Thai Competitiveness in US Markets

Thai Farmers Research Center

September 2000

Table of Contents

page

1.Introduction1

2.Transportation Costs6

3.Foreign Exchange10

4.Labor Costs16

5.Tariffs23

6.Cost Analysis30

7.Discussion and Recommendations36

8.Bibliography46

9.Tables48

9.1US Imports Market, Market Share48

9.2Transportation Costs to the United States50

9.3Foreign Exchange Rate Changes Relative

to the Dollar Since 199354

9.4Foreign Exchange Rate Changes Relative

to the Baht Since 199355

9.5International Labor Costs by Sector56

9.6International Labor Costs as a Percent

of Thai Labor Costs57

9.7Tariffs for Important Thai Exports58

9.8Market Share for Important Thai Exports60

9.9Share of World GDP and Trade67

1

Thai Competitiveness in US Markets : Introduction

This paper looks at Thai competitiveness in the US market and attempts to determine why Thailand has had such poor performance. Unlike our neighbors in South East Asia, Thai exports to the US have actually experienced a small drop in market share since 1992. Overall, Asia has been losing ground in terms of US share, a fact that has been masked by the huge increase in US imports overall. However, higher income countries (Japan, and the NICs) have shown most of the decrease in market share, with middle income countries such as Thailand mostly showing small increases, and lower income countries such as China and Vietnam showing stronger growth in market share. Thailand is an exception in our group in that we have been losing market share. Our poorer performance can partly be explained by the composition of our exports, with more emphasis on agricultural and labor intensive goods which compete with lower income countries, and less on electronics and consumer goods.

Higher Income Countries-

JapanSingapore

TaiwanHong Kong

AustraliaNew Zealand

Brunei

Medium Income Countries-

ThailandMalaysia

PhilippinesSouth Korea

Fiji

Low Income Countries-

ChinaIndonesia

VietnamCambodia

BurmaPapua New Guinea

Although our neighbors in ASEAN have mostly been doing better then us in terms of market share, our real competition for the US market comes from elsewhere, from the combined expansion of Chinese and Mexican imports into the US market. These two countries export many products that compete directly with Thai exports, and that are often cheaper. In an effort to better understand this competition, the core of this paper takes a serious look at the factors that determine the cost of Thai products. By looking carefully at transportation costs, foreign exchange rates, labor costs, and tariffs, we can begin to understand what in particular is influencing Thailand's lack of competitiveness.

The US economy is enormous accounting for 27 percent of world GDP. The United States is by far our largest export market, and deserves special attention. Last year, the US accounted for 21 percent of our exports. Furthermore, the US share in our total exports has been steadily rising, increasing our reliance on that market. Exports to the United States are now equal in value to about ten percent of the value of Thai GDP.

The United States is important in another way. As a long term defender of free trade both in principle and in practice, it is the importer of last resort. It has been instrumental in instituting many of the trade policies in effect today. The average tariff on imports to the US is only 2 percent on a trade weighted basis. Nevertheless some sectors are still heavily protected, and we shall see that trade barriers on textiles and agricultural products to most of the world, have had a significant effect on import patterns particularly in shifting production of labor intensive goods to Latin America. These special trade bloc programs of the US are likely to increase in importance in the short term, further reducing our competitiveness.

The importance of the US market and our lackluster performance therein inspires this cost-based analysis. It is only by understanding our competitive strengths and weaknesses that we can ready ourselves for ever increasing competition. As with all our work here at Thai Farmers Research Center, we have tried to include suggestions and opportunities for investors and exporters throughout the paper.

The Current Situation

Source: USITC Dataweb Note: these numbers are in terms of value, and are market shares. Falling market share tells us that imports from Thailand are rising slower than US imports overall. Measuring in value terms means that as the baht devalues, export levels fall. For the sake of comparison, all of these countries currencies have experienced similar levels of devaluation since 1992, except Indonesia, which has devalued more.

Relative to our neighbors in ASEAN we are doing poorly, as the only country which has lost market share since 1992.

The dominant features of US imports has been the fall in market share of Japan and the ascendance of Mexico and China.

Source: USITC Dataweb

The Asian newly industrialized countries (NICs) as a group have been losing market share in the US, though incidentally, their market share in world exports have not fallen. High costs have prompted them to invest in neighboring countries.

Source: USITC Dataweb

Looking at these charts together we can see several things. Although China and Mexico are doing very well in terms of market share, they have not yet had a big impact on ASEAN countries. Market share has grown at the expense of Japan and the higher income NICs. As those higher income countries have suffered market share losses, they have invested in other source countries, following in the footsteps of Japan. Critically, unlike in the late 1980s and early 1990s, much of that investment has gone to other countries, especially China.

Although ASEAN has not yet been strongly affected by the growing dominance of Mexico and China, we predict that those countries will soon have a more direct effect on Thailand. Industries in China and Mexico are growing very rapidly in precisely those exports in which we are doing the best. Therefore it is only a matter of time before they start directly affecting our own market share. Those predictions will also be borne out in a lter section on factor cost analysis.

