VZCZCXRO4980
OO RUEHCHI RUEHCN RUEHDT RUEHGH RUEHHM
DE RUEHBK #0286/01 0340951
ZNY CCCCC ZZH
O 030951Z FEB 10
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9808
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS IMMEDIATE
RUEHOO/CHINA POSTS COLLECTIVE IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RHHMUNA/CDR USPACOM HONOLULU HI IMMEDIATE
RUEKJCS/JOINT STAFF WASHINGTON DC IMMEDIATE
RUEKJCS/SECDEF WASHINGTON DC IMMEDIATE
RUEAIIA/CIA WASHINGTON DC IMMEDIATE
RUEKDIA/DIA WASHDC IMMEDIATE
RHEHNSC/NSC WASHDC IMMEDIATE
RUEHBJ/AMEMBASSY BEIJING IMMEDIATE 7980
RUEHBY/AMEMBASSY CANBERRA IMMEDIATE 0396
RUEHUL/AMEMBASSY SEOUL IMMEDIATE 6177
RUEHKO/AMEMBASSY TOKYO IMMEDIATE 2321
RUEHWL/AMEMBASSY WELLINGTON IMMEDIATE 0302

C O N F I D E N T I A L SECTION 01 OF 06 BANGKOK 000286 
 
STATE FOR EAP, EEB 
STATE PASS TO USTR FOR BWEISEL, BKLEIN 
COMMERCE FOR EAP/MAC/OKSA FOR JKELLY 
TREASURY FOR OASIA 
SINGAPORE FOR FINATT SBLEIWEIS 
BEIJING FOR WWEINSTEIN 
 
SIPDIS 
 
E.O. 12958: DECL: 02/01/2020 
TAGS: ECON ETRD EINV PREL CH TH
SUBJECT: CHINA'S RISE AS THAILAND'S ECONOMIC PARTNER 
 
REF: A. 10 BANGKOK 269 (CHINA'S EFFORTS TO COURT THAILAND) 
¶B. 10 BANGKOK 186 (VIEWS ON THE RISE OF CHINA) 
¶C. 09 CHIANG MAI 170 (KUNMING-BANGKOK CORRIDOR) 
¶D. 09 BANGKOK 534 (THAILAND AT G20) 
 
CLASSIFIED BY: Ambassador Eric G. John, reasons 1.4 (b) and (d) 
 
¶1. (SBU) SUMMARY: For the month of December 2009, China, for the 
first time, displaced the United States as Thailand's top export 
market. For the previous year as a whole, the U.S. barely held on to 
the number one position it has held for decades, but China is likely 
to overtake the U.S. in 2010. Counting exports and imports, China is 
now Thailand's second largest trading partner (following Japan), 
having overtaken the United States in 2007. While the United States 
continues to be a major player in the Thai economy, and foreign 
direct investment from Japan, the U.S., and Europe still dominates, 
the new trend arrows point north. In 2009 alone, the value of Chinese 
investment applications in Thailand increased by more than USD 1 
billion. 
 
¶2. (C) SUMMARY CONT'D: Trade agreements between Thailand and China, 
and between ASEAN and China, have bolstered trade, but the main 
driving force is simply the growth of the China market. Moreover, the 
burgeoning economic relationship between Thailand and China is 
facilitated by the large number of Thai with at least part Chinese 
ethnicity in the Thai commercial sector. Embassy contacts have told 
us that Thai trade policy with China has for years been influenced by 
Sino-Thai trading conglomerates. While cheap Chinese imports hurt 
some Thai producers, Bangkok is generally reluctant to rock the boat 
on economic matters with Beijing, even when China's exchange rate 
policies undermine Thai competitiveness. In fact, Finance Ministry 
and Bank of Thailand leaders applaud the growing Chinese connections, 
declaring that Thailand is better off moving away from economic 
dependence on the West. As Finance Minister Korn told CNN in an 
interview last month, "The Chinese attitude, diplomatically, 
politically, and economically, with the rest of Asia has been wholly 
positive." END SUMMARY. 
 
