rubber-product manufacturers will experience a decline totalling 0.005 per cent and 0.003 per cent of GDP respectively. 

One large automotive parts manufacturer in Thailand said it is confident of weathering the impact of the trade conflict thanks to its geographic spread both in terms of manufacturing and markets. 

It has factories in Michigan and Kentucky in the US, and is a supplier to all the big-three automakers there, besides also producing parts for Tesla and supplying aluminium car bodies to several other companies. In all, the company has production units across seven countries, including in China, and its main production base in Thailand targets exports markets in Asean, the European Union and the Middle East. 

Evidence indicates Chinese or even US companies will relocate production activities to Thailand as a way to bypass the tariffs. 

For instance, a survey of US companies operating in China conducted in 2018 found that 18.5 per cent of respondents had either relocated or were considering relocating manufacturing facilities from China to the Asean region over concerns arising from the US-China trade conflict. 

Mitigating measures

Although the trade conflict’s impact on the Thai economy is not expected to be severe, the government could consider adopting measures to mitigate potential damage to certain sectors and use this opportunity to enhance efficiency and productivity. 

First, the Thai government could encourage companies to produce more finished goods for export that can absorb any losses in the intermediate goods market. 

Thai companies should also be encouraged to diversify their export markets so that they reduce their reliance on US and Chinese demand. 

Second, Thailand could strengthen efforts to promote inward foreign direct investment and present itself as a viable and attractive destination for manufacturers looking to move their production out of China. 

And third, the government can help suppliers affected by the trade conflict to restructure their operations. 

In particular, the government can support Thai companies’ outward direct investment efforts and diversification strategies.

Jae Young Lee is lead economist, and Ruperto Pagaura Majuca is a senior specialist, at the Asean+3 Macroeconomic Research Office (AMRO).

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