Thailand’s Board of Investment said that they have received a threefold increase in the number of applications from Chinese businesses looking to relocate their supply chain to other Asian countries.
While some of this can be chalked up as a relatively new phenomenon in China due to rising costs and regulations there, others are looking to set up shop in Thailand to avoid current tariffs, or future ones.
“Part of those investment projects are the result of trade disputes. These are investment plans only so some of them may never see the light of day, or take a few more years to complete,” says Khun Chokedee, deputy secretary general of the Thailand Board of Investment. “More Chinese companies and Chinese investors are visiting our offices in China to inquire about moving,” he says, adding that in the first quarter of 2019, the number of Chinese companies that have visited all three of their offices in mainland China rose by 40% from last year. “That’s an indicator of interest. I’d say most of that is due to the trade war.”
For much of the past year, China has seen companies speed up relocation efforts. For some industries, especially apparel, companies have already moved. China’s environmental and labor laws are getting more strict, a long overdue effort on the part of Beijing to get the country up to par with World Trade Organization rules on such things. Now that the trade war is in full swing, companies have gotten a shot in the arm and are moving faster abroad.
Others are using Hong Kong ports to export to the U.S. in order to avoid tariffs. Some are shifting sources of origin from Vietnam. On commodities, mainly soybeans, Chinese companies have avoided paying Beijing’s tariffs by buying from Brazil or having the government buy the beans for them in order to absorb port duties imposed by Beijing.
Recently, U.S. Treasury Secretary Steve Mnuchin said he would advise U.S. companies to reconsider China as a source of supply.
Other companies are taking a “wait-and-see” approach, assuming President Trump is gone by 2020.
China-watchers believe that countries like Thailand will see an even greater uptick of interest on the part of Chinese corporations should Trump win his re-election bid.
Others are waiting to see what becomes of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, initiated out of Japan from the ashes of President Obama’s anti-China Trans-Pacific Partnership. It has not yet been ratified by the 11 member states, which include China-centric economies like Australia and Vietnam and U.S.-centric ones like Mexico and Canada.
Chinese investments in Thailand thus far have been focused on electrical products and auto parts.
“American companies in China have come to us saying they are thinking of relocating and Thailand is a destination for them in Asia,” says Chokedee.
In the past, U.S. companies that source goods from China were paying an average of 4% port duties. At least half of the now pay 25% duties. If tariffs go up on every China import, some companies will be looking for other supply chain models.
“Trump’s trade wars are realigning economic interests. We haven’t yet fully seen the impact this will have on the global supply chain, but wheels are in motion,” says Kim Catechis, head of global emerging markets and portfolio manager for Martin Currie Investment Management in the U.K.
What if Trump wins in 2020?
“Trade tariffs will continue,” says Catechis.
That means a few years from now, say in just two or three, Thailand could find itself in the crosshairs.
“It’s all about opportunity versus risk and right now the opportunity in Thailand outweighs that risk,” says Chokedee.
Thailand used to be a lower skilled manufacturing country. Now they are moving up the value chain, have a solid local market, solid infrastructure at logistics like the Laem Chabang Port. Based on the World Bank’s Doing Business rankings, it is easier to set up a business there than in Cambodia, Myanmar and Vietnam, but not as easy as it is in Malaysia, Singapore, Taiwan and the more expensive South Korea.
‘Two months ago, a U.S. company came here and met with me to discuss their three investment prooposals,” Chokedee says from his New York office at No. 7 World Trade Center in downtown Manhattan. “One of those projects came to us; the other two went to Vietnam and Singapore.”
It’s not all because of the trade war realigning things. It is unclear if those projects, on which Chokedee did not elaborate, were eyeing southeast Asia as an alternative to mainland China.
Neither the U.S. nor China are the number one source for foreign direct investment in Thailand. That’s Japan’s job. But China and the U.S. are in the top five, led by automotive, auto electrics and chemicals.
Last year, a $6.3 billion investment by Exxon, however, put the U.S. ahead of Japan in terms of FDI into Thailand.