¶3. (C) COMMENT: Thailand's long-term growth prospects are such that 
the market here presents a good opportunity to seek to double our 
exports, in line with the President's goal. Thailand will continue to 
be distracted by political and social change over the next several 
years, but will benefit from our trade agenda as civil society 
continues to mature. In the near term, our ability to manage a 
counterstrategy to China's charm offensive is complicated by the fact 
that, unlike the Chinese, most of the U.S.-Thai trade and investment 
relationship is based on decisions made by private U.S. firms and not 
by the U.S. government. Nevertheless, we will continue to advocate 
for changes to improve the trade and investment climate, in 
particular the need for greater transparency and rule of law. END 
COMMENT. 
 
China Taking over as Thailand's Top Export Market 
--------------------------------------------- ---- 
 
¶4. (SBU) Thai economic officials celebrated after reviewing the 
government's official trade data for December 2009, which cited a 
26.1 percent increase for Thai exports over December 2008. For this 
export-driven economy, the data was a sign that the worst of the 
recent economic recession was probably over, and that the 
government's economic stimulus packages, many targeted at export 
industries, may be working. But key to that big picture improvement 
was that Thai exports to China increased more than 115 percent for 
the month of December (year-on-year) -- significantly undergirding 
the overall improved figures. Shipments to China ballooned from USD 
863 million in December 2008 to USD 1.88 billion in December 2009. 
Thai export sales to the U.S. grew 13 percent to USD 1.56 billion 
over the same period. 
 
¶5. (SBU) The United States continues to be a significant player in 
 
BANGKOK 00000286  002 OF 006 
 
 
the Thai economy. Taking advantage of the unique bilateral Treaty of 
Amity and Economic Cooperation, hundreds of U.S. firms have deep 
roots in Thailand, employing an estimated quarter of a million Thai. 
Nevertheless, the trends are in China's favor. For 2009 as a whole, 
the United States maintained a slight edge over China as Thailand's 
number one export destination, a position we have held for decades, 
but by the end of 2009, China had moved past both the United States 
and Japan as Thailand's top export market. The total amount of 
exports to the U.S. (with the exception of the last year during the 
global recession), has continued to increase as the Thai export pie 
has grown larger, but the rate of increase is nothing compared to 
that of exports to China. The share of Thai exports bound for China 
has risen from 5.2 percent in 2002 to 10.3 percent in 2009. In 2002, 
the United States was the destination for nearly 20 percent of all 
exports from Thailand; today, only 11 percent are bound for the U.S. 
market. In a January 21 interview with CNN, Finance Minister Korn 
Chatikavanij stated the export growth to China is "indicative of the 
fact that China has become a much more significant market." 
 
A Deepening (and Rapidly Expanding) China Trade Relationship 
--------------------------------------------- --------- 
 
¶6. (SBU) The data for December were a surprise to some, but when 
looking at the last three decades of Thai-Chinese economic relations, 
it is obvious that this day was inevitable. In 1975, the first year 
of diplomatic relations between Thailand and the PRC, total bilateral 
trade between the two countries amounted to only USD 25 million. 
Throughout the 1980s, bilateral relations focused on the political 
and military spheres, but beginning in the 1990s, the two governments 
began to negotiate and sign a number of agreements to promote trade 
and investment. Combined with the rapid expansion of the Chinese 
economy in 1990s, the governments' efforts meant significant new 
opportunities for Thai exporters to seize the growing demand in 
China's massive market. 
 
¶7. (SBU) Today, following a decade of double-digit trade growth, 
China now ranks as Thailand's second largest trading partner (exports 
and imports), having displaced the United States in 2007. The gap 
between Thai trade with China and with the U.S. is growing each year, 
and China soon may challenge Japan as Thailand's top trading partner. 
From 1995 to 2002, Thai-Chinese trade more than doubled from USD 3.7 
billion to USD 8.4 billion. But more impressively, bilateral trade 
between the two then quadrupled between 2002 and 2008, from USD 8.4 
billion to over USD 36 billion, an increase of over 330 percent. 
U.S.-Thai trade grew 60 percent over the same period. Thai-Japanese 
trade grew 116 percent to USD 53.4 billion. 
 
New Trade Pacts only Part of the Growth 
--------------------------------------- 
 
¶8. (SBU) Following the signing of the framework for the ASEAN and 
China Free Trade Agreement in 2002, former Prime Minister Thaksin 
Shinawatra wanted Thailand to have a head-start on the other ASEAN 
countries. Thaksin believed that Thailand should be China's gateway 
to ASEAN, and with Thai companies eager to sell their wares in China, 
Thaksin negotiated the October 2003 China-Thailand Early Harvest 
Agreement to give Thai exporters a two year jump start on ASEAN 
competitors. The initial agreement accelerated tariff reductions on 
agricultural products, and Thaksin hoped the deal would give Thai 
fruit and vegetable exporters, traditionally some of Thailand's 
strongest businesses, an early advantage in the Chinese market. The 
Thai government, and the majority of Thai businesses, viewed the 
growing demand in China as a major engine for Thai growth. 
 
