Neighbourhood trade: CLMV countries are becoming a primary target for Thai exports

Leveraging its central position to drive trade and investment with neighbouring countries, Cambodia, Laos, Myanmar and Vietnam (CLMV) in particular, will be a driving force for Thailand’s economic prospects. Long dominated by trade with Malaysia, which accounted for roughly 60% of Thailand’s border trade in 2013, cross-border trade is increasingly developing with northern neighbours. While the value of Thailand’s trade with CLMV doubled in the five years to 2012, with a consistent trade surplus, driven by rapid economic growth in neighbouring countries and rising cross-border investments, Thai authorities recognise the need to channel investment to the logistical infrastructure necessary to support growth. The stimulus of border trade to upcountry provinces has been highly significant, as it has generated above-average national growth and is a key driver in spreading economic development beyond traditional clusters in Thailand’s central regions.

Rising Tide

Spurred by high single-digit growth in bordering economies and the economic liberalisation in Myanmar since 2011, Thailand’s exports to CLMV rose from 3% of total exports in 2000 to 3.8% in 2007 and 7.8% by 2012 according to Bank of Thailand (BOT) statistics, nearly matching the value of exports to Europe and set to overtake exports to the US in the next three years, according to Bangkok Bank. Meanwhile, exports to the US and EU fell from 21.3% to 9.9%, and from 15.8% to 8.5%, respectively, between 2000 and 2012, according to BOT data. Thailand’s exports to CLMV are second only to China’s, according to Kasikornbank research, although the bank expects Japan to overtake Thailand in coming years. Trade liberalisation and the reduction in Customs duties in the context of the ASEAN Free Trade Agreement (AFTA) played a key part in fostering trade, as with larger ASEAN 5 (which includes the Philippines, Indonesia, Malaysia, Thailand and Vietnam) economies. Moves towards the tariff-free ASEAN Economic Community (AEC) from the end of 2015 should support further trade expansion, although slow growth in larger traditional trading partners still weighs on export prospects. “Regional trade should continue expanding in the run-up to the AEC, although this is unlikely to fully compensate for lacklustre growth in China, the US and Europe,” Luxmon Attapich, country economist for the Asian Development Bank (ADB), told OBG. The combined GDP of CLMV countries is only roughly half of Thailand’s, although the emerging middle classes in CLMV’s population of 150m have driven import demand.

Less Volatile

In contrast to other ASEAN economies however, exports to CLMV tend to be less volatile given the higher share of necessary goods such as fuel and consumer goods, according to the BOT. While many Thai exports to ASEAN 5 are intermediate goods used for products destined for re-export, the lion’s share of exports to CLMV are destined for end-users and are thus less linked to global market demand. Credit Suisse noted in an October 2012 report that while Thai exports to Western markets are correlated to ASEAN 5 exports, those to CLMV are not and provide much-needed diversification to offset slow growth in the West.

Exports to Vietnam are dominated by automotive and electronics exports while those to Cambodia are driven by food, cosmetics and automotive exports according to research by Bangkok Bank. Sales to the two smaller trading partners of Myanmar and Laos have a higher share of essential items, with the former primarily importing oil and food products and the latter importing oil, computer and automotive parts. In aggregate the three largest Thai exports to CLMV from 2007 to 2011 were chemicals (37% of exports), mineral fuels (19%) and food (15%) according to Credit Suisse. Vietnam, Thailand’s largest export market in CLMV, accounting for 3.06% of exports in 2013, witnessed 7.12% import growth to $5.8bn in the first nine months of 2013, according to Commerce Ministry data.

The second-largest neighbouring market, Cambodia, with 1.8% of exports, grew 9.12% y-o-y to $3.4bn. Myanmar and Laos, accounting for 1.63% and 1.62% of exports, respectively, witnessed 21.3% and 3.5% y-o-y growth to $3.07bn and $3.06bn. While slower than the five-year average to 2011, 2013 marked the continuation of growth led by Myanmar: average annual growth in Thai exports from 2007 to 2011 was 26% for Myanmar, 18% for Laos, 17% for Cambodia and 16% for Vietnam according to Credit Suisse figures.

