Thai Exports to CLMV: Neighbourly Support

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CEIC ASEAN Data Talk - September 10, 2015 Thailand is heading for another year of tepid growth amid sluggish private consumption and weak external demand. Trade is integral to Thailand’s open economy, accounting for about 132% of nominal GDPi. Exports are crucial engines of employment and sources of income. At the same time, they are vital sources of government tax revenue and foreign exchange reserves. Exports (including re-exports) account for two thirds of Thailand’s nominal GDP but are on course for a third consecutive year of negative year-on-year growth. A number of factors are weighing down on exports, including economic slowdowns in China and Japan, lacklustre demand from the US and EUii, and an electronics sector that is falling out of sync with the global supply chain amid shifting preferences for high-technology consumer electronics. In the interim, Thailand should capitalise on its geographical location and export more to the CLMV economies (Cambodia, Laos, Myanmar and Vietnam). Exports Remain the Main Contributors to Nominal GDP High Reliance on Computer Parts Exports Highlight Structural Concerns in the Electronics Sector Manufacturing products comprise the bulk of exports and are likely to remain depressed due to weak global demand for electronics. The latter comprise the country’s largest export sector, with a total value of US$33.3 billion in 2014, which is equal to 16.5% of manufacturing exports and 14.6% of total exports. While Thailand exports high-value electronic items, such as integrated circuits, the reliance on computer parts exports, which includes hard disk drives (HDDs)iii, highlights vulnerabilities from such a narrow focus. Thailand is the second-largest producer of HDDs; they are used mainly in PCs and laptops but are being challenged by solid state drives (SSDs) which are used in ultra-thin laptops, smartphones, and tablets. As consumer product preference shifts in this way and as Thailand competes with lower cost destinations in China and CLMV for manufacturing foreign direct investment, Thailand must upgrade its electronics sector and integrate into the higher-value added electronics global supply chain; this will require public and private sector investment in research & development (R&D), and improvements in competitiveness by enhancing the technical capabilities of the country’s workforce. Thailand can also lure established high-technology manufacturers by offering more favourable investment incentivesiv and by capitalising on its trade and infrastructure advantagesv. Thai Exports to CLMV Rising as a Percentage of Total Exports As the process of export restructuring in the electronics sector will take years, Thailand must look to ASEAN to expand trade. Favourable demographic profiles, specifically the 600 million consumer market of the ASEAN Economic Community (AEC), and economic growth among ASEAN member states support intra-ASEAN exports and provide a counterweight to the slowdown in China’s economy and weak demand from developed economies. Exports to CLMV have experienced strong growth in recent yearsvi, doubling from US$9.4 billion in 2009 to US$20.5 billion in 2014 (growing at an annualised rate of 13.8%). As economic growthvii propels infrastructure spending and urbanisation in CLMV economies, Thailand can capitalise on these economies’ demand for the necessary raw materials, equipment and machinery needed to fuel their economic growth and development. Thai exports of electrical machinery & equipment to CLMV expanded by 41.1% in 2014 after growing by 28.8% in 2013; as a result, the share of electrical machinery & equipment exports to the CLMV economies has grown from 5.5% in 2012 to 8.3% in 2014. Thailand’s cultural similarities with CLMV economies and its well-developed consumer industry offer Thai companies advantages to fill the needs of CLMV economies’ growing demand for consumer durable and non-durable goods. Thailand is the second-largest producer of air conditioners, the fourth-largest producer of refrigerators, and the twelfth-largest automotive producer. Thai vehicle exports have seen their share of total exports to CLMV economies rise from 7.1% in 2012 to 8.4% in 2014; low vehicle ownership rates, favourable demographics, economic growth, and a growing middle class among CLMV economies provide solid growth pillars for vehicle exports and the regional automobile industry. Top Export Products to CLMV The integration of the AEC and trade liberalisation under the ASEAN Free Trade Agreement (AFTA)viii will further increase Thai exports to CLMV economies. Moreover, the military-appointed government has planned an infrastructure spending programme of US$100 billion over seven years on rail and highway links to CLMV economies to increase trade by enhancing Thailand’s transport network. Top Export Markets Year-On-Year Growth Thailand’s Top Export Markets By Derrick Metriyakool - CEIC Analyst i. Total trade as a percentage of nominal GDP is the ratio of the sum of exports and imports to nominal gross domestic product (GDP). This indicator, also called the trade openness ratio, reflects a country’s integration or openness to the global economy. In 2014, Thailand’s total trade as a percentage of nominal GDP totaled 132% compared to 48% in Indonesia, and 138% in Malaysia. ii. Weak exports are exacerbated by the withdrawal of the EU’s generalized scheme of preferences (GSP) on over 6,200 Thai products on January 1, 2015. The GSP allows developing country exporters reduced tariffs or no duties on their exports to the EU until the country is deemed competitive enough to no longer need preferential tariffs. iii. The Board of Investments (BOI) highlights opportunities for growth in the market for enterprise storage, where hard disk drives (HDDs) still dominate due to its substantially lower costs compared to solid states drives (SSDs). iv. Thailand offers various tax and non-tax incentives to entice foreign investors. Please refer to the Board of Investment for a list of investment incentives under the Investment Promotion Act B.E. 2520. On April 16, 2015 the BOI announced it will offer maximum incentives to a list of 13 targeted industries covering 61 business activities that invest in Thailand’s special economic zones; businesses covered under the 13 targeted industries will receive the maximum incentives, which includes an 8-year corporate income tax exemption plus an additional 5-year 50% corporate income tax reduction. The 13 targeted industries include critical manufacturing sectors such as automotive, machinery and parts manufacturing and electronics and electrical appliances manufacturing. The BOI also eased rules and regulations on utilizing used machinery in BOI promoted projects. Businesses are allowed to use machinery older than 5 years but not exceeding 10 years; however, imported used machinery do not qualify for import duty exemption. v. Thailand allows foreign companies access to Asia-Pacific markets through its various free trade agreements with ASEAN, Australia and New Zealand, China, India, Japan, and South Korea. The country has a well-developed transport and communications infrastructure, reliable and affordable electricity, and is in the process of expanding its railway and highway links to CLMV economies and southern China. vi. Robust growth of exports to CLMV economies has seen their share of total Thai exports to ASEAN increase from 30% in 2012 to 35% in 2014. Over the same period, the share of total Thai exports to CLMV economies has increased from 7.5% in 2012 to 9.2% in 2014. vii. Thailand will be competing with CLMV economies for foreign direct investment. Manufacturers are choosing to relocate their operations in CLMV given their favourable demographics, low labour and manufacturing costs, and proximity to China-based supplies. viii. Trade liberalisation and tariff reductions under the ASEAN Free Trade Agreement (AFTA) have seen the average Common Effective Preferential Tariff (CEPT) among the CLMV economies fall from 7.3% in 2000 to 1.8% in 2013. ix. The A6 aggregate is comprised of Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand. Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog

10th September 2015 Thai Exports to CLMV: Neighbourly Support

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