Trade Integration of Thailand with the Greater Mekong Sub-region― An Assessment Using the Gravity Model of Trade ―Cabinet Office, Hiroyuki Taguchi
1. Introduction
This paper aims to assess the extent of the trade integration of Thailand with the Greater Mekong
Sub-region (hereafter referred to simply as GMS) in comparison with the trade integration with theother advanced ASEAN economies and the other major partners (Japan, China and the United States),
by using the gravity trade model as an analytical framework, for the period from the 1980s through the
2000s.
The GMS generally refers to a geographical region covering five countries – Cambodia, the Lao
People’s Democratic Republic (Lao PDR), Myanmar, Thailand and Vietnam – as well as southernparts of China. Although the six economies share not only the Mekong River but also deep cultural,
ethnic and historical similarities, substantial economic cooperation among these economies developed
just after the 1990s, due to international political difficulties during the cold war and the delayedtransition of these economies except Thailand to market economies until the 1980s. In 1992, with themain support of the Asian Development Bank, the GMS countries met together for the first time andagreed to launch a program of sub-regional economic cooperation designed to facilitate economic
linkages across their borders. The program covers both the “hard” (infrastructure development) and“soft” (agreements and reforms) aspects of cooperation, specifically nine sectors and areas ofcooperation: agriculture, energy, environment, human resource development, telecommunications,transport, tourism, trade and investment. For about two decades since then, the GMS economic
cooperation has been steadily promoted, although the 1997-98 financial crises directly hit Thailand
and gave downward impacts to other GMS economies. Thus, it is an appropriate time to review thelong-term progress of the GMS cooperation from the perspectives of trade integration on a quantitative
base.
Thailand has played a central role in the GMS cooperation in terms of promoting trade andinvestment in private sectors as well as providing financial resources in the implementation of the
GMS cooperation program. At the same time, Thailand is an original member of the Association ofSoutheast Asian Nations (ASEAN) that was established in 1967. The cooperation framework of theASEAN is by far precedent to that of the GMS, as we can see that the ASEAN agreed on the Free
Trade Area (AFTA) in 1992, and the original members already enacted zero tariff rates on virtually allimports.1 Thus, it would provide significant implications on the development stage of the GMS
cooperation, to compare quantitatively the degree of trade integration of Thailand with the GMS, withthat of Thailand with the originally-member ASEAN. In addition, it would also be interesting to see if
1

Cambodia, the Lao People’s Democratic Republic, Myanmar, and Viet Nam, which joined the ASEAN in
the 1990s, agreed to enact zero tariff rates by 20151

there is a change in the intensity of trade integration of Thailand with such major trading partners as
Japan, China, and the United States, amid the growing presence of China in the global economy.
The paper is structured as follows. Section 2 review previous studies and clarify this paper’s
contribution. Section 3 presents empirical analyses introducing the methodology and data, anddiscussing the estimate results. Section 4 summarizes the results and concludes.
2. Previous Studies and Our Contribution (omit)
3. Empirics
We now proceed to the empirical analysis. We first simply overview the trends in trade integrationof Thailand with the GMS2, the other ASEAN, and the other major trading partners, i.e. Japan, China
and the United States. Then we move to statistical tests on the intensity of trade integration of Thailand
with these trading partners by estimating the gravity trade model.
3.1 Overviews of Trade Integration in Thailand (omit)
3.2 Analysis of Gravity Trade Model
This section first clarifies the methodology and data, then shows the estimation results, anddiscusses the results.
3.2.1 Methodology and Data
Considering the evolution of the gravity trade model as shown in Section 2, we herein adopt theaugmented version of the model with per capita income levels for both exporters and importers, which
was used for estimation also in Poncet (2006). We specify the equation in the following way.
ln(Tti) = const. + α*ln(Yt*Yi) + β*ln[(Yt/popt)*(Yi/popi)] + γ*ln(Dti) + δ*DM + εti (1)where the subscript t and i denote Thailand and its trading partner’s country; T is

trade flows(exports, imports, and their total flows) between Thailand and country i; Y is the economic size ofcountry, i.e. GDP; Y/pop is per capita GDP; D is the geographical distance between the capital cities ofThailand and its trading partner i; DM is a dummy variable that takes the value of one for a specifictrading partner which is supposed to have a preferential trade integration with Thailand, i.e. the GMS3,
2

