Imagine you are a high-level economic minister in any government in the world. Let’s say you are given the task of improving a certain industry and are holding a brainstorming session with other economists. All ideas, no matter how crazy, are on the table. Which ones would you consider?
Most likely the first idea would be to protect your domestic industry from cheap imports. To solve that problem you raise tariffs to such a high level, imports from competing countries stop.
Next, in a perfect world, you want to export your product to other countries tariff-free. Big deal if you have high import tariffs on the same product. Even better, make a free-trade agreement with other countries in the region so you can export tariff-free, but still maintain your high import tariffs. Who says free-trade needs to be free and fair?
Then you need to expand your domestic industry to meet international demand. To do that, you offer a 0% corporate tax rate to entice foreign companies to build manufacturing plants. That way, you don’t even need the technical knowledge to build the product. Companies will bring it to you.
Lastly, other countries avoid complaining about your protectionist policies for decades. The reason why is not important.
Thailand: The ‘Detroit of Asia’
If the above scenario sounds far-fetched, you might want to re-evaluate your position on globalization. Thailand has successfully implemented all of those ideas and is now the largest automobile manufacturer in SE Asia. The Thai government charges up to 80% duty on vehicle imports while exporting around the region tax-free. Foreign companies pay no corporate income tax for eight years, and once that expires they are taxed at 50% the normal rate if their factory is in the right province. As a result, Thailand’s auto production has risen almost 400% since 2000.
For some reason, no one complains. Other countries seem content to carry on business as usual and don’t question the large artificial trade imbalance. The lack of response from other ASEAN members is surprising since most Asian governments need the upper-hand in trade agreements.
The US-China Trade War
We previously talked about the truth behind Trump’s tariffs. Most Western media sources only talk about how protectionist policies will hurt American consumers by raising prices. Experts predict tariffs will backfire and jobs will not be brought back to the US. Many pundits and the average American don’t mind unfair trade rules and the transfer of US intellectual property. The absolute cheapest prices possible and the race to the bottom are more important.
At the same time, those experts are completely quiet about how Thailand became the ‘Detroit of Asia’ by implementing a winning combination of protectionist trade policies.
Thailand appears to have found a good balance between protecting its domestic auto industry while still participating in free-trade agreements. The rest of the world could learn from Thai trade policy.