Growing Trade Integration with China: Impact on Thailand’s Overall Trade

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Growing Trade Integration with China: Impact on Thailand’s Overall Trade

Exports to Thailand constituted just 1% of China’s total exports in 2007, and imports from Thailand constituted 2% of total Chinese imports.
For Thailand, China is the third most important export destination absorbing 10% of Thai exports in 2007 (up from 7% in 2004).
Second single largest source of Thai imports after Japan, providing 12% of Thai imports in 2007 (up from 9% in 2004).
Thailand’s exports to China grew faster than its bilateral imports in the 2002-07 period.
But, Thailand's trading partners with whom it had a deficit, China's ranking jumped from 8 in 2002 to 4 in 2008.

Major Products in Bilateral Exports and Imports

Relative Export Market Performance in Machinery Industries

Thailand increased its share in the Chinese electrical machinery imports from 1.6% in 2001 to 2.2% in 2007. In the Chinese machinery market, Thailand increased its market share from 2.4% in 2001 to 5.6% in 2007.
Between 2001 and 2007, China’s shares in the US, EU and Japan increased for both sectors.
All the major ASEAN countries- Malaysia, Singapore, Philippines and Indonesia, lost market shares in these developed countries significantly.
But, Thailand increased its shares in the US, EU and Japanese markets, though these increases were of a much lower extent.

Nature of Thailand’s Trade in Electrical Machinery Industry

Thailand was still exporting final consumer products (of the less sophisticated type) to the developed markets, but the share of ICs & microassemblies had increased much more.
Thus, Thailand has been involved in two-way trade in electrical machinery parts & components with the developed countries.
But, Thailand has also been involved in direct sales of final products to the developed country markets, such as the US and Japan.
Thailand has been involved in Chinese hub-based two-way trade in the electrical machinery and machinery industries.

Differentiating the Impacts of Deeper Trade Integration in China-centric IPNs

IIT can be in horizontally differentiated goods (HIIT) or goods that differ in appearance and attributes but have similar qualities and therefore prices; or
Trade in products differentiated by quality, accounting for specialisation along ranges of quality within industries.
Unit values (UV) of exports and imports are employed to untangle the two types of IIT since relative prices generally reflect relative qualities.
The methodology is based on the assumption that a “significant” gap (kept at 25%) between the unit value of imports and the unit value of exports for each commodity reveals the qualitative differences of the products exported and imported between the two economies.

IIT in Electrical Machinery Industry

Between 2001 and 2007, the share of IIT in total bilateral trade in the electrical machinery industry showed a decrease from 97% to 86% respectively.
Due to significant increase in the number of products, the majority of which involved only imports from China.
Out of total (allotted) bilateral IIT, the share of vertical IIT showed a decline from 92% in 2001 to 90% in 2007.
Thailand’s specialisation appears to be getting concentrated around electrical parts and components within vertical as well as horizontal IIT.

Impact on Thailand’s Electrical Machinery Industry

The most important products in which Thailand had a significantly higher export unit value than those of its imports from China were printed circuits, followed by mostly electrical parts and components as well as television cameras.
While Thailand continued to have high vertical intra-industry trade involving technologically sophisticated electronic parts and components such as digital integrated chips as well as IC parts (dominated by increased exports to China), the gap in unit values with China narrowed in 2007 when compared to 2001.
Thailand has been losing to Chinese competition in the electronic audio-visual industry, both in the case of final products colour TV receivers/monitors/projectors, etc. as well as in parts such as parts and accessories of recorders,; cathode ray picture tubes etc.

Impact on Thailand’s Domestic Industry

The falling trend in Bank of Thailand’s domestic manufacturing index for TV beginning in 2005.
In the case of ICs, the steadily rising trend in domestic production was reversed only in the crisis year 2008.
But the unit value analysis revealed heavy competition from China in the IC industry. Implies tremendous pressure on the profit margins of the firms.

Trends in Production Indices (continued…) (Base 2000=100)

IIT in Bilateral Machinery Industry

Between 2001 and 2007, the share of IIT in bilateral machinery trade increased dramatically to 97% (from 26% in 2001).
But, there’s a significant increase in horizontal IIT from 6% to 29% of bilateral machinery trade, when compared to vertical IIT. This implies that a lot of products shifted from inter-industry specialization in 2001 to that based on horizontal differentiation.
Thailand had acquired a quality advantage over China in computer data storage units- the most important product within the product group computers in the machinery sector.

Vertical IIT in Machinery Industry

The other significant products in VIIT were: computers, nes, computer input or output units; compressors of a kind used in refrigerators, and printing machinery nes.
Among these, Thailand maintained its quality advantage in compressors for refrigerators, while in both computers nes and computer input/output units, and also in printing machinery and parts, the country continued to import higher quality products from China.
In computers nes, however, the unit value gap was narrowing in favour of Thailand.
There is a distinct declining trend in Thailand’s production index for computer keyboards and printers, the production index for hard disk drives show a sharply rising trend.

