Assessing the Regional Spillovers: How the Thai-Cambodia Border Conflict Impacts Southeast Asian Tourism and Cross-Border Investment

The 2025 Thai-Cambodia border conflict has emerged as a pivotal case study in geopolitical risk and sector-specific vulnerability, with far-reaching implications for Southeast Asia's tourism and cross-border investment ecosystems. While the immediate human and political costs of the conflict are stark, its economic ripple effects—particularly on tourism-dependent economies and regional trade—demand a nuanced analysis for investors navigating this volatile landscape.

Geopolitical Risk: A Catalyst for Economic Volatility

The conflict, rooted in historical disputes over border temples like Preah Vihear and Ta Muen Thom, has been exacerbated by domestic political dynamics in Thailand. The ousting of Prime Minister Paetongtarn Shinawatra and the military's growing influence have transformed the border dispute into a proxy for broader power struggles. This domestic instability, coupled with nationalist rhetoric and military escalation (including airstrikes and landmine casualties), has heightened geopolitical risk.

The SET index, a barometer of Thailand's economic health, plummeted 8% in early July following the U.S.-brokered ceasefire and threats of tariffs. This volatility underscores how geopolitical tensions can swiftly disrupt investor confidence, particularly in economies reliant on tourism and trade. Cambodia's stock market, meanwhile, fell 12%, reflecting fears over disrupted cross-border tourism and supply chains.

Sector-Specific Vulnerabilities: Tourism in the Crosshairs

Tourism accounts for 12% of Thailand's GDP and 9% of Cambodia's, yet the two countries face asymmetrical risks. Thailand's major attractions—Bangkok, Phuket, and Chiang Mai—are geographically distant from the conflict, allowing it to weather short-term disruptions. However, Cambodia's tourism sector is more exposed. Border closures and travel advisories have crippled cross-border tourism, particularly Thai visitors to Cambodia for gambling and cultural tourism.

Cambodia's tourism sector, already fragile due to limited fiscal buffers and underdeveloped infrastructure, faces a steeper decline. The closure of key border checkpoints like Aranyaprathet has reduced cross-border trade by half, while the destruction of infrastructure near UNESCO sites raises long-term concerns about preserving cultural assets that draw international visitors.

Cross-Border Investment: A Shattered Supply Chain

Thailand and Cambodia's $5.4 billion in border trade has been disrupted, with companies scrambling to reroute supply chains through Laos and Vietnam. The automotive and electronics industries, which rely on just-in-time manufacturing, are particularly vulnerable. For example, automotive components and garment exports have faced delays, prompting firms to stockpile inputs and reassess production strategies.

ASEAN's lack of enforceable crisis mechanisms has further compounded the issue. While frameworks like the ASEAN Single Window exist, they falter during bilateral conflicts, leaving regional supply chains exposed. This has accelerated diversification trends, with investors shifting capital to Vietnam and Indonesia—markets with more stable U.S. trade relations.

Regional Spillovers: A Broader Southeast Asian Reckoning

The conflict's spillovers extend beyond Thailand and Cambodia. Investor behavior has shifted toward markets perceived as less geopolitically exposed. Vietnam's VN30 index, for instance, has outperformed Thailand's SET by 15% since July 2025, as firms like VinFast secure U.S. contracts. Meanwhile, China's quiet support for Cambodia's territorial claims has deepened its soft power influence, fragmenting regional economic alignment.

The widening spreads on Cambodia's dollar-denominated bonds (now trading at a 200-basis-point premium over U.S. Treasuries) highlight the sector's vulnerability. Thailand, while less exposed, faces risks from U.S. tariff threats and oil price volatility, which could erode its tourism recovery.

Investment Advice: Navigating the New Normal

For investors, the key lies in balancing risk and opportunity:
1. Avoid Overexposure to Cambodia's Tourism Sector: With limited fiscal resilience, Cambodia's tourism-dependent regions remain high-risk. Diversify into Vietnam or Indonesia, where tourism infrastructure is more robust.
2. Hedge Against Geopolitical Shocks: Prioritize sectors less tied to cross-border trade, such as renewable energy (Thailand's $2 billion in new investments) or technology. Thailand's Digital Wallet Scheme and BOI-backed green energy projects offer long-term stability.
3. Monitor U.S.-China Dynamics: The U.S.'s transactional approach (tariff threats) and China's soft power influence will shape regional investment flows. Align with markets that balance these powers, such as Vietnam.
4. Consider Defense-Linked Industries: Thailand's 60% increase in defense spending has boosted demand for military infrastructure. U.S. firms like Lockheed Martin and Thai defense contractors are poised to benefit.

Conclusion: A Fragile Equilibrium

The Thai-Cambodia conflict underscores the fragility of Southeast Asia's economic interdependence. While Thailand's tourism sector remains relatively insulated, Cambodia's vulnerabilities highlight the need for diversified investment strategies. For investors, the path forward requires vigilance in geopolitical risk management, a focus on resilient sectors, and a readiness to adapt to shifting regional dynamics. As the region navigates this crisis, the winners will be those who balance short-term caution with long-term strategic foresight.