Potential impacts on Thailand from a US-China trade war
Trade remains a key focus for 2018 as US President Donald Trump continues to deliver on his promise of "America First". Aiming to achieve a fairer deal for American companies globally and to reduce his country's trade deficit, Mr Trump has been ramping up threats against major trading partners.
The campaign began in January with the imposition of safeguard tariffs on imported washing machines and solar panels, mainly from China. Mr Trump followed that up in March with threats of tariffs on imported steel and aluminium. Several countries have since persuaded Washington to delay the imposition of the penalties on their goods pending further negotiations.
The initial trade actions by the US did not target specific countries; however, recent actions focus mainly on China, which had a world-leading trade surplus of US$396 billion in 2017 with the US, according to the International Trade Center.
On March 22, the Trump administration formalised plans to impose 25% tariffs on 1,333 Chinese products, saying China does not adequately observe intellectual property rights. This drew a quick response from Beijing, which threatened tariffs of 15-25% on 128 American products such as fruits and pork, followed by a threat to impose 25% tariffs on 106 additional products including oilseeds and plastics from the US.
Fears of a trade war between the world's two biggest economies have rattled markets for the past few weeks, and there is still hope that cooler heads will prevail. Senior US officials including the commerce and treasury secretaries met in Beijing on May 3 and 4 with their Chinese counterparts in hopes of defusing tensions. Both sides agreed the talks were constructive, and the need for a mechanism to head off future trade disputes was clear, but differences remain.
What each giant wants: A detailed examination of the products targeted by the US and China reflects the varied objectives of each country. Chinese products that are high in technological content, such as automotive and electronic goods, are the primary targets of the US, while agricultural products face penalties imposed by China.
Apart from aiming to reduce its trade deficit, the US is making clear efforts to deter China from moving up the value chain to become a high-technology powerhouse with a targeted tariff list of tech products. The US has long complained that the "technology transfer" American companies enter into when forming ventures in China is all one way.
Washington's action threatens the success of President Xi Jinping's "Made in China 2025" initiative, which seeks to shift the country away from labour-intensive industries such as footwear and toys to high-tech industries.
On the other hand, China's penalisation of US agricultural products could be deemed as an effort to target American farmers, especially in the Midwest, who are strong supporters of President Trump.
What does this mean for Thailand in the short term?
In the short term, Thailand could face direct and indirect impact. The most immediate direct effect at a time when the two giants are staking out their positions is to cause the products of both 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 their two markets.
Agriculture and petrochemicals: Our analysis shows that, in the short term, there seem to be some Thai sectors such as agriculture that may benefit from the trade war.
For example, Thai cassava chips may stand to gain as a result of Chinese tariffs on US ethanol. In 2017, China's ethanol imports from the US declined 99% year-on-year from 2016 after China increased the ethanol import tariff to 30%. A further increase in China's ethanol tariff, to 45%, would further limit US ethanol exports to China.
This action, together with China's plan to expand the mandatory use of ethanol in gasoline (E10) nationwide by 2020, will encourage Chinese ethanol manufacturers to increase their domestic production. Since 25% of the ethanol is produced using cassava chips, demand for Thai cassava is likely to increase.
Another noteworthy product on the list is soybeans. China relies heavily on soybeans imports for its domestic soymeal requirements to produce animal feed. China now imports 90% of its soybean consumption, of which 32 million tonnes was imported from the US in 2017. This accounted for 57% of US soybean exports and was worth $12.4 billion. China is likely to shift its import requirements from the US to Brazil. Together the US and Brazil accounted for 83% of global soybean exports (40% from the US, 43% from Brazil) last year.
Since China still has soybean stocks totalling 21 million tonnes, it can turn away from purchasing US soybeans in the short term. This may cause a fall in US soybean prices due to declining demand from China. As Thailand is an importer of soybeans, of which 26% comes from the US, this will benefit local industries that use soybeans as raw materials to produce animal feed and cooking oil.
Chinese tariffs on other US products may also create further opportunity for Thai petrochemical players to export more plastic resins to China, which is already the destination of 30% of Thai plastic resins.
Thailand's technology sector -- cause for concern? US tariffs on Chinese high-tech goods could affect Thailand, although the impact should be limited for now. This is because the link between Thailand's supply chain and high-tech Chinese exports is relatively small. Also, Thai exports to China of automobile and electronic products, such as digital cameras, are mainly for final consumption within China.
As a developing country that relies on exports, Thailand grows best in times when world trade is expanding. Thus, Thailand cannot be complacent about riding out the storm peacefully as a bystander, because there is no signal that President Trump will be halting threats to impose further tariffs.
We should continue to look for opportunities to attract strategic foreign direct investment, partly benefiting from the relocation of investment from China. Going forward, Thailand can also enhance its resilience to potential escalating trade wars by accelerating negotiations for the Regional Comprehensive Economic Partnership (RCEP) and strengthening other free trade agreements to gain more market access for Thai products.
EIC, a unit of Siam Commercial Bank Public Company Limited, offers in-depth macroeconomic outlook and sectoral impact analyses. For more information, please visit www.scbeic.com or contact email@example.com