This study, focusing on national level analysis, does not specifically analyze the provinces in China
covered in the GMS.
3
As the GMS in the gravity model estimation, we exclude Myanmar due to the lack of GDP data, and2

the other ASEAN countries and the other major trading partners such as Japan, China and the UnitedStates in our model; α, β, γ, and δ are coefficients of each explanatory variable; ε is the disturbanceterm.
According to the theoretical underpinning of the gravity model that bilateral trade flows are
explained positively by the economic size and level of two countries, and negatively by thegeographical distance between them as a proxy for trade costs, we can expect a positive sign in α andβ, and a negative sign in γ. Of particular importance is the coefficient for a dummy variable, δ, which
is useful for identifying the intensity of trade integration with Thailand. A positive and statisticallysignificant coefficient, δ, means that trade flows with Thailand exceed the level predicted by thegravity elements, thereby implying the partner’s preferential economic ties with Thailand.
For estimating the equation (1), we construct panel data for the period between 1980 and 2009
with 215 countries as Thailand’s trading partners identified in the statistics of International Monetary
Fund (IMF). To avoid the problem of sample selection bias in our panel data which contain a large
number of missing data in a specific group of countries such as small-size countries, we adopt thetruncated regression model.
As for the source of the annual data used for estimation, the bilateral trade data with Thailand interms of the export and import values of millions of U.S. dollar are retrieved from “Direction of Trade
Statistics” of IMF. The data on GDP and per capita GDP on U.S. dollar base comes from the WorldBank’s “World Development Indicators”. The geographical distance between Thailand and eachtrading partners is measured by the “greater circle” distance formula between Bangkok (the capital of
Thailand) and the capital city of each country.4
3.2.2 Findings
Table 2 reports the results of the gravity model estimation on Thailand’s trades: Table2a on
Thailand’s exports, Table2b on Thailand’s imports, and Table3c on the total of its imports and its
exports. Figure 1 describes the summary on the trade integration of Thailand with the GMS, the other
ASEAN and the other major trading partners (Japan, China, and the United States).
We could verify the validity of the gravity trade model through all the estimations shown in Table
2. The basic explanatory variables have the expected signs and statistically significant at the
one-percent level: the coefficient of joint GDP is significantly positive; the one of joint per capita issignificantly positive; the one of geographical distance is significantly negative.
Our great concern is the coefficients of dummy variables to describe the intensity of tradeintegration beyond the gravity-model level, which are introduced for the GMS (Cambodia, Lao PDR,
and Vietnam (CLV)), the advanced ASEAN (Indonesia, Malaysia, Philippines and Singapore), and thetarget only Cambodia, Lao PDR, and Vietnam, which we call “CLV”.
4
For the calculation of “greater circle” distance, the website, http://www.distancebetweencities.us, isavailable.
3other major economies (Japan, China and the United States) as the trading partners of Thailand.
Regarding with Thailand’s exports in Table 2a, within the GMS, the export to Cambodia
significantly exceeds the gravity-model standard in the 2000s; the one to Lao PDR exceeds thestandard in the 1990s and the 2000s; the export to Vietnam, which is significantly less than thestandard in the 1980s, is above the standard in the 2000s. As a total, the exports to CLV, which fall
below the standard in the 1980s, exceed the level in the 1990s and the 2000s. In comparison with theexports to the advanced ASEAN, which exceeds the gravity-model standard in all the periods, theintensity of the export integration of Thailand with CLV catches up with that with the advanced
ASEAN in the 1990s, and even goes beyond it in the 2000s. The coefficients of dummy variables
show that in the 2000s, Thailand’s exports to CLV are 5.21 times (exp (1.651) = 5.21) larger than thegravity-model standard, whereas those to the advanced ASEAN are 4.79 times (exp (1.567) = 4.79)
greater than that level. As for Thailand’s exports to the other major partners, the export to the UnitedStates keeps the above-standard level in all the periods, while that to China stays at the gravity-modellevel.
Concerning with Thailand’s imports in Table 2b, within the GMS, there are no countries fromwhich the imports are significantly above the gravity-model standard, while the imports from
Cambodia in the 2000s and from Vietnam in the 1980s are even discernibly below the standard. The
imports from CLV show a clear contract with those from the advanced ASEAN, which remarkably
exceeds the gravity-model standard in all the times. The imports from the major partners, i.e. Japan.
China and the United States indicate the above-standard level respectively all through the periods,
although the import from the United States reduces its intensity towards the 2000s.
We finally report the total outcomes of Thailand’s exports and imports. The trade with CLV, whichlies below the gravity-model standard in the 1980s, exceeds the standard in the 2000s. The intensity oftrade integration with CLV is in the process of catching up with that with the advanced ASEAN, but
still behind its level. The coefficients of dummy variables indicate that Thailand’s trade volume with
CLV, which is 2.21 times (exp (0.793) = 2.21) greater than the gravity-model standard, is less than thatwith the advanced ASEAN shown by 3.40 times (exp (1.226) = 3.40) above the standard. As for the
trade with the other major partners, Japan and the United States keep the above-standard level all
through the periods, whereas China does not represent any significant dissociation from thegravity-model standard. Although we found the growing trade share between Thailand and China in
Table 1, it might reflect the growing economic size of China following the gravity-model standard.
3.2.2 Discussions
We now discuss the implications of the above-mentioned outcomes of the gravity model estimation.
One of the important findings is that the trade integration of Thailand with the GMS has remarkably
grown from the 1980s to the 2000s, as shown in the estimation results that Thailand’s trade with CLV,
which lies below the gravity-model standard in the 1980s, exceeds the standard in the 2000s, mainly
4reflecting the trend in Thailand’s exports. It might reflect the steady progress of the GMS collaboration,
which launched in 1992 and has evolved in terms of facilitating the hard and soft infrastructure as the
cross-border projects with nine sectors and areas, as we stated in the introduction.
The intensity of the trade integration of Thailand with the GMS is, however, still behind that withthe advanced ASEAN in the 2000s, as indicated in the estimation outcomes that Thailand’s importintegration with the GMS is far below that with the advanced ASEAN, whereas its export integration
with the GMS already catches up with that with the advanced ASEAN. We speculate as to the possible
reasons for the immaturity of the GMS integration in the following ways. In institutional frameworks
such as enacting zero-tariff rates, the GMS cooperation is behind the ASEAN’s one within the original
members, as we mention in the introduction. In addition, as ADB (2007) suggested, the GMS has stillmuch room to facilitate the software components of cooperation, while the GMS projects had so farplaced much emphasis on the need to remove the physical barriers to sub-regional cooperation. In thiscontext, ADB (2007) recommended “enhancing efforts to promote private sector participation” forinvestment promotion and trade facilitation in the GMS. If we follow this argument, we mightinterpret the less intensity of Thailand’s imports in the GMS as the lack of private sector participationin neighboring economies, i.e. CLMV. Thus, our estimation outcomes might imply the necessity totake such measures as enhancing the skills of labor forces in CLMV for instance.
4. Concluding Remarks
This paper examined the extent of the trade integration of Thailand with the GMS in comparison
with the trade integration with the other advanced ASEAN economies and the other major partners(Japan, China and the United States), by using the gravity trade model as an analytical framework, forthe period from the 1980s through the 2000s.
We found that Thailand’s trade integration with the GMS has remarkably grown from the 1980s to
the 2000s, in the sense that Thailand’s trade with the GMS, which lies below the gravity-model
standard in the 1980s, exceeds the standard in the 2000s. It might reflect the steady progress of the
GMS collaboration efforts since 1992. However, we also found that the intensity of Thailand’s tradeintegration with the GMS is still behind that with the advanced ASEAN. It might come from theimmaturity in private sector participation in the GMS neighboring economies for instance. As for theother major trading partners, while China just follows the integration with gravity-model standard,
Japan and the United States still show the above-standard integration.

