Thailand: Internal Instability and Regional Volatility Threaten the Southeast Asian Trade Hub

Agora Strategy Executive Briefing on Thailand

Executive Summary

• Thailand – despite being a U.S. ally – de facto practices “bamboo diplomacy” by pursuing flexible and pragmatic bilateral relations with America, China and other powers, swaying in multiple directions over time in line with its national interests.
  

• Tensions between the Thailand’s old political establishment and pro-reform groups will likely negatively affect political stability for the foreseeable future.
  

• Rising global protectionism and concerns over political instability are set to limit GDP growth to around 2.5%, considerably lower than that of its neighbours.
  

Implications for International Business

• To mitigate pressure from the U.S. and China, Thailand is actively seeking to expand its business relationships with Europe which opens opportunities for European businesses, specifically in green mobility, green tech and renewable energy, infrastructure and transport, digital industries, biotechnology as well as the healthcare industry.
  

• The risk of further political instability in Thailand, including the risk of a coup d’etat, remains heightened; international businesses are well advised to practice continuous risk monitoring and associated scenario building, engage in corporate diplomacy, form strong partnerships with local firms, and, if possible, diversify across multiple Southeast Asian countries.
  

• While international businesses (including from China) have flocked to Thailand in the context of “China+1” in recent years, there is now a need to hedge against potential disruptions under Trump 2.0 by expanding geographic and operational flexibility across the region to avoid lock-ins.

State of Play

Generally, Thailand continues to grapple with political instability, restrictions on freedom of expression, and the influence of conservative elites over democratic processes. The country’s Prime minister Paetongtarn Shinawatra, in office since 2024, currently faces two major hurdles in domestic politics: First, she needs to manage the fractious internal politics of an often disparate 12-party coalition. Second, she needs to bridge the general political divide between the old establishment of royalty, bureaucracy and military, and the Pheu Thai Party (PTP) she has been leading since October 2023 and other reformist forces. If she fails either task, wider political instability, and with it the risk of a coup d’etat, will likely increase.

Political instability notwithstanding, the current government has put a strong focus on sustaining economic growth as well as bringing about a more equitable income distribution to increase domestic consumption (Thailand has Asia’s highest rates of income inequality). Policies to reduce it include prolonging a debt moratorium for small scale farmers and doubling the minimum wage. Furthermore, the government tries to reduce over-dependence on the tourism sector by investing more in green and high-tech sectors and related infrastructure. However, high U.S. tariffs are likely to force the government to reallocate some public spending to counter their impact.

Internationally, Bangkok currently seeks to diversify its economic dependence on the US and China by advancing trade and investment negotiations with other international partners. Thailand recently became a BRICS partner country and began accession talks for OECD membership in 2024, the second Southeast Asian country after Indonesia. Following a period of strained relations after Thailand's 2014 military coup, the EU and Thailand have revitalized their relations, most notably by reviving negotiations for an EU-Thailand Free Trade Agreement. The EU is Thailand's fourth-largest trading partner, and some analysts have suggested that the agreement could potentially double Thailand's trade with the EU.

Moreover, Thailand is an important regional hub. It is particularly competitive in manufacturing due to its strong automotive, electronics, and agribusiness sectors as well as associated suppliers and supply chains. To be sure, in logistics, Singapore –also the region’s undisputed financial centre – and increasingly Malaysia, outperform Thailand. However, Thailand has become an attractive destination for international firms’ "China+1" strategy, by which they couple investments in China with a second facility in another Asian economy. The country offers a strong manufacturing base, membership in multiple free trade agreements (including with Japan, Australia, and China), and access to other markets in Asia and beyond Asia.

Key Issues

Geopolitics

Thailand is a major non-NATO ally of the U.S., which suggests close strategic alignment with Washington. However, in reality, Thailand’s strategic posture is best described as hedging or “bamboo diplomacy”. Bangkok has maintained close relationships with the U.S. and China whilst avoiding over-reliance on either. This has allowed Thailand to simultaneously maintain close security and economic ties with the U.S. and deepen its economic relationship with China. Throughout the last decade, however, Bangkok’s relations with Beijing have expanded from mainly economic, including in the field of security and defence with arms purchases and joint naval exercises: From 2019 to 2023, China accounted for 44% of Thailand's major weapon imports, more than doubling its share compared to the previous five-year period. Relations with the U.S., in turn, have cooled because of a freeze of U.S. aid in response to the 2014 coup d’etat and U.S. criticism of Thailand’s democratic backsliding. While U.S. policymakers understand that Thailand is not “choosing China”, but rather trying to hedge, they view Thailand’s ties with China with concern. Therefore, Washington’s strategic focus has been on other allies, notably the Philippines, Australia and Japan. The EU and Thailand have decided to resuscitate negotiations for an EU-Thailand Free Trade Agreement to be completed by the end of 2025.

