March 28, 2018
TL;DR: The US and China need to suffer through a trade war to restore equality, which may not be possible with the current version of democracy. Thailand will be fine.
Welcome to our 5-part series on Thailand and the US-China Trade War. This series is going to take a hard look at the trade relationship between East and West and how deeply rooted globalization has become in Western democracy. We will also explore how problems inherent in democracy have lead to the current tariffs and trade war. But first, we will start by investigating how Thailand will be affected.
There have been conflicting reports in the Thai media about how the trade war will affect Thai companies and the Thai stock market. So far, the market here has avoided the double-digit drops that have happened around the world. The SET Index is currently hovering around 1,800, which is just a couple percent lower than its all-time high of 1,839. The market hasn’t priced in any future downside for Thai companies. Yes, the market is always right, but what will happen in the next few years if cooler heads don’t prevail and the trade war escalates?
One recent article in The Nation stated that China is Thailand’s largest export market with a 12.4% share of all exports. The United States is second at 11.2%. Since Thailand supplies parts and raw materials to Chinese factories, there would be a chain reaction if Chinese exports to the US go down. Thai companies that export to China would be negatively affected.
Most likely, Thai exports would only decrease a small percent since China exports around the world, not only to the US. With total exports accounting for about 70% of the total Thai economy, the overall impact of the US-China trade war would be just a couple percent. For example, let’s assume a worst case scenario where 50% of all Thai exports to China are affected. That decreases the total value of all exports by 6.2%. Then we have to multiply that by 70% to get the total amount of GDP affected.
After going through the math, you get about a 4% decrease for total GDP. That could be thought of a huge number in terms of baht and there will be further knock-on effects on other parts of the economy, but it’s far from the doomsday scenario some are talking about. Remember, that’s assuming a 50% decrease in exports to China.
If the US decided to go after Thailand for unfair trade practices as well, then it would be a different story. There are already hints that might happen, although it’s unlikely. Thailand meets the three criteria the US uses to determine if a country is a currency manipulator, but is an insignificant trade partner compared to China, India, Japan, and South Korea so the US is more likely to target those other countries first.
Another recent article, this time in the Bangkok Post, talked about how South East Asian stocks could be a safe haven during a US-China trade war. In the past decade, the Thai economy has shifted to more domestic consumption. While I don’t believe the economy is anywhere near the ambitious Thailand Version 4.0 that the government is promoting, it’s possible that some people are overreacting based on outdated numbers. Tourism companies were mentioned as one such safe haven.
Although on the surface the trade war seems quite simplistic, there are much deeper issues that need to be examined to understand why the trade imbalance went on for so long without any objection from Western governments.