¶9. (SBU) In the years following the Early Harvest Agreement, Thailand 
and China negotiated and signed additional agreements on trade and 
investment -- many more symbolic than practical. In 2004, China and 
Thailand formed the Joint Committee on Trade, Investment and Economic 
Cooperation to further economic ties. At the second meeting of the 
Joint Committee in 2005, then Thai Deputy Prime Minister Somkid 
 
BANGKOK 00000286  003 OF 006 
 
 
Jatusripitak and Chinese Vice Premier Wu Yi pledged to increase 
bilateral trade to USD 50 billion by 2010. What was seen then as a 
wildly optimistic target may be reached within the next couple of 
years. 
 
¶10. (SBU) But trade bolstered by the new trade agreements was only a 
portion of the overall growth. Most of the trade growth is accounted 
for by the expansion of the Chinese market. The early harvest 
agreement clearly improved agricultural trade between the two 
countries, but the most significant trade gains over the last decade 
were seen in sectors not covered by these initial tariff reductions 
-- notably computers and computer parts and other manufactured goods. 
One of Thailand's strongest exports has been computer hard drives 
from US and Japanese manufacturers such as Western Digital and 
Toshiba who established their operations in Thailand many years ago 
to export to computer assembly plants throughout Asia, including 
China. 
 
¶11. (SBU) As the ASEAN-China FTA kicks off this year, Prime Minister 
Abhisit Vejjajiva and his economic team are well aware of the 
pitfalls, including the potential negative impact on domestic 
industries that do not adapt to the increased competition from China. 
Concerns also remain that the difficulties of intra-provincial trade 
within China, and the effect that excise taxes, documentation 
requirements and other non-tariff barriers, will give China an upper 
hand in the new agreement. Despite the challenges ahead, the Thai 
government is optimistic the ASEAN-China agreement will deliver even 
more opportunities to the Thai economy overall and bring a boost to 
Thailand's exports. As Finance Minister Korn told CNN, "I think it's 
important to continue to work with each other rather than to be 
concerned about the potential impact of [China's] economic rise." 
 
Chinese FDI Growing, But Still Small 
--------------------------------------------- ----- 
 
¶12. (SBU) Investment from China is still a small fraction of that 
from more established foreign investors from Japan, the U.S., and 
Europe. However, Chinese investors are clearly increasing their 
presence in Thailand. According to Thailand's Board of Investment, 
the value of proposed Chinese investments in Thailand increased by 
more than USD 1 billion in 2009. Chinese applications to the Board of 
Investment included a proposed power plant worth nearly USD 800 
million, a chemical production plant worth more than USD 150 million, 
and a coal mine project valued at nearly USD 100 million. If these 
applications are approved (a process which typically takes many 
months), the 2010 FDI figures from China may be sharply higher than 
in previous years. Net investment remains relatively low, but trend 
lines for future investment point upwards, with some Thai officials 
predicting that China will one day become one of the top investors in 
Thailand. 
 
¶13. (SBU) Unlike most Japanese and American investors, Chinese 
investors have typically teamed up with Thai partners. Chinese 
investors view Thailand as a manufacturing and export base to expand 
markets in the rest of ASEAN. Most projects are in garments and light 
industry, but substantial investments have been made in chemical and 
plastics production, mining, and electronics. While no special 
incentive packages exist for Chinese investors (unlike those enjoyed 
by U.S. firms under the Treaty), the Thai government sees new 
opportunities for Chinese investors who have access to China's wealth 
of foreign currency reserves. The Board of Investment created a 
special China desk to facilitate mutual investments several years 
ago, and the Chinese Ministry of Commerce responded by sending more 
diplomats to its Embassy in Bangkok to help potential investors 
navigate the investment procedures. 
 