Source: USITC Dataweb

The dominant feature of this graph is the astonishing rise in imports of garments from Mexico, from a very low base in 1992. Mexico has benefited from proximity to the US as well as low tariffs and an absence of quotas due to its participation in NAFTA. Many countries (not just the US) have invested in Mexico because of its special privileges under NAFTA.

Source: USITC Dataweb

In this graph, both Mexico and China are dominating growth in the import market for computer monitors. China's advantages are low labor costs, and an enormous and dynamic domestic market that makes FDI attractive. Although Thailand is not yet losing much market share, if current trends continue, loss of market share is inevitable.

Focus of Study

This series will focus on:

  • Macroeconomic Factors - rather than microeconomic factors. The study is broad and it would be difficult to talk about individual conditions for every product. Nevertheless numerous specific examples are given.
  • Foreign Data - rather than Thai data. There are many studies that start from Thai data and work outwards. This study does the opposite. US data is comprehensive and freely available from a variety of sources, many of which are listed in the bibliography.
  • Cost-Based Approach - rather than a strategic or marketing approach. This paper tries to look at the costs involved in producing products rather than the strategies of competing nations, or the marketing of particular products.

Chapters

Over the coming weeks, the following topics are scheduled to be addressed. Each chapter is a free standing article, which can be found in its entirety on our English language website.

Transportation Costs discusses the role transportation costs play in restricting low value goods in favor of high value goods, and looks at actual transportation costs for many Thai products. The effect of rising oil prices on transportation costs is also discussed.

Foreign Exchange discusses the gradual depreciation of the currencies of many developing currencies relative to developed countries and the relationship between exchange rate shifts and export performance.

Labor Costs discusses wage rates by sector for many countries around the world. Labor costs, although a surprisingly small part of total costs, play a major role in some industries. Thailand's performance in a number of labor intensive industries is discussed.

Tariffs discusses the three main strands of US trade law: 1) Global free trade, 2) Free Trade Area for the Americas, and 3) Support for least developed nations, and the tensions that arise between them. Also covered - typical tariff rates for Thai products, the effects of changes in trade status for competitors such as China, Caribbean countries, and Vietnam, and non-tariff barriers.

Cost Analysis divides exports into three broad sectors, and gives predictions for each. Then it discusses price sensitivity and the effects different shocks would have on price competitiveness. Finally the different cost factors from this paper are summed together to give a sense of how we compare to China and Mexico.

Conclusions and Recommendations summarizes findings from this paper, and suggests some ways to address our competitive situation in the future.

Finally, the Appendix of Tables is an extensive collection of data related to Thai trade with the US and comparing Thai costs with those of other countries in the world.

Thai Competitiveness in US Markets : Transportation Costs

Transport costs have long played a significant role in determining the flow of imports and exports. A few centuries ago, spices from South East Asia were sold for exorbitant prices in Europe, while tea from India was sold for exorbitant prices in China and America. Spanish galleons carried gold from Latin America, and British brigs carried diamonds from South Africa. In short, the only goods transported internationally were small, valuable, and commanded enormous premiums. Since the advent of modern shipping and air freight transportation costs have diminished in importance, but they still play a significant role in the flow of trade for some of Thailand's most important exports, especially those of lower unit value.

With transportation costs, the most important relationship is of the value of the good relative to the cost of transporting it. So, for example, a valuable good (e.g. frozen shrimp) may be expensive to ship, but compared to its final value the transportation cost is reasonably low. Other valuable goods (e.g. hard drives, jewelry) are so cheap to transport that their final cost is hardly affected by transport costs. Goods that are of low value must be cheap to transport in order to make it economical to ship them. (Shoes and clothing can be transported because they require neither speed nor special care. Fresh jackfruit and rose apples are not transported.) Transportation costs play the least role with goods that are of high value and easily shipped, and play the largest role with goods that have low value and are expensive to ship.

Some Goods are More Economical to Transport Than Others

High Transport Cost / Low Transport Cost
High Value / Okay / Best
Low Value / Cannot Transport / Okay

The cost of transport something will depend on how it is transported. When transporting by water, bulky goods are expensive, since prices often reflect volume rather than weight. For air transport, weight is the critical factor. When shipping by land, both of these factors can be important. The speed with which the good must be delivered (perishability), and any special conditions the good requires (e.g. keep frozen) also have a large effect on the shipping cost. In terms of competitiveness, generally if a good is expensive to ship from one country, it is also expensive to ship from another. Advantages arise only in being closer to the final market. If the good is expensive to transport distance matters a great deal.

The following table shows actual transport costs for imports to the United States from a variety of different countries. Values shown are the percent of the value of the good that must be added for transport costs, and are calculated by taking the difference between custom value and C.I.F. value in US trade data, and dividing by the custom value. Custom value is the price paid for the good before shipment to the US. C.I.F. value includes all costs including insurance and freight of bringing the good to the customs port in the US. Therefore transportation costs within the US are not included in these numbers. Transportation costs are averaged for the years 1996-1999.