Trends in Production Indices (Base 2000=100)

Insignificant Bilateral Investment Relations

China accounted for a share of 11% in total Thai equity investment abroad, but Thailand’s share in total inward FDI into China stood at a meagre 0.2% in 2006.
China’s share in net inflows of FDI into Thailand was also insignificant at just about 0.7% even in 2007. Thailand’s share in China’s total outward FDI stood at just 0.1%.
But, since the late 1990s, textiles, machinery & transport equipment and electrical appliances have been the major recipients. The ‘other industry’ category (most likely light industries) has also been significant in all the periods.

Chinese Investments in Thai Electrical Machinery Industry

The lone Thai-owned firm in the consumer electronics sub-sector, DiStar, positioned itself in the middle- to low-end market where consumers are more sensitive to prices rather than advanced product features.
But, while the top-end markets are already occupied by Japanese, US, European, and Korean brands, the low-end markets are being gradually taken by Chinese firms such as Haier.
Haier’s joint venture with Distar—Haier Electrical Appliances (Thailand)—is a 55 per cent majority-owned joint venture between Haier and Distar Electric.
The Thai partner was originally marketing its own brand of Distar television sets and had 15 per cent share of the Thai TV market.
After establishing the joint venture, Distar Electric continued to market Distar products, while at the same time selling Haier products as well.

Increasing Competition from Chinese Investments

Increasing domestic competition, excess production capacity and sliding profit margins, abundant foreign exchange reserves, huge and still rising demands for natural resources, and Chinese governments’ determination and associated “going abroad” policy and financial support, among others - work towards increasing the scale of Chinese FDI into Thailand.
Increasing competition between Chinese and Thai companies in countries at a lower development stage particularly in the Greater Mekong Sub-region (GMS).
Previously Thai investment dominated Laos and Cambodia apart from the USA and Vietnam; but now China has become the number one investor in Laos and Cambodia.
In the longer term, Chinese enterprises may strategically work towards the development of an Asian free trade area, constituted by ASEAN plus China and maybe other countries.

In Conclusion

Thailand does seem to have benefited from its early bird advantages of integration into the East Asian electronics production networks even after China’s deeper integration into these same networks after its WTO accession.
But, both the division of labour in these industries and Thailand’s position in the value chain have not been static; rather subject to severe competitive pressures as reflected in the changes in the IIT pattern.
Ability to withstand the competition from China’s scale advantages and technological upgradation will depend on Thailand’s ability to focus on the technological upgradation of its own firms and forge strategic complementarity with China.
Given that China’s dominant markets continue to be the developed world, the increased participation in China-centred production sharing has increased the historical dependence of Thailand on extra-regional trade for its growth dynamism.

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Growing Trade Integration with China: Impact on Thailand’s Overall Trade

Growing Trade Integration with China: Impact on Thailand’s Overall Trade

Exports to Thailand constituted just 1% of China’s total exports in 2007, and imports from Thailand constituted 2% of total Chinese imports.

For Thailand, China is the third most important export destination absorbing 10% of Thai exports in 2007 (up from 7% in 2004).

Second single largest source of Thai imports after Japan, providing 12% of Thai imports in 2007 (up from 9% in 2004).

Thailand’s exports to China grew faster than its bilateral imports in the 2002-07 period.

But, Thailand's trading partners with whom it had a deficit, China's ranking jumped from 8 in 2002 to 4 in 2008.

Major Products in Bilateral Exports and Imports

Relative Export Market Performance in Machinery Industries

Thailand increased its share in the Chinese electrical machinery imports from 1.6% in 2001 to 2.2% in 2007. In the Chinese machinery market, Thailand increased its market share from 2.4% in 2001 to 5.6% in 2007.

Between 2001 and 2007, China’s shares in the US, EU and Japan increased for both sectors.

All the major ASEAN countries- Malaysia, Singapore, Philippines and Indonesia, lost market shares in these developed countries significantly.

But, Thailand increased its shares in the US, EU and Japanese markets, though these increases were of a much lower extent.

Nature of Thailand’s Trade in Electrical Machinery Industry

Thailand was still exporting final consumer products (of the less sophisticated type) to the developed markets, but the share of ICs & microassemblies had increased much more.

Thus, Thailand has been involved in two-way trade in electrical machinery parts & components with the developed countries.

But, Thailand has also been involved in direct sales of final products to the developed country markets, such as the US and Japan.

Thailand has been involved in Chinese hub-based two-way trade in the electrical machinery and machinery industries.

Differentiating the Impacts of Deeper Trade Integration in China-centric IPNs

IIT can be in horizontally differentiated goods (HIIT) or goods that differ in appearance and attributes but have similar qualities and therefore prices; or

Trade in products differentiated by quality, accounting for specialisation along ranges of quality within industries.

Unit values (UV) of exports and imports are employed to untangle the two types of IIT since relative prices generally reflect relative qualities.

