I'm not a Donald Trump supporter. On the contrary, I dislike the US president for his abrasive behaviour. For Mr Trump, everything is nothing but numbers. Compassion has no meaning in his dictionary.
But I'm behind him on the issue of raising tariffs and a trade war because I am an economist. The US has a chronic current account deficit, which reached as high as 3.9% of GDP last year. The country has been exporting its wealth to pay for the deficit. This is surely not acceptable, and something must be done to lower the deficit to a sustainable level.
Something like this was done before in 1985, called the Plaza Accord Agreement, which reduced the US trade deficit from US$114 billion (3.8 trillion baht) in 1985 to $28.6 billion in 1991, a 75% reduction. Instead of polite negotiation and gradual market adjustments, the arrogant Mr Trump wants immediate reduction by imposing massive tariffs. Despite an understandable intention, Mr Trump has become the anti-free trade villain.
But let's now look at the economic theory of international trade, which is the core of the Plaza Accord Agreement and its call for a sharp adjustment of the US dollar.
This is how economics textbooks teach economics students. There should be no long-term trade surplus or deficit, as changes in currency value would restore the balance. When Country A has a trade surplus over Country B, then B is required to pay money to A for the surplus. The inflow of trade payments would cause the currency of A to appreciate, and it would do the opposite to the currency of B. Consequently, goods from Country A would become more expensive in Country B's currency and vice versa. B then buys less from A, and A buys more from B. Over time, trade between these two countries would return to balance.
If the "invisible" hands can do their job, no tariffs or trade war would be necessary.
What happens when there is no adjustment of currency value, or, worse, the currency of B does not depreciate but appreciates? Invisible hands, if allowed, would do their miracle job again. B would keep buying more goods from A until B runs out of foreign reserves. Trade would stop dead there.
The example of A and B does not work in the real world of US-China trade which makes Mr Trump mad as hell. From March 2022 to the present, China (Country A in the example) has a trade surplus of $943 billion with the US (Country B in the example), but the CNY, instead of appreciating, depreciates 15.8% from 6.32 yuan to the dollar to 7.32 yuan to the dollar.
If China did not intervene in the foreign exchange market and let the Yuan freely float, the Yuan would surely appreciate, as the theory explains, causing the trade gap between the two countries to narrow naturally. Then, Mr Trump would not need to waste his time raising the import tax of 34% (the original tariff) on Chinese products.
There remain two questions. First, how does China intervene in the exchange market? From September 2022 to September 2024, China bought $300 billion for its foreign reserve, increasing its reserve by 10%. Moreover, the intervention did not just start. During the Plaza Accord Agreement, China had $264 billion in reserves with a 2.9 yuan per dollar exchange rate. Currently, China has $3.2 trillion in reserves with a 7.3 yuan per dollar exchange rate. Need I explain more?
The second question is why the US does not run out of foreign reserves, as cautioned in the economics textbooks. The answer is that the US is a special country that can print money to pay for trade deficits. As long as the US keeps printing money, it can pay for an unlimited amount of trade deficits.
Mr Trump is unlikely to change his mind about drastically lowering the US trade deficit, so high tariffs are here to stay.
There are now three further questions: (1) Will world economic growth slow? (2) Will the US economy slow? (3) Will Thai economic growth slow? The answers to all three questions are -- yes, maybe, and yes.
The world economy will decelerate because the US has reduced its purchases from the world. Lower global trade volume means lower global production, translating into lower GDP growth. The answer to the first question is a firm yes. The world of excess is over, and penny pinching will be the new norm.
How about the possibility of the US economy slipping into recession or even depression? It should not, but it might. From the formula Y=C+I+G+(X-M), if (X-M) improves, then Y should improve mathematically. Arguments usually refer to the Smoot-Hawley Act of 1930, which was accused of being a culprit of the Great Depression. The act increased import tax up to 60%.
The formula Y=C+I+G+(X-M), if (X-M) is the standard equational (expenditure) representation of GDP. Y means the country's GDP, C means consumption, I for investment, G for government spending, X for exports, and M for imports.
I have two counterarguments. At that time, US trade was in balance, and a trade war would reduce US exports as much as it would lower US imports. (X-M) was, therefore, not improved. The second argument is that the act was enacted in September 1930 after the US stock market crashed in October 1929. The recession led to the enactment of the act, not caused by the act.
A more interesting argument is that higher import prices would cause inflation and, ultimately, cause "C" to drop. Mr Trump would surely want consumption to drop only for imported products, not domestically made products. But it cannot be controlled. That is why he has agreed to exempt certain imported products that can lead to excessive price increases.
I have done a simple calculation: a 10% reduction in imports would allow US consumers to have extra cash to consume 1.5% more. This is Mr Trump's real purpose: pressuring Americans to spend more on locally produced products and/or having foreigners buy more US-made products.
The last question is about Thailand. Our negotiations with the US will almost certainly fail, as the Thai government will not restrict China's re-exporting through Thailand. As the government would say "Thailand must stay impartial". The US counterpart is likely to interpret that impartial means not trying to reduce the Thai-US trade gap significantly. The export tax of 36% is then likely to stay.
If the 36% tax stays, Thai GDP would be reduced by 1.1% due to fewer exports to the US. But that is not the end of the story. Thailand would have fewer tourists, particularly the Chinese. Lower tourism receipts would cut 2025 GDP growth by another 1%.
It's not over yet. Exports to China, like the 150 billion baht of durian fruit, might be substantially curtailed as the Chinese have less to spend. In all, 2.5% of GDP growth would be cut.
Something like this is unavoidable and bound to happen. The US would not indefinitely finance the world economy by exporting its wealth to pay for trade deficits. Corrections must be made.
The US corrected it with a 31.25% depreciation of the US dollar under the Plaza Accord Agreement. This time, it is a swift increase in import tariffs by Mr Trump.
I advise learning to live and adjust one's economy under this "new normal".