Drivers

Accelerating development in CLMV has played a role in driving trade, as have declining tariff levels as part of AFTA. Average annual growth in CLMV and Thailand combined rose from 6.5% in the 1990-2000 period to 7.2% (8.5% if excluding Thailand) over 2001-2012, according to Deutsche Bank. Meanwhile, urbanisation in neighbouring countries is driving demand for consumer goods, with Laos alone recording an urbanisation rate of 5% annually, according to Siam Commercial Bank. Increasing investments by Thailand-based corporates in these economies is also expanding production chains regionally, driving trade and establishing synergies between neighbouring countries (see analysis). Meanwhile, trade liberalisation under AFTA has seen average tariffs applied by CLMV countries drop from 7% in 2000 to 2.6% in 2010, with the levies on some 99% of all products at below 5%, according to the ASEAN Secretariat.

Trade is likely to be stimulated by further tariff reductions by end-2015 when the AEC comes into force. While tariffs will be reduced to 0% by end-2015, a “sensitive list” of items including certain food products like meat and beverages and automotives like cars and motorcycles, key Thai exports to the region, benefits from a slightly longer timeframe. Tariffs on goods under this list will fall to the 0-5% range by 2015 for Laos and Myanmar and 2017 for Cambodia. The Thai government is rolling out key mechanisms to support expansion in trade. The Department for International Trade Promotion is supporting business fairs to link Thai exporters to firms in CLMV, while the Export-Import Bank announced plans to expand insurance and credit for Thai exporters targeting neighbouring markets.

Infrastructure

While such support is welcome, border trade remains constrained by the inadequacy of infrastructure. The ADB’s Greater Mekong Sub-region Transport Sector Strategy for 2006-15 provides the master plan for regional connectivity, aiming to establish three economic corridors – Southern, East-West and North-South. Of the BT5.5tn ($179.85bn) infrastructure investments planned by the government to 2019, BT243bn ($7.95bn) has been earmarked for building four-lane highways to Thailand’s nine biggest border crossings and an additional BT403bn ($13.18bn) to double-track 768 km of existing rail lines and extending them to Laos and Cambodia. Although the focus of the planned BT783bn ($25.6bn) high-speed rail projects is on passenger traffic to Thai cities inland, a second stage would link these lines to a Chinese-backed high-speed rail plan that connects Kunming with Singapore (see Economy chapter). An important step in this was the opening of the fourth “Friendship Bridge” linking Laos to Thailand’s Chiang Rai province in 2013, with $50m from Laos, Thailand and China. While Thailand pursues plans to improve border links and the logistics of Customs clearance, it is dependent on CLMV countries investing in their own logistics upgrades. “Neighbouring countries might need to match Thailand’s infrastructure investment first for Thai exports to see significant benefits,” Credit Suisse economist Santitarn Sathirathai noted in an April 2013 report on infrastructure development plans. “We suspect that it could take as long as five years for major gains to appear.” Road links to Vietnam, which account for 72% of CLMV GDP, remain inadequate with most Thai exports transported by sea-freight. While Laos is on track to complete a road connecting Thailand and Vietnam in 2015, linking Bangkok with Hanoi, improvements in trans-Cambodian roads that would connect Bangkok to Ho Chi Minh City are proceeding much more slowly, according to Credit Suisse. The sea route is also used for exports to Myanmar given the absence of reliable road connections between Bangkok and the commercial capital of Yangon, while plans for an integrated deep-sea port costing $8bn in Dawei, linked to Thailand’s Laem Chabang port, appeared stalled in early 2014.

Up-Country Growth

Despite persistent logistics bottlenecks, Thailand’s border provinces have benefitted from higher trade. Indeed, according to Bangkok Bank, Greater Bangkok’s share of GDP fell from 51% in 2001 to 44% by 2012. The Industrial Estates Authority of Thailand has worked with local government and private investors to establish special economic zones in provinces such as Mae Sot, bordering Myanmar, to leverage this growth and attract migrant workers. “High growth in provinces close to foreign borders has fuelled rising land prices in key cities like Kanchanaburi, Nakhon Ratchasima and Chiang Rai,” James Moss, ASEAN banks analyst at Capital Nomura Securities, told OBG.

Therefore, while the Thai government’s plans to invest in much-needed infrastructure are integral to supporting this trend, overcoming these challenges will also require concurrent investments by the CLMV countries themselves. ASEAN connectivity depends not only on softer measures such as tariff reductions but also on more concerted investments in hard infrastructure.