The challenge for Thailand and Vietnam in coming years will be to maintain manufacturing competitiveness. This will be harder in a slowing global trade environment. On the other hand, there will be opportunities arising from the US-China trade conflict, even if there is a resolution and retraction of US tariffs. US (Trump) protectionism has already started the ball rolling for a realignment of Asian supply chains which has potential benefits both for Thailand and Vietnam.
Competing at different levels
Vietnam has an easier path of achieving its objective for two main reasons, first its low wage and young labour-force advantage and second, a more clear-cut policy on openness to trade and foreign investment. Thailand will have a more difficult path; its wage level is too high to compete in low-cost manufacturing and the economy is not sufficiently advanced to compete in high-tech manufacturing. Even so, manufacturing prospects have brightened with reaffirmed support from Japanese investors, specifically in embracing new technology in the auto sector. Thailand, after prodding by Japan, will apply for membership in the Trans Pacific Partnership, thereby strengthening its supply-chain links.
Thailand Eastern Economic Corridor: A magnet for ‘new age’ industry
Thailand’s strategy is to attract ‘new age’ industry to its Eastern Economic Corridor. Construction of the infrastructure framework will offset slowing exports with a large boost to GDP growth. Similar projections in 2014 were not delivered, raising doubts about implementation. Anecdotal reports though, suggest that faster progress will be made starting this year.
Vietnam: Early success in replacing China as Asia’s low-cost manufacturing hub
Vietnam’s open-trade and investment strategy has been rewarded with early success in replacing China as Asia’s next low-cost manufacturing hub, evident from its rising market share. Vietnam had the largest share of China’s import market in 2018, marginally displacing Malaysia.
Relocation will be gradual
Likely repercussions of US-China trade conflict will be China reducing its reliance on the US market and foreign manufacturers diversifying operations from China. Relocation will be gradual though, reflecting various constraints. Wage inflation in Vietnam will reduce its wage-cost advantage while low local procurement rates and poor logistics raise overall production costs. Skills deficiency in Vietnam and Thailand will be exacerbated by fiscal constraints on improving human capital.
Both countries are well placed
Even so, Vietnam’s continuing surge of foreign-direct-investment inflows and more disciplined policy approach to achieving emerging-market status and Thailand’s established supply chains leave both countries well placed to meet the competitiveness challenge.