¶14. (C) Going in the other direction, Thai businesspeople, 
particularly those of Chinese descent, have been investing in China 
for the last three decades. Some analysts estimate that Thai 
investments in China are well over ten times the value of Chinese 
 
BANGKOK 00000286  004 OF 006 
 
 
investments in Thailand. The most prominent Thai investor in China is 
the Charoen Pokphand Group (CP Group), a Sino-Thai multinational firm 
which estimates the value of its Chinese investments at USD 6 
billion. Embassy contacts point out that the CP Group has managed to 
place at least one of its top managers in a key ministerial position 
in every Thai government in the past decade --perhaps the only Thai 
entity that has managed to maintain substantial influence in recent 
governments across the political spectrum. 
 
Make Way for Chinese Tourists 
----------------------------- 
 
¶15. (SBU) China's new traveling class is also opening up new 
opportunities for increased trade and investment between the two 
countries. In 1995, annual tourist arrivals from China amounted to 
only 15,000, but by 2007, the number of Chinese tourists had swelled 
to nearly one million, easily surpassing the fewer than 700,000 who 
arrive annually from the U.S. While the global economic crisis and 
political uncertainty in Thailand slowed tourism in 2008-09, Thai 
tourism authorities are hopeful that the upcoming Chinese New Year 
festivities in Thailand will give an early boost to Chinese arrivals 
in 2010, and Bangkok's malls and department stores are gilded to the 
hilt with decorations welcoming the Chinese Year of the Tiger. 
Thailand's ethnic Chinese, who account for between 10 and 15 percent 
of the total population, are also traveling in large numbers to 
China. According to China's National Tourist Office, more than 
540,000 Thais made their way north in 2009. 
 
Avoiding Debate on Exchange Rates 
--------------------------------- 
 
¶16. (C) In the aftermath of the 1997 financial crisis, when the value 
of the Thai baht fell by half, China's decision not to devalue the 
renminbi was warmly welcomed as a gesture of support for other Asian 
economies devastated by the ensuing economic collapse. (NOTE: Thai 
government and financial elites have not forgotten that during the 
same period the U.S. would not initially support an IMF bailout 
package for Thailand as it had earlier for Mexico. END NOTE.) During 
the past several months the baht has appreciated, reflecting 
Thailand's continuing current account surplus, but Beijing has kept 
the renminbi fixed to the dollar, making Chinese exports cheaper than 
Thai exports. When visiting U.S. Treasury officials last week asked 
Bank of Thailand deputy governor Bandid Nijathaworn whether Thailand 
would raise this issue with the Chinese, he demurred, clearly not 
wanting to challenge the Chinese on the issue. At the recent Asian 
Financial Forum in Hong Kong, meanwhile, Finance Minister Korn 
reportedly spoke only of the need for currency adjustment in the 
dollar and the pound. 
 
New Financial Relationships: Asians Helping Asians 
--------------------------------------------- ----- 
 
¶17. (SBU) Also in the wake of the 1997 financial crisis, Thailand led 
an effort to create a pool of foreign exchange funds for use by Asian 
economies separate from the IMF. The effort became known as the 
Chiang Mai Initiative (CMI), and, while it has not yet been 
particularly active, earlier this year at the ASEAN+3 Finance 
Ministers Meeting in Phuket, agreement was reached to increase the 
pool of funds to USD 120 billion, with China and Japan agreeing to 
contribute the largest shares. Thai government support for the CMI 
has been a priority for the current government, and the previous 
government as well, despite their political differences (ref D). 
Moreover, Bank of Thailand governor Tarisa Watanagase announced on 
February 1 that Thailand has opened talks with China to create a 
currency swap agreement, whereby traders in both countries could 
settle accounts in renminbi or baht, rather than rely on dollars as 
has been the case in the past. Tarisa said that Thailand's 
diminishing reliance on the U.S., Japan and Germany is a good thing. 
We need some other driving engines, Bloomberg reported her saying. 
 
