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SCB EIC ARTICLE
14 May 2018

The impacts to Thailand from the impending US-China trade war

Trade remains a key focus for 2018 as President Trump continues to deliver his promise of the “America First” Policies. Aiming to attain fair trade for American companies globally to reduce trade deficit, implementation of the policies began in January with imposition of safeguard tariffs on imported washing machines and solar panels, followed by the steel and aluminum tariffs in March.

Author: ­LERDSAK SANGASILPA

 

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The impacts to Thailand from the impending US-China trade war

 

Trade remains a key focus for 2018 as President Trump continues to deliver his promise of the “America First” Policies.  Aiming to attain fair trade for American companies globally to reduce trade deficit, implementation of the policies began in January with imposition of safeguard tariffs on imported washing machines and solar panels, followed by the steel and aluminum tariffs in March.

 

The initial trade actions by the US did not target specific countries, however, recent actions seem to focus on China – a country having the largest trade surplus of $396 billion in 2017 with the US, according to the International Trade Center.

 

On March 22nd, US formalized plans to impose 25% tariffs on 1,333 Chinese products as US deems that China does not adequately observe intellectual property rights. This action prompted the initiation of China’s retaliation, first with tariffs of 15% to 25% on 128 American products such as fruits and pork followed by Chinese’s threat to impose 25% further tariff on 106 additional products such as oilseeds and plastics from the US.

 

US and China’s objectives

 

A detailed examination on the products targeted by the US and China reflects the varied objectives of both countries. Chinese products that are high in technological content i.e. automotive and electronics are primary targets of the US and agricultural products from the US i.e. fruits and pork are penalized by China.

 

Apart from aiming to reduce trade deficit, US is making clear efforts to deter China from moving up the value chain into becoming a high technology powerhouse with a targeted tariff list on tech products. This is to combat the “Made in China 2025” initiative which has been adopted by China to shift away from labor intensive industries such as footwear and toys to high-tech industries.

 

On the other hand, China’s penalization on US agriculture products could be deemed as an effort to target American farmers, especially in the Midwest, who are strong supporters for President Trump.

 

What does this mean for Thailand in the short term?

Tension abounds amid the trade war between two global super-powers. In the short term, Thailand could face direct and indirect impact. The most immediate direct effect which can arise in times of loggerheads is for the mutual tariff-imposition to cause products of both trade giants to be dumped into Thailand, resulting in stiffer competition with Thai domestic products.

 

However, the imposition of tariffs between the US and China may lead to an increase in the demand for Thai products that are substitutable in these two markets.

 

Riding the storm with Thai agriculture and petrochemicals

 

Our analysis shows that, in the short term, there seems to be some Thai sectors such as the agriculture sector that may benefit from the trade war. 

 

For example, Thai cassava chips may stand to gain as a result of Chinese tariff on US ethanol. In 2017, China ethanol import from US declined 99% YoY from 2016 after China increased ethanol import tariff to 30%. The further increase in China’s ethanol tariff of 15%, to 45% from 30%, will further limit US ethanol export to China. This action, together with China’s plan to expand the mandatory use of ethanol in gasoline (E10) nationwide by 2020, encourage Chinese ethanol manufacturers to increase their domestic production of ethanol. Since 25% of the ethanol are produced using cassava chips, the demand of Thai cassava chips export is likely to increase.

 

Another noteworthy product on the list is soybean. China relies heavily on soybean imports for its domestic requirements of soymeal to produce animal feed. China now imports 90% of its soybean consumption of which 32 million tons was imported from the US in 2017. This accounted for 57% of the soybean exports of the US at $12.4 billion. China is likely to shift its domestic import requirements from the US to Brazil. Together the US and Brazil accounted for 83% of global soybean exports (40% from US, 43% from Brazil) in 2017.

 

Since China still has the soybean stocks of 21 million tons, it can turn away from purchasing US soybean in the short term. This may cause a fall in US soybean price due to declining demand from China. As Thailand is an importer of soybeans, of which 26% comes from the US, this will benefit the industries that use soybean as raw materials to produce animal feed and cooking oil. 

 

China’s tariff on US products may also create further opportunity for Thai petrochemical players to export more plastic resins to China - currently 30% of Thailand’s plastic resins are exported to China.

 

Thailand’s technology sector – cause for concern?

With the possible US tariffs on China high-tech goods, Thailand is likely to be affected, although the impact should be limited for now.  This is because the linkage of Thailand’s supply chain to high-tech China exports is relatively small.  Also, Thai exports to China of automobile and electronic products like digital cameras are mainly for final consumption within China. 

 

As a developing country that relies on export, Thailand grows best in times when the world trade is expanding. Thus, Thailand cannot be complacent on riding the storm peacefully as a bystander because there is no signal that President Trump will be halting threats to impose further tariffs.  We should look for opportunities to attract strategic FDI, partly benefiting from the relocation of investment from China. Going forward, Thailand can also enhance our resilience to potential escalating trade wars by accelerating Regional Comprehensive Economic Partnership (RCEP) negotiations and strengthening other FTAs to gain more market access for Thai products. 

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