5

-1.0

-2.0

-4.0
2.0
Coeffeicients

1.0
**

***
***

-3.0

***

6
***

***
***
** **

**

***
**
**

* **

U.S._80
U.S._90
U.S_00*** ***

China_80
China_90
China_00***

U.S._80
U.S._90
U.S_00China_80
China_90
China_00

Japan_80
Japan_90
Japan_00

ASEAN_80
ASEAN_90
ASEAN_00***

U.S._80
U.S._90
U.S_00-3.0**** ***

China_80
China_90
China_00

2.0

Japan_80
Japan_90
Japan_00

3.0**

Japan_80
Japan_90
Japan_00

***
*
***
***

ASEAN_80
ASEAN_90
ASEAN_00***

ASEAN_80
ASEAN_90
ASEAN_00

Coeffeicients

CLV_80
CLV_90
CLV_003.0

CLV_80
CLV_90
CLV_00-4.0
Vietnam_80
Vietnam_90
Vietnam_00**

Vietnam_80
Vietnam_90
Vietnam_00

Coefficients

CLV_80
CLV_90
CLV_00-2.0
Laos_80
Laos_90
Laos_00

2.0

Vietnam_80
Vietnam_90
Vietnam_00-1.0
Laos_80
Laos_90
Laos_00-3.0**

Laos_80
Laos_90
Laos_00-2.0

Cambodia_90
Cambodia_00-1.0

Cambodia_90
Cambodia_00

1.0

Cambodia_90
Cambodia_00

Figure 1 Trade integration of Thailand with the GMS and the other ASEAN
Thailand's exports

***
***

***

***

Cambodia_00*

0.0
Laos_80
Laos_90
Laos_00

Vietnam_80
Vietnam_90
Vietnam_00***

CLV_80
CLV_90
CLV_00Thailand's imports**

ASEAN_80
ASEAN_90
ASEAN_00

1.0
*

0.0

***

Thailand's trades*** *** **0.0Japan_80
Japan_90
Japan_00

China_80
China_90
China_00

U.S._80
U.S._90
U.S_00