Trump tariffs spell trouble for Thailand

Readers must have read a few articles or listened to numerous analyses of US President-elect Donald Trump’s trade protectionism policy and its impact on the world economy, particularly China. But this could be the first genuinely economic-oriented analysis of Mr Trump’s policy, emphasising issues relevant to Thailand. Readers could find that an economic approach would give new insights into this much talked about topic.
First, explain why “Making America Great Again” appeals to American voters. The answer is in the table.
Among major economies, America is clearly the worst performer when it comes to international trade, with a low level of exports to GDP and a high level of trade deficits. Even President Joe Biden said “For too long, we have been exporting jobs.” Cheap imports suppress both employment and wages at home.
Over the past decade, American workers’ real wages have increased by only 1.43% per year, which is viewed as inadequate. Things got worse during Mr Biden’s administration.
Housing prices rose by 10.2% while nominal wages increased by 4.6%. The income-expense imbalance persuaded American voters to look for change. The time for the Democratic Party is over. American voters elected a Republican president, Republican senators and representatives on Nov 5.
I do not think Mr Trump is a trained economist. However, as a shrewd businessman, he surely understands that fewer imports mean more domestic jobs; more domestic jobs mean higher wages and higher wages and employment mean more loyal voters.
Mr Trump promises to mend the job export problem by slapping 20% tariffs on all imports and 60% on imports from China. At present, the effective tariff rate of industrial imports to the US is 2%. A tenfold increase in import tariffs to the world’s largest economy would send a shock wave worldwide; Thailand would be one of the worst-hit countries.
And this could not have come at a worse time.
Do readers want to know why China is targeted? One could explain this with the political theory of world domination. But as an economist, I would say that China is the prime target because it is the biggest trade threat to the US. China is the largest exporter to the US, with a market share of 17.1%, followed by Mexico, which has a market share of 13.6%, and Canada, which has a market share of 13.2%. Here is the catch: Mexico and Canada are close allies of the US. They are partners in the United States-Mexico-Canada Agreement (USMCA), a trade agreement initiated by Mr Trump in 2018 to replace NAFTA.
If readers could look at the featured table again in the China column, they would immediately notice that, contrary to popular belief, China is not an export-oriented economy, as exports account for less than 20% of its GDP. The Chinese economy depends on domestic demand for consumption and investment, and domestic demand is shrinking fast.
To understand how bad the domestic demand situation is in China, one does not need to look further than the disastrous property market. Home sales dropped 34.8% in the first nine months of this year after a sales decline of 28% last year. Half of the property market is already dead. The property sector accounts for 29% of Chinese GDP. A one-third drop in housing sales means a 10% contraction of GDP.
The official Chinese GDP growth rate of 4.87% for the first three quarters of 2024 is probably manipulated. A one-third decline in the property sector cannot maintain positive overall GDP growth.
Hint, hint: Thailand’s 27% decline in housing and automobile sales tells the same story as China’s.
In the midst of super-weak domestic demand, the last thing that China needs is weak exports. The issue of concern is probably not low or negative GDP growth but a potential unemployment threat. Right now, the youth unemployment rate is already at 18.8%. If the declining economy causes more broadly 10% unemployment, 77.2 million jobless labourers would be roaming Chinese streets, causing unimaginable social problems.
This is entirely my guess. The Chinese government could counter Mr Trump with a 10% depreciation of the yuan and a 20% tax rebate for exporters. To maintain the US market, exporters would have to find ways to cut costs and improve efficiency by 30%.
How about relocating factories to other countries like Thailand, Vietnam, and Indonesia? It is reported that applications at Thailand’s Board of Investment for the first nine months of this year exceeded 720 billion baht, the highest in 10 years.
The factory relocation strategy option would work under Mr Biden, not Mr Trump. Judging from Mr Trump’s USMCA negotiations, he imposed a strict “Rule of Origin” (ROO) on products to enjoy free tax benefits. One rule is that automobiles imported into the US must have a minimum of 75% locally sourced content.
Mr Trump can easily block the factory relocation strategy with ROO restrictions. By regulations, products labelled “Made in Thailand” must have at least 40% local content, while products labelled “Product of Thailand” require none. Mr Trump would just say that only “Made in Thailand” products are qualified for a 20% tariff. Others, like Chinese products, go to a 60% tariff channel.
If one thinks China has it bad, Thailand is having it much worse.
First, Thailand is an export-oriented economy, with exports accounting for 65.4% of GDP. It is difficult for the economy to expand without robust export growth. The heavy reliance on exports hurt the economy badly during the Covid-19 year of 2020. The economy contracted 6.1% compared to an average GDP contraction of 3.2% for Asean members.
The US is our number one export market, with a 17% share, and China is our second largest export market, with 12%. However, if indirect exports to China via Malaysia and Singapore are included, exports to China could increase to 17% of total exports. These two markets are set to be profoundly affected by Mr Trump’s trade protection policy.
Thailand and China could muddle through US trade protectionism if not for weak domestic demand. China would take about five years to manage the real estate oversupply problem, and Thailand would take about the same to manage household debt. During this critical five-year period, both economies would slip into recessions. Mr Trump’s policies could be the last straw for this critical time in history.