In its immediate neighborhood, Thailand enjoys generally cooperative relations with Laos, for which it serves as a major investor in hydropower projects and other infrastructure. Ties to Cambodia have been marked by territorial disputes in the past but have recently improved as the result of an agreed freezing of the disputes and growing economic interdependence. Bilateral cooperation has since intensified in the fields of trade, investment, energy and border management. Relations with Myanmar, in contrast, have significantly deteriorated since the coup there in 2021 and the ensuing civil war. Thailand has faced a huge influx of refugees and fighting has occasionally spilled onto Thai territory.

To maintain regional autonomy amid great power rivalry, Thailand has in the past a policy of putting the ASEAN group of Southeast Asian countries at the centre. It has tried to leverage platforms like the ASEAN Regional Forum and the East Asia Summit to shape regional agendas on trade, development, and connectivity. This “ASEAN centrality” fits nicely with Bangkok’s hedging strategy between the U.S. and China. However, ASEAN norms of non-interference and consensus decision-making have limited Thailand’s ability to move forward on regional issues it deems important, especially on Myanmar. In practice, therefore, Thailand increasingly choses coalitions of the willing over ASEAN to influence regional issues.

Thailand is not party to the conflicts in the South China Sea or the Taiwan Strait. Any military involvement is therefore unlikely. However, an escalation in the South China Sea or the Taiwan Strait would almost certainly disrupt maritime trade routes through which a significant portion of Thailand’s trade flows. Diplomatically, its hedging strategy would almost certainly come under immense pressure. It is likely that Washington would pressure Bangkok to fulfil its alliance obligations, including the use of Thai military installations such as U-Tapao. So far, Thailand has tried to avoid becoming a pawn in a great power conflict.

Geoeconomics

Thailand is Southeast Asia’s second largest economy and is considered a major regional trade and manufacturing hub. The country offers a range of incentives to attract foreign direct investment (FDI), especially in strategic sectors like advanced manufacturing, digital industries, biotechnology, and green energy. These include tax-related incentives such as exemptions or reductions on corporate income tax or import duties. They also include non-tax incentives such as liberalizing foreign ownership, eased visa and work permit processes, access to infrastructure, logistics, and data access support, and faster customs clearance and project approvals.

Thailand has also taken some steps to align with international environmental, social, and governance (ESG) as well as due diligence standards, particularly as demands by global investors and trading partners increase. Its approach combines regulatory reforms, voluntary frameworks, and market-driven adaptations. Also, Bangkok is preparing to align with standards such as the EU Corporate Sustainability Due Diligence Directive or the German Supply Chain Act. However, the country’s response is uneven across sectors and enforcement of compliance remains inconsistent.

Thailand also is one of the largest indirect beneficiaries of U.S. tariffs against Chinese companies, as many of the latter sought alternative manufacturing bases in non-tariffed countries. As a result, exports from Thailand to the U.S. strongly increased since 2017. This has earned it the ire of the second Trump administration: The 36% tariff the country now faces is among the highest among Southeast Asian nations. Additionally, Thailand’s role in manufacturing exposes it to significant knock-on effects from global trade disruptions—even if it is not the primary target. Furthermore, Thailand would also be affected by a further decrease in economic growth in China due to a further reduction in Chinese demand for Thai components (e.g., plastics, chemicals, agri-commodities) as China is Thailand’s largest export market.

Relocation or diversification to Thailand in the context of the China+1 strategy to mitigate exposure to the Sino-US trade war can be beneficial for European companies. Thailand’s government offers considerable support to investors, especially in key economic sectors. The conclusion of a free trade agreement with the EU would furthermore reduce tariffs, improve protection of intellectual property, and enhance regulatory cooperation. However, European companies must also consider Thailand’s fragile domestic politics, its structural predicaments (i.e. lack of skilled labour or compliance risks due to lax enforcement), as well as the negative impact on Thailand of the Chinese Market. Lastly, a further reconfiguration of global supply chains and trade policies under Trump 2.0.

looms large on the horizon.