Why China, Japan and South Korea’s economic woes are Thailand’s too

Thailand must not only overcome stagnation but withstand prolonged challenges from weak growth and stagnating demand in Northeast Asia
Tourism and agriculture are particularly at risk. Could a pivot to new markets in South and Southeast Asia, as well as the West, help?

Richard Yarrow

Published: 8:13am, 4 Nov 2023

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Thailand’s Pheu Thai came to power with a mission of revitalising the economy, after nine years of disappointing growth under coup-installed governments. Yet world events have not been kind to its plans.

While Middle East conflicts threaten to raise oil prices, high US interest rates have kept pressure on the baht, which has fallen to its lowest levels in 17 years. This prompted the Bank of Thailand in September to raise interest rates to 2.5 per cent, up from 0.5 per cent in mid-2022, purportedly creating tension between the central bank and Prime Minister Srettha Thavisin.

Thai authorities had hoped that the return of high-spending Chinese tourists would mitigate other external pressures. Predictably, this has not happened. Even after Srettha eased tourist visa requirements for Chinese citizens in September, monthly arrivals were still well below their January 2020 peak of one million.

Chinese tourists dressed in traditional Thai costumes from a rental shop pose for a photograph at a temple in Bangkok on Thursday. Photo: EPA-EFE

The reduced numbers of Chinese tourists hint at deeper problems beyond oil and interest rates. Thailand could face prolonged challenges from weak growth and stagnating demand in Northeast Asia: namely China, Japan, and South Korea. Thai politicians have looked to these countries as drivers for Thailand’s future growth, with Srettha and Prayuth Chan-ocha both investing considerable time appealing to Chinese and Japanese businesses. So how much risk does Thailand face from these countries’ economic problems?

In 2022, all three nations reported declining or stagnant gross domestic product in US dollar terms, which is likely to be repeated this year. All three have massive amounts of debt, which have generally grown faster than their economies. All three have mediocre outlooks for consumer spending. China’s real-estate crisis risks devastating the wealth of many families and reducing their likelihood to spend or travel, much as earlier real-estate crises affected many Japanese families.

China’s slowdown is the most serious, as it is Thailand’s top trading partner, importing billions of dollars worth of Thai agricultural products like rubber and durian. Before Covid-19, China was the single largest source country for tourists in Thailand. But as the Chinese economy faces a sustained shortfall in consumption – with consumers scaling back spending and opting for cheaper, domestically made, products – it seems unlikely that Thailand’s tourism sector will fully recover soon or that Thailand’s durian industry will expand its recent China-driven boom.

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Japan ranks among Thailand’s largest trading partners, primarily trading manufactured and intermediate products. Tourism from Japan and South Korea is also significant, with each country being the source of between 100,000 and 200,000 tourists a month before the pandemic. Korean tourism has mostly recovered while Japanese tourism has not: lately, there are more Thais travelling in Japan than Japanese tourists in Thailand.

China, Japan and South Korea are also leading sources of foreign investment in Thailand. But as Japanese and Korean firms face mounting competition and financial pressures, Thailand could see a substantial decline in new Japanese and Korean investments, and a drop in the importance and value of their Thailand-based manufacturing. So far this year, net incoming Korean and Japanese investment in Thailand is vastly below its mid-2019 value.

In terms of trade, Thailand runs large deficits with the economies of Northeast Asia. Much of this trade is in raw or industrial materials, such as metals and chemicals, and in electronics, like circuits and data processors – many of which are re-exported to the US and Southeast Asia. Exports to the US have accounted for all of Thailand’s growth in exports of data-processing equipment, such as computer hard drives, since 2015.

A vendor cuts a durian at an outdoor stall in Bangkok last month. China imports billions of dollars worth of Thai agricultural products like rubber and durian Photo: AFP

Therefore, a closer look at trade suggests that Thailand is less exposed than first meets the eye. If the US and Southeast Asian economies – where many of Thailand’s higher-value products end up – maintain strong growth in consumer demand, then much of Thai manufacturing should withstand weakened demand in Northeast Asia.

Instead of the broad consequences that some analysts fear, Thailand would face narrower effects on specific sectors. In addition to tourism, agriculture and raw-materials exports – such as rubber, fish, and fruits – could face worse growth prospects, unless new markets are fostered. Trade with India is growing quickly but remains under 3 per cent of total trade by value. Thailand is fortunate that, unlike Indonesia or Australia, its natural-resource exports are weakly linked to the real-estate industry at the centre of China’s slowdown.

Western-led “de-risking” campaigns complicate this trajectory. Thailand is embedded in supply chains stretching across Asia, particularly for the production of vehicles and electric or electronic devices. These depend heavily on trade with China. If US-China trade tensions further escalate, then whether Thailand suffers from “de-risking” could depend on Thai manufacturers’ flexibility to adjust suppliers. Thailand might succeed in attracting and growing its own advanced manufacturing, at least if leaders can demonstrate that they are still reliable partners for Japan, the US, and other democratic countries.

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Bangkok could also further attract expat entrepreneurs, financiers, and professionals. Since last year, Bangkok has gained expats from other Asian business capitals, who appreciate the city’s lower costs, relatively better political conditions, easier visa policies, and widespread use of English. The Bangkok and national governments could cooperate to entice foreigners and their businesses, including by reducing visa restrictions, attracting international schools, fostering multinational cultural organisations, expanding flights to global financial centres, easing rules for foreigners holding properties, and relaxing restrictions on foreign ownership of domestic assets, particularly if the latter helps finance improvements to Bangkok infrastructure.

Thailand’s looming challenge is not only to overcome stagnation but also to withstand the growing problems of its economic partners. Most of Thailand’s risks likely concentrate around a few sectors such as tourism and agriculture. These can be mitigated by helping industries pivot to new markets and fostering integration with South and Southeast Asia as well as the West. The ultimate challenge, as ever in Thailand, is in maintaining stable democratic leadership capable of instituting reforms.

Richard Yarrow is a Fellow at the Mossavar-Rahmani Centre for Business and Government at Harvard Kennedy School. He is the author of Thailand’s Economic Dilemmas in Post-Pandemic Asia (ISEAS, 2022). This commentary was first published by ISEAS – Yusof Ishak Institute’s commentary website fulcrum.sg.

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