The methodology is based on the assumption that a “significant” gap (kept at 25%) between the unit value of imports and the unit value of exports for each commodity reveals the qualitative differences of the products exported and imported between the two economies.

IIT in Electrical Machinery Industry

Between 2001 and 2007, the share of IIT in total bilateral trade in the electrical machinery industry showed a decrease from 97% to 86% respectively.

Due to significant increase in the number of products, the majority of which involved only imports from China.

Out of total (allotted) bilateral IIT, the share of vertical IIT showed a decline from 92% in 2001 to 90% in 2007.

Thailand’s specialisation appears to be getting concentrated around electrical parts and components within vertical as well as horizontal IIT.

Impact on Thailand’s Electrical Machinery Industry

The most important products in which Thailand had a significantly higher export unit value than those of its imports from China were printed circuits, followed by mostly electrical parts and components as well as television cameras.

Thailand has been losing to Chinese competition in the electronic audio-visual industry, both in the case of final products colour TV receivers/monitors/projectors, etc. as well as in parts such as parts and accessories of recorders,; cathode ray picture tubes etc.

Impact on Thailand’s Domestic Industry

The falling trend in Bank of Thailand’s domestic manufacturing index for TV beginning in 2005.

In the case of ICs, the steadily rising trend in domestic production was reversed only in the crisis year 2008.

But the unit value analysis revealed heavy competition from China in the IC industry. Implies tremendous pressure on the profit margins of the firms.

Trends in Production Indices (continued…) (Base 2000=100)

IIT in Bilateral Machinery Industry

Between 2001 and 2007, the share of IIT in bilateral machinery trade increased dramatically to 97% (from 26% in 2001).

But, there’s a significant increase in horizontal IIT from 6% to 29% of bilateral machinery trade, when compared to vertical IIT. This implies that a lot of products shifted from inter-industry specialization in 2001 to that based on horizontal differentiation.

Thailand had acquired a quality advantage over China in computer data storage units- the most important product within the product group computers in the machinery sector.

Vertical IIT in Machinery Industry

The other significant products in VIIT were: computers, nes, computer input or output units; compressors of a kind used in refrigerators, and printing machinery nes.

Among these, Thailand maintained its quality advantage in compressors for refrigerators, while in both computers nes and computer input/output units, and also in printing machinery and parts, the country continued to import higher quality products from China.

In computers nes, however, the unit value gap was narrowing in favour of Thailand.

There is a distinct declining trend in Thailand’s production index for computer keyboards and printers, the production index for hard disk drives show a sharply rising trend.

Trends in Production Indices (Base 2000=100)

Insignificant Bilateral Investment Relations

China accounted for a share of 11% in total Thai equity investment abroad, but Thailand’s share in total inward FDI into China stood at a meagre 0.2% in 2006.

China’s share in net inflows of FDI into Thailand was also insignificant at just about 0.7% even in 2007. Thailand’s share in China’s total outward FDI stood at just 0.1%.

But, since the late 1990s, textiles, machinery & transport equipment and electrical appliances have been the major recipients. The ‘other industry’ category (most likely light industries) has also been significant in all the periods.

Chinese Investments in Thai Electrical Machinery Industry

The lone Thai-owned firm in the consumer electronics sub-sector, DiStar, positioned itself in the middle- to low-end market where consumers are more sensitive to prices rather than advanced product features.

But, while the top-end markets are already occupied by Japanese, US, European, and Korean brands, the low-end markets are being gradually taken by Chinese firms such as Haier.

Haier’s joint venture with Distar—Haier Electrical Appliances (Thailand)—is a 55 per cent majority-owned joint venture between Haier and Distar Electric.

The Thai partner was originally marketing its own brand of Distar television sets and had 15 per cent share of the Thai TV market.

After establishing the joint venture, Distar Electric continued to market Distar products, while at the same time selling Haier products as well.

Increasing Competition from Chinese Investments

Increasing competition between Chinese and Thai companies in countries at a lower development stage particularly in the Greater Mekong Sub-region (GMS).

Previously Thai investment dominated Laos and Cambodia apart from the USA and Vietnam; but now China has become the number one investor in Laos and Cambodia.

In the longer term, Chinese enterprises may strategically work towards the development of an Asian free trade area, constituted by ASEAN plus China and maybe other countries.

In Conclusion

Thailand does seem to have benefited from its early bird advantages of integration into the East Asian electronics production networks even after China’s deeper integration into these same networks after its WTO accession.

But, both the division of labour in these industries and Thailand’s position in the value chain have not been static; rather subject to severe competitive pressures as reflected in the changes in the IIT pattern.

Ability to withstand the competition from China’s scale advantages and technological upgradation will depend on Thailand’s ability to focus on the technological upgradation of its own firms and forge strategic complementarity with China.

Given that China’s dominant markets continue to be the developed world, the increased participation in China-centred production sharing has increased the historical dependence of Thailand on extra-regional trade for its growth dynamism.