Transportation Costs as a Percent of the Value of the Product of Goods Arriving in the United States From Several Countries, Average for 1996-1999

HS Code / Hard Drives
8471704065 / Shrimp
160520130 / Garments
HS62 / Grain
incl. Rice
HS10 / Jewelry
HS71 / Wooden Frames
HS4414 / Cars and Parts
HS87 / Plastics
HS39
World / 1.0 / 2.1 / 4.0 / 9.2 / 0.5 / 4.8 / 1.8 / 5.1
Thailand / 0.5 / 1.9 / 5.0 / 14.2 / 1.1 / 5.7 / 5.3 / 11.2
Mexico / 1.0 / 1.7 / 0.9 / 4.2 / 0.4 / 1.0 / 1.1 / 1.9
Canada / 0.8 / 2.2 / 0.7 / 6.5 / 0.1 / 3.0 / 0.9 / 2.4
Honduras / ---- / 2.2 / 1.9 / ----- / ----- / ----- / ----- / -----
Mainland China / 1.6 / 3.5 / 4.7 / 16.8 / 4.3 / 7.4 / 8.8 / 8.6
Philippines / 1.0 / 12.8 / 5.2 / ----- / ----- / 7.5 / 5.6 / -----
Malaysia / 1.5 / ----- / 4.7 / ----- / ----- / 7.1 / 9.2 / 10.1
Indonesia / ----- / 1.8 / 5.8 / ----- / 1.9 / 8.1 / 6.1 / 11.3
Italy / ----- / ----- / 2.8 / 8.5 / 0.8 / 6.6 / 3.5 / 6.5
India / ----- / 6.6 / 8.5 / 8.1 / 0.5 / 10.7 / 7.2 / 8.2

Source: United States National Trade Data Base, Dataweb, World Trade Analyzer

In this table, some goods, such as hard drives, shrimp, and jewelry, have low transport costs that do not influence Thai competitiveness for US markets. In other categories, such as plastics, grain (rice), wooden articles and garments, there is a clear transportation cost advantage to being close to the US. There is not a clear distance based relationship here because of 1) economies of scale, 2) efficiency in ports and airports, and 3) the composition of goods within a category may vary.

Clearly transportation costs are not prohibitive for any of the above categories, since they are all important Thai exports, but in terms of long term competitiveness Thailand is at a disadvantage. The economic benefit of producing these goods close to the United States might eventually move centers for their production closer to the final market. The location of other goods, such as electronics and jewelry will be influenced by other factors such as tariffs, exchange rates, and conditions in the producing countries.

We can look at a more complete list of Thai exports to discover what other goods might have a long term competitive disadvantage.

Thai Products that have Different Levels of Transportation Costs

Low Transport Cost
0-2% / Medium Transport Cost 2-5% / High Transport Cost
5-8% / Very High Transport Cost
Hard Drives
Jewelry
Shrimp
Integrated Circuits
Ink Jet Printers
VCRs
Photocopy Machines / Monitors
Rubber Gloves
Vehicle Wiring Sets
Fax Machines
Footwear
Tuna
Power Supply Units / Garments
Wooden Frames
Keyboards
Ceiling Fans
Toys
Microwaves
Rubber / Ceramics 9%
Plastics 11%
Pineapples 15%
Cement 42%
Rice 14%
Speakers 12%
Furniture 10%

Based on US merchandise trade data, NTDB

Some products have already shown a marked tendency to shift towards more local production. For example, garments imported into the United States are increasingly coming from a variety of Latin American countries, rather than Asia, although Asia is still the largest source. Garment exports to the United States from Thailand have increased over the past five years, and they have also increased from China, but the largest increases have been from Latin American countries.

US Imports from Several Regions of Articles of Apparel, or Clothing Accessories, Not Knitted or Crocheted (HS62)

Based on US merchandise trade data, NTDB

The transportation sector is strongly sensitive to energy costs. Because of this, Thai competitiveness in US markets may be decreased if the oil price rises. The following table gives an idea of the effect on transportation costs of a change in oil price.

Effect of Changes in Energy Prices on the Cost of Transportation

Sector / Percent Change in Cost for a 1 percent Change in Oil Price
Ocean and Coastal Water Transportation / 0.306
Road Freight Transport / 0.270
Railways / 0.183
Air Transport / 0.143

Source: TDRI, "The economic impact of the liberalization of the oil market," May 1998. Based on data from the 1990 Input-Output Table for Thailand, NESDB

We can calculate the effect the recent rise in oil prices might have on Thai competitiveness via transport costs. The average price of oil (Brent Crude) from 1996 to 1999 was $17.70 dollars a barrel. In the first 10 months of this year, the average price was $28.80, an increase of 63 percent. Ocean transport costs should therefore rise by

.63 * .306 = .193 or 19.3 percent. Then if transport costs are 10 percent of the value of the product, the increase in the final cost of the product, due only to transport costs, would be

.10 * .193 = .0193, or 1.93 percent of the price of the good. Unfortunately, goods that already have high transport costs will show more of an effect than those with low transport costs.