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What are Thailand’s options as trade war escalates?

One year after the tit-for-tat trade battle began, US exports to China have declined by 38% while China’s exports have fallen by 13% in the face of higher US tariffs. Both economies are suffering from the trade war.

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As the intensifying US-China trade war plunges the world into an economic slowdown, Thailand urgently needs to review trade policies to save its export-dependent economy.

One thing is clear: Trade conflicts between the world’s two biggest economies will drag on for a long time.

The result is an economic slowdown across the globe and severe impacts on supply chains. The sooner we act to minimise the fallout and seek new trade opportunities, the better.

Since our economy is heavily dependent on China, we will inevitably be affected by the slowdown.

But there are a number of things we can and must do to lessen the impacts of this protracted trade war.

These include the need to reduce economic risks from our current over-dependence on China’s economy while also expanding trade in Asean, which is now Thailand’s biggest export market. Thailand must also expand access to other markets through active trade negotiations.

At the same time, it must help the private sector prepare for change. Additionally, the country must ensure fair distribution of costs and benefits of trade by addressing legitimate public concerns that include the rising costs of healthcare and farming.

UNDERSTANDING TRADE WARS

The US-China trade war is only the tip of the iceberg of larger structural conflicts in world politics. That’s why the tensions will not end soon. One year after the tit-for-tat trade battle began, US exports to China have declined by 38% while China’s exports have fallen by 13% in the face of higher US tariffs. Both economies are suffering from the trade war.

So are the countries and businesses which operate in their supply chains.This kind of rivalry is nothing new. Conflicts have occurred throughout history, whenever a hegemonic power is challenged by a rising rival. This is sometimes referred to as the Thucydides Trap, after the ancient Greek conflict between Sparta and upstart Athens.

Over the past five centuries, such geopolitical rivalries have produced 12 wars, including two world wars, according to Graham Allison of Harvard University. Now, the world is reeling with anxiety over how the latest political and ideological confrontation will unfold.

The US trade deficit with China is often pinpointed as the reason why Washington is slapping higher tariffs on Chinese goods. In reality, the move was spurred by China’s rapid economic growth, technological prowess, and increasing global influence that challenges America’s status as sole superpower.

Surveys from leading institutions indicate that China’s influence in Asia has already exceeded that of the US on all fronts except for American “soft power” in the cultural and education sectors.

The US disengagement in Asia provided a vacuum for China to fill through trade, investment and aid money, resulting in a shift in geopolitical power.

As Asia tips towards China, only those countries with a long history of distrust and conflicts with China, such as Japan, India, and South Korea, remain outside its sphere of influence. But probably not for much longer.

RISKS AND OPPORTUNITIES

But trade wars also bring opportunities, as demonstrated when Japan faced US trade sanctions in the 1980s.To make their products more competitive, Japanese industries moved production bases to other countries. Southeast Asia, especially Thailand, benefited greatly from this strategy. The same thing is happening this time.

The auto, electronics, household appliances, and petrochemical industries are rushing out of China to survive.Asean countries are the main destination. While Thailand is a top choice, it lags far behind Vietnam, which is currently the biggest winner in this trade war.Along with its developed labour force and infrastructure, Vietnam’s membership of 12 foreign trade agreements (FTAs) makes the country more attractive and profitable for foreign investors.

While Thailand does need to adjust its trade policy, it must first reduce risks from overdependence on China’s economy.In the past decade, China’s investment in Thailand has increased 46 times, from 0.3% to 14% of total foreign direct investment (FDI). During the same period, Thai exports to China have increased from 9% to 12% of total exports, while tourism revenue from China has jumped from 5% to 29%. The Thai economy is thus facing big trouble as China slows down.This is where Asean can come to Thailand’s rescue.

Asean is already Thailand’s biggest export market, contributing 25% (US$68 billion) of Thai export revenue. This is more than double Thai exports to the Chinese market (US$30 billion).As of 2017, 214 publicly listed Thai companies are investing in Asean, of which 161 are in Cambodia, Laos, Myanmar and Vietnam (CLMV). It’s clear that to maintain economic health, Thailand should strengthen and expand its export market in Asean – especially our immediate neighbours.

FTA UPGRADES

In addition to attracting foreign direct investment to the Eastern Economic Corridor, Thailand needs to speed up trade negotiations through various free trade agreements to access wider markets.In short, we need to do what Japan and Vietnam have done.

We also need effective negotiations to maximise benefits for the country.Thailand should speed up its FTA talks with the European Union and also upgrade the Japan-Thailand Economic Partnership Agreement (JTEPA). Elsewhere, progress towards the Regional Comprehensive Economic Partnership (RCEP) is facing resistance from India. Thailand should instead focus on the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the third-largest free trade area in the world. The longer it takes to join, the fewer benefits we will receive.

But the CPTTP is highly controversial. Civil society groups are against it because it will make medicines more expensive and strengthen agro giants’ monopoly on seeds. Meanwhile, its tax exemption for digital trade will boost US tech giants even further.But these concerns can be addressed by increasing the national budget for universal healthcare, strengthening the FTA Fund for research and development in agriculture, and using domestic laws to protect local farmers, consumers and the environment.

The tax exemption for digital trade should also be put off until a study on the issue by the Organisation for Economic Cooperation (OECD) is completed.We should be aware too that the CPTPP provision on international access to Thailand’s government procurement market will help lift standards, increase both transparency and efficiency, and reduce corruption.Meanwhile, Thailand needs to fix law and regulations that increase business costs and reduce our competitiveness in the global export market. State authorities also need to strengthen domestic laws and make decision making inclusive, to win public confidence in trade.Free trade agreements are not a zero-sum game. Both parties win some and lose some. Only if Thailand acts fast and shrewdly can we hope to escape the fallout of a US-China trade war with no end sight.

Somkiat Tangkitvanich

Somkiat Tangkitvanich, PhD, is president of the Thailand Development Research Institute (TDRI). Policy analyses from the TDRI appear in the Bangkok Post on alternate Wednesdays.

The post Thailand’s options as trade war rages appeared first on TDRI: Thailand Development Research Institute.

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