More dynamic relationships between Myanmar and Western powers were imperative in the development of Myanmar's economy over the past decade. As a result, it has reported relatively impressive economic growth on the back of increased foreign investment, thus helping bolster its exports and allowing Myanmar to make a transition from an agricultural society to an industrial one. Additionally, there has been massive employment generation and a significant increase in consumer purchasing power in Myanmar. Despite these improvements, the recent seizing of power by the Myanmar army is bound to stall its relationships with Western powers and may lead to economic sanctions, such as withdrawals of trade privileges by the European Union (EU) and US, thus inevitably hurting its overall trade, investment and economic conditions.
In terms of trade, Myanmar's exports to the EU recorded a 10-fold jump over the course of only six years after it received trade privileges from the EU. It shipments to the US reported a five-fold increase within just three years, suggesting the importance of such trade privileges in helping boost Myanmar's exports to both the EU and US over the years. Presently, the value of Myanmar's outward trade to the EU and US account for 23 percent of its total export value. Therefore, if it loses trade privileges granted by the EU and US, its exports will be directly affected, in particular, textiles and garments because such products would have been subject to the EU's import tariff of approximately 12 percent and the US import tariff of 20 percent . In addition, such products account for one-third of all Myanmar's exports. Most importantly, up to 60 percent of these products are exported to the EU and US. KResearch is of the view that if the EU and US withdraw their trade privileges from Myanmar, the value of its exports may contract by approximately 10 percent in 2021.
In terms of investment, the seizing of power by Myanmar's army will not only hurt its exports, but also foreign investment. Political uncertainties and risks of the withdrawals of trade privileges by the EU and US, following the seizing of power, may prompt foreign investors to adopt a wait-and-see attitude or even halt their investment in Myanmar. This in turn may cause investment in Myanmar's industrial sector to contract in the long term. Over the past five years, industrial investment accounted for 22 percent of the total foreign investment, primarily in the textile and garment industries. If such exports are subject to the EU import tariffs of about 12 percent, its comparative advantage in terms of the country with the lowest labor costs in ASEAN may not be adequate to offset the rising tariff costs, meaning that its ability to attract foreign investment in the textile and garment industries will significantly be affected. This along with the ongoing COVID-19 pandemic leads KResearch to expect that the seizing of power by Myanmar's army will cause foreign investment in Myanmar to decline by 30-40 percent in 2021.
Over the long term, if Myanmar loses trade privileges granted by the EU and US, it is expected that foreign investors wanting to invest in Myanmar's industrial sector for export to these two markets will decline steadily. However, China's investment in Myanmar may rise, especially in infrastructure development projects linking its Yunan Province with the Indian Ocean on the western coast of Myanmar, but as such investment does not focus on the industrial sector, it may not significantly help enhance Myanmar's industrial development.
Regarding the overall economy of Myanmar, the seizing of power by its army will likely trigger political uncertainties and represent risk to its economic recovery and the government's financial position. It will also affect Myanmar's attempts to combat the COVID-19 pandemic such as leading to delays in COVID-19 vaccine distribution. Due to these factors coupled with the likelihood that it may lose trade privileges granted by the EU and US, which would result in a broad-based impact on the economy as there are over 1 million workers employed in the textile and garment industries, we at KResearch expect that Myanmar's economy may contract within a range of 2.5-0.5 percent in 2021.
The impact on Thailand will be seen through border trade and movements of Myanmar workers to Thailand. The seizing of power in Myanmar may create uncertainties surrounding border policies, meaning that inspections on passenger or freight transportation via the Thailand-Myanmar border may become more stringent. For this reason, KResearch expects that border trade between the two nations will continue to shrink for the fifth consecutive year by 0.5 percent in 2021. Obstacles in moving Myanmar workers across Thailand-Myanmar border may result in a shortage of legal foreign workers in a number of businesses, namely construction, fisheries and related processing, agriculture and livestock, as well as in the retail and restaurant sector in the future.
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