Tariff talks are unlikely to go as planned
However, US President Donald Trump has left the door open for countries to negotiate for lower tariffs. Several countries have reached agreements with the US after receiving tariff rate notification letters on July 7th, such as Indonesia, Japan and the Philippines.
All have to yield to the US demand for more access to their economies, plus other conditions. Even Japan has agreed to allow more access to its closely guarded rice market.
Indonesia is an important case study for Thailand as its 32% reciprocal tariff was reduced to 19%. Thailand is looking for a similar tariff reduction deal. Much like Vietnam and the Philippines, Indonesia has given free export access to its 280-million people market.
Moreover, products exported to the US will be taxed differently between Indonesian-made products (19%) and transshipment products (19%+ reciprocal tariff rate for transshipping countries). Open access and two-tier tax rates are not the only conditions, though more than US$200 billion in purchase pledges for American goods, ranging from energy products to 50 Boeing jets, is included.
I am surprised that nobody asked why Indonesia agreed to such strict conditions, particularly compared to Vietnam's which has no purchase pledge. Indonesia has a small trade surplus of $17.8 billion (572.5 billion baht) with the US while Vietnam has a $123.5 billion trade surplus. Based on the size of the trade gaps, Indonesia should have had much softer conditions, not harder. The $200 billion purchase alone is able to close the US-Indonesia trade gap for 10 years.
This is my own reading of the situation. The reason why Indonesia went all out to win a lower tariff rate was not about trade, but to gain investment appeal for the country. With a 32% tariff rate compared to Vietnam's 20%, foreign investors would have been more likely to by-pass Indonesia for Vietnam.
Thailand has not gone that far yet to worry about international competitiveness. The negotiation team is still focusing on protecting the domestic market, particularly on agricultural products. The team seems to ignore the fact Thai exports to the US total about 2 trillion baht per year. Even after deducting "transshipment" products, Thai export value to the US market would still be around 1.2 to 1.5 trillion baht. The value of the US market is many times larger than the domestic agricultural market that the government wants to protect.
Unfortunately, some Thai farmers, such as pig farmers, could be severely hurt as US pork is 30% cheaper. The efficient US pig farming industry has wiped out pig farmers in many countries and it is likely to do so in Thailand. The smart solution is not to close our doors to US pork products but to compensate Thai pig farmers for damage caused while encouraging them to move to another profitable industry.
It is the job of the government to balance the benefits of the economy as whole against the losses of certain industries. Adequate and fair compensation should be the answer to making affected farmers happy while exploiting robust export opportunities.
Unfortunately, the government probably does not think like me about winning the big ticket first and compensating the affected concurrently. The negotiation team, as it appears in the news, will offer about 90% access to the Thai market. I do not think such partial access is acceptable to the US in light of the free access to the Vietnamese, Indonesian and Philippine markets. Japan, to get tariff rate reduction from 25% to 15%, would have to not only open its rice market but also commit to a $550 billion investment pledge.
After free market access with a zero import tariff, the second issue in the eyes of the US is transshipment penalties. This is a burning issue and probably not negotiable. However, the public has never heard about commitments on the issue from the Thai negotiation team. In the Vietnamese and Indonesian cases, both accepted the imposition of much higher tax rates for transshipment products. The rates are set high enough to discourage transshipments.
To illustrate the severity of the issue, I will need to give some numbers. Mr Trump's first term in office began in January 2017. He then gradually raised the import tax on Chinese products from 3% to 20%. To avoid paying higher taxes, Chinese manufacturers diversified their production bases, notably to Thailand and Vietnam. As a result, direct exports from China to the US dropped from $538.5 billion in 2018 to $428.7 billion in 2024. Is it logical to see China exported less to the US over time? Should it be the other way around? After all, it is a known fact that China has been building more factories.
While direct exports from China to the US dropped by $110 billion during this period, exports from Vietnam and Thailand to the US rose by $87.4 billion and $31.5 billion respectively. Add the two numbers and readers will understand where the $110 billion in Chinese products went. Transshipments are a big issue in this negotiation game.
Peter Navarro, White House trade adviser, told CNBC that "Vietnam's 0% tariff offer is not enough, it's the non-tariff cheating that matters."
Some optimistic critics point out that Thailand ought to have a milder "transshipment" penalty, compared to Vietnam. Therefore, Thailand will get a better reciprocal tariff rate cut from the US. I used to think like that too until I saw the Indonesian case where the country has almost no transshipment volume, but received almost the same tax rate as Vietnam.
This is more of a preventive measure as all Asean members have a free trade agreement with China where products can be shipped tax-free from China to any member country and transshipped to the US later. In short, if it has not happened yet, it could happen any minute. A penalty tax rate is therefore essential regardless of present transshipment volume.
Before I conclude, I have an observation about Indonesia. I think Indonesia has a tighter deal compared to Vietnam. Vietnam was literally Mr Trump's first successful negotiation case. He wanted a conclusion before the July 7 deadline to put pressure on other Asean countries if they want to be competitive with Vietnam in international markets. Indonesia certainly wants that and quickly joined the negotiation process. Now the pressure is on Thailand.
But Thailand does not have such ambitions. We live our lives one day at a time. We are acting like we have the bargaining power. Therefore, "no total access" and "no transshipment penalty" are on the table. Undoubtedly, this will translate to "no deal" for Mr Trump.
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