 
BANGKOK 00000286  005 OF 006 
 
 
Work Towards Principled Trade 
------------------------------- 
 
¶18. (C) The U.S. economic and trade agenda with Thailand is 
unquestionably broader than what the Chinese bring to the table. The 
Thai economic leadership understands that in the long run, respect 
for intellectual property rights, fair labor practices, and good 
governance -- principles that are part and parcel of our agenda with 
the Thai -- are necessary for sound economic growth and political and 
social peace. This is evidenced by the cooperation we receive across 
the board on issues such as child labor and trafficking in persons, 
though Thai efforts are never quite to the level we would like them 
to be. Nevertheless, in the short term, the Chinese 
conflict-avoidance model of trade relations is alluring. While 
sometimes called "free trade agreements," what China has with 
Thailand (and ASEAN) are little more than tariff-reduction 
arrangements on goods and do little to expand trade in economic 
sectors such as services, or protect intellectual property, that are 
key to expanding long-term growth in maturing economies. Even then, 
there are large carve-outs for "sensitive" industries in the 
agreements with China. Progress on the U.S. trade agenda with 
Thailand, as we work to support the President's stated goal of 
doubling U.S. exports around the world, may thus be slowed a bit as 
the Thai devote more time and attention to building economic ties to 
China. But the easy harvest of "low hanging fruit" in those trade 
relations will not last forever, and as with any burgeoning trade 
relationships conflicts will be inevitable. Meanwhile, the emerging 
strength and influence of Thai civil society should work in our favor 
over the long haul. Academic contacts point out that the government 
is "scared to death" of NGO criticism, as evidence by the 
unprecedented influence they have been able to wield through the 
courts to bring construction projects to a halt at the Map Ta Phut 
industrial zone because of pollution and health concerns. Thai media 
and public attention to the resurgent Chinese melamine scandal, and 
continuing concerns over the safety of food products from China, show 
that a sole focus on trade for money's sake will not survive in the 
long run. 
 
Selected Economic Statistics 
---------------------------- 
 
¶19. (U) Below are selected statistics on trade and investment that 
highlight the economic relationship between Thailand and China. 
 
Total Bilateral Trade: By Country 
Unit: Billions of US Dollars 
Source: Ministry of Commerce of Thailand 
 
       2002   2003   2004   2005   2006   2007   2008   2009 
       ----   ----   ----   ----   ----   ----   ----   ---- 
China  8.45  11.69  15.26  20.33  25.33  31.07  36.35  33.15 
Japan 24.75  29.43  35.79  41.12  42.05  46.50  53.63  40.76 
USA   19.66  20.69  22.71  25.68  29.04  28.91  31.70  25.03 
 
 
Exports from Thailand: By Country 
Unit: Billions of US Dollars 
Source: Ministry of Commerce of Thailand 
 
       2002   2003   2004   2005   2006   2007   2008   2009 
       ----   ----   ----   ----   ----   ----   ----   ---- 
China  3.56   5.69   7.11   9.17  11.73  14.85  16.19  16.12 
Japan  9.95  11.36  13.49  15.09  16.39  18.12  20.09  15.73 
USA   13.51  13.60  15.50  17.99  19.45  19.42  20.28  16.66 
 
 
Imports into Thailand: By Country 
Unit: Billions of US Dollars (rounded to nearest million) 
Source: Ministry of Commerce of Thailand 
 
 
BANGKOK 00000286  006 OF 006 
 
 
       2002   2003   2004   2005   2006   2007   2008   2009 
       ----   ----   ----   ----   ----   ----   ----   ---- 
China  4.90   6.00   8.14  11.16  13.60  16.23  20.16  17.03 
Japan 14.80  18.06  22.29  26.03  25.67  28.38  33.54  25.02 
USA    6.15   7.09   7.21   8.68   9.59   9.50  11.42   8.37 
 
 
Net Flows of FDI in Thailand 
Unit: Millions of US Dollars (rounded to nearest million) 
Source: Bank of Thailand 
 
       2003   2004   2005   2006   2007   2008  2009 Q1-Q3 
       ----   ----   ----   ----   ----   ----  ---------- 
China    24     -4     12     50     74     17     23 
Japan  2298   2750   2927   2576   3155   2534   1864 
USA     336    540    750    166    624    340    124 
 
 
Board of Investment Applications in 2009 
Unit: Millions of US Dollars 
Source: Board of Investment of Thailand 
 
        Apps Received  Value      Apps Approved   Value 
        -------------  -----      ------------    ----- 
China        25        1,308           15           212 
Japan        266       2,345           243        1,785 
USA          56        1,049           37           775 
 
 
Tourist Arrivals in Thailand by Country 
Source: Tourism Authority of Thailand 
 
          2005     2006     2007     2008   Jan-Oct 2009 
          ----     ----     ----     ----   ------------ 
China   776792   949117   907117   826660    590725 
Japan  1196654  1311987  1277638  1153868    822767 
USA     639658   694258   681972   669097    496812 
 
 
JOHN