Trade Diversification and Crisis Transmission: A Case Study of Thailand

• Author: Kornkarun Cheewatrakoolpong,Somprawin Manprasert
• DOI: http://doi.org/10.1111/asej.12080
• Date: 01 December 2015
• Published date: 01 December 2015

Trade Diversification and Crisis Transmission:

A Case Study of Thailand*

Kornkarun Cheewatrakoolpong1and Somprawin Manprasert2

Received 12 July 2012; Accepted 20 September 2015

The international trade literature suggests trade concentration is an important factor

in the amplification of the global financial crisis. However, the relationship

between trade concentration and transmission of the subprime crisis is empirically

weak. Thailand is one of the countries with declining reliance on the advanced

economies, yet it was greatly affected by the recent crisis. This might result because

the formation of global supply chains creates both direct and indirect trade link-

ages. In this paper, the authors include the effects of both linkages to examine their

connection to the transmission of external shocks, as experienced by the Thai

economy. If total trade linkages are calculated, Thailand is still found to be highly

exposed to advanced markets. Simulation using a computational general equilib-

rium model also indicates that the country was seriously affected by the financial

crisis through indirect channels.

Keywords: crisis spillover, global financial crisis, trade diversification.

JEL classification code: F14.

doi: 10.1111/asej.12080

I. Introduction

In 2008, the US subprime crisis led to a sharp contraction in global trade and this

caused a worldwide recession. Even though Asian countries have weak financial

linkages with the USA the Asian countries still experienced severe crisis trans-

mission. Trade linkages are presumed to have been the most important channel

for the transmission of the crisis to East Asian countries, including Thailand.

Apart from direct trade channels, the crisis has also caused a severe drop in

indirect intraregional trade in parts and components, especially in the East Asian

1Cheewatrakoolpong: Faculty of Economics, Chulalongkorn University, Bangkok 10330.

Email: kornkarun.k@chula.ac.th. 2Manprasert (Corresponding author): Faculty of Economics,

Chulalongkorn University, Bangkok 10330, Thailand.

* An earlier version of this paper was presented at the ARTNeT Symposium organized by the United

Nations and is available online at http://www.unescap.org/tid/artnet/pub/wp11212.pdf. The authors

are grateful to the International Institute of Trade and Development (ITD) for providing funds for this

project. Discussions with Danupon Ariyasajjakorn and Tosapol Apaitan were of great benefit. The

authors would like to thank anonymous reviewers for their valuable comments. Technical support

from the United Nations Economic and Social Commission for Asia and the Pacific and ARTNeT

Secretariat is gratefully acknowledged.

bs_bs_banner

Asian Economic Journal 2015, Vol. 29 No. 4, 385–408 385

© 2015 East Asian Economic Association and Wiley Publishing Asia Pty Ltd

region. Most of the industrial production in East Asia (i.e. automobiles and parts,

computers and parts, and electronic and electrical appliances) is carried out

through international production networks (IPN), where production is broken into

several stages and undertaken in various countries, according to their respective

comparative advantages. A decrease in the demand for final goods in the G3

countries (the USA, the European Union and Japan) has, therefore, resulted in a

drop in exports of parts and components in the region.

The international trade literature shows that both geographical and commodity

trade concentrations are important factors in amplifying the effects of crisis

transmission via international trade channels. Hesse (2008) shows that Thailand

has experienced a decline in export concentration over the past 40 years. During

that period, the country moved from being an agricultural and resource-based

economy to being a manufacturing exporter. However, the export data for Thai-

land still shows that exports are concentrated in the country’s major manufactur-

ing sectors, such as computers and parts, automobiles and parts, and electrical

parts and appliances. These products may share similar export destinations as

well as backward and forward linkages. In addition, many Thai manufacturing

exports comprise intermediate goods that may be re-exported to G3 destinations;

this is the so-called indirect trade effect. Therefore, when the indirect effect is

taken into account, Thailand’s destination concentration may be high, especially

in terms of exposure to changes in the state of G3 economies. Thus, trade

concentration could be one reason why the subprime crisis had a serious impact

on Thailand, despite the fact that the country has very weak financial linkages

with the USA.

To consider whether trade concentration, in the presence of the indirect trade

effect, played a major role in the spillover to Thailand of the 2008–2009 global

financial crisis, we first computed the Herfindahl index. This revealed the product

and destination concentration of Thai exports using the Harmonized System (HS)

classification of trade data at the two-digit level. Next, the trade matrix was

computed to identify Thailand’s total trade dependence on, and the concentration

of it in, the G3 countries. This included indirect trade; that is, trade in components

and parts which are used in the production of final goods that will also be

re-exported to G3 destinations. The calculation of such a trade matrix will help to

reveal the true level of Thai exports to the G3 economies. In addition, the authors

explored forward linkages using the input–output matrix, to reveal the impact of

export concentration on related industries. Finally, information was extracted

from the Global Trade Analysis Project (GTAP) model and used to reconstruct a

model that can decompose the total effect of external shocks on the Thai economy

into direct and indirect effects. When the indirect trade effect is taken into

account, the results illustrate the importance of trade concentration in the trans-

mission of the crisis to the Thai economy.

Section II of this paper reviews related literature. Section III explains the

conceptual framework and methodology of the study. Section IV describes the

results while the conclusion is given in Section V.

ASIAN ECONOMIC JOURNAL 386

© 2015 East Asian Economic Association and Wiley Publishing Asia Pty Ltd