1. Impact of Chinas Emergence on Thailand: A focus on production network-driven Industries Smitha Francis

2. Backdrop to the Growing Bilateral Relations Thailand was one of the keenest adopters of the FDI-driven export growth paradigm among Southeast Asian economies from the mid- 1980s. By the early 1990s, FDI inflows into Thailand, as well as its trade with other ASEAN countries and with East Asia, were concentrated mostly in electrical and electronics products, followed by automobiles, chemicals and petrochemical products, food processing, footwear, textiles, and paper & paper products. By the mid-1990s, China was also involved in the East Asian-wide production networks because of its own export-oriented liberalisation policies. Quite significant by the time of its WTO entry.

3. Growing Bilateral Relations The ASEAN-China Framework Agreement on Comprehensive Economic Cooperation signed in November 2002 was to preempt ASEANs perception of a China threat upon WTO entry. China has become a very important trade partner for ASEAN. Thailand is the third largest exporter and importer within ASEAN after Singapore and Malaysia. Thailand has recorded the second largest gain in Chinas imports among ASEAN countries, after Malaysia. Thailand and China also share deep involvement in the Greater Mekong Sub-region.

4. Objectives of the Current Study Understand the nature of the impact of the growing economic power of China on Thailand by examining: 1) the nature of the trade and investment relations that have emerged between Thailand and China; and 2) the implications of the emerging trade and investment patterns for Thailand, particularly in the context of Thailands deeper integration into the China-centric production networks for the machinery industries.

5. Growing Trade Integration with China: Impact on Thailands Overall Trade Exports to Thailand constituted just 1% of Chinas 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). Thailands 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.

6. Impact on Thailands Trading Partners The USA, Japan, Singapore and Netherlands, the UK, Germany and Taiwan Province of China have all lost shares as Thailands top export markets and import sources since 2001. On the export side, the shares of Malaysia, followed by Indonesia and Vietnam in increased significantly. Malaysia, UAE, Saudi Arabia, Indonesia, Myanmar, India and Qatar, followed by South Korea and Vietnam increased their shares in Thailands imports.

7. Major Changes in Bilateral Sectoral Trade: Between 1997-2001 and 2002-07 Share of agricultural products declined from 25% during 1997- 2001, but was still significant at about 18% in the second period. Exports of agricultural products were growing nearly as fast as labour-intensive and high-tech exports to China. Increase in the level of bilateral two-way trade in electrical machinery & parts and machinery & parts. Other sectors with increased two-way trade were: plastic & plastic products; iron & steel; organic chemicals; optical, photo, technical, medical, etc. apparatus; and manmade staple fibres.

8. Major Products in Bilateral Exports and Imports

9. Dominance of Machinery & Electrical Machinery Industries Thailands integration in the FDI-driven East Asian production networks: Combined share of machinery and electrical machinery industries in Thailands total imports and exports were around 33% and 36% respectively in 2007. In bilateral trade with China, this combined share was at 49% of Thai imports from China and 43% of Thai exports to China. Chinas integration into the production networks began to impact Thailands trade patterns significantly in the post-2001 period after China joined the WTO, and increased further in the more recent years following the ASEAN-China FTA.

10. Changes in Thailands Trade Partners in the Machinery Industries Thailands trade flows with China has increased significantly in both the electrical machinery and machinery industries in the post-2002 period. Trade with the US and Singapore shows a declining trend for both exports and imports. The shares of European countries have also been declining in Thailands trade in computers & parts. Japans role in Thailands trade in these industries has been the least affected until 2007. Supports the observation that growing trade integration with China has been reducing developing Asias trade with developed country markets.

11. 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, Chinas 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.

12. Nature of Thailands 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.

13. 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.

14. 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. Thailands specialisation appears to be getting concentrated around electrical parts and components within vertical as well as horizontal IIT.

15. Impact on Thailands 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.

16. Impact on Thailands Domestic Industry The falling trend in Bank of Thailands 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.

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

18. 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, theres 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.

19. 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 Thailands production index for computer keyboards and printers, the production index for hard disk drives show a sharply rising trend.

20. Trends in Production Indices (Base 2000=100)

21. Insignificant Bilateral Investment Relations China accounted for a share of 11% in total Thai equity investment abroad, but Thailands share in total inward FDI into China stood at a meagre 0.2% in 2006. Chinas share in net inflows of FDI into Thailand was also insignificant at just about 0.7% even in 2007. Thailands share in Chinas 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.

22. 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. Haiers joint venture with DistarHaier 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.

23. 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.

24. In Conclusion Thailand does seem to have benefited from its early bird advantages of integration into the East Asian electronics production networks even after Chinas deeper integration into these same networks after its WTO accession. But, both the division of labour in these industries and Thailands 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 Chinas scale advantages and technological upgradation will depend on Thailands ability to focus on the technological upgradation of its own firms and forge strategic complementarity with China. Given that Chinas 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.