[December 2018] Is Thailand’s manufacturing sector vulnerable to a potential slowdown in China?

By Joseph Oliver Willan, Business Development Specialist Baker McKenzie Thailand


Thailand has, for the most of its history been a Sinophilic country and enjoyed friendly and productive relations on many levels with China as a major trading partner in the region. However, most recently, Thailand has found itself caught in an escalating power struggle between the United States and China, as the two countries vie for power in Southeast Asia. In turn, the United States has taken more and more aggressive action against China, which many say has resulted in a weakening Chinese economy. So where does this leave Thailand’s manufacturing sector?

Strong Chinese demand for Thai exports is coming to an abrupt end as the country reels from the effects of a “phony” trade war with the United States. Growth in Thailand’s exports to China has slowed to 5.7 percent, the sluggish pace since the end of 2016. This figure indicates that the Chinese demand for goods manufactured in Thailand is cooling off, which could hamper the economic recovery of Southeast Asia’s second-largest economy.

This poses a serious challenge to Thailand’s export-driven economy, as China (with Hong Kong included in this measure), is its second-largest export market, accounting for up to 17 percent of total exports. If the Chinese economy continues to stagnate in 2019 — as expected –this cold lead to further difficulties for Thailand’s economy, despite the fact that it has enjoyed relative success in previous years. The Thai economy is increasingly vulnerable to fluctuations in external demand because of its reliance on exports for growth.

An additional concern for Thailand’s export-driven economy is the recent improvements in the Thai baht’s value against the US dollar. The value of the baht compared to the dollar has risen 8.1 percent since the start of last year, at a time when most emerging-market currencies have contracted significantly.

While a full-scale reduction of exports is unlikely to happen, a slowdown in the Chinese economy remains a real risk. While Thailand’s manufacturing sector will remain agile and well-positioned to respond to fast-growing Indian and Southeast Asian markets, these are not at a high enough stage of development to offset demand from China. While Thailand looks to diversify its economy under the auspices of Thailand 4.0, its manufacturing sector is still subject to the risk of a protracted trade war between the US and China.

Joseph

Joseph is currently a Business Development Specialist at Baker McKenzie Thailand. He graduated with an LL.B. (Hons) from the University of Lincoln. He has been residing in Southeast Asia since late 2014 and has worked in both regional and international law firms.

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