Don’t get too excited over news the temporary trade deal between China and the US will mean friendly negotiations with other countries. The US government still aims for higher import tax income to narrow its monstrous fiscal deficit. As explained in a previous article, Donald Trump would love to see an average tariff rate of around 20% or higher on imports. Higher customs revenue already allowed the US to achieve a budget surplus of US$258 billion (8.5 trillion baht) in April. The figure incorporates only a 10% universal tariff, as full reciprocal tariffs were postponed for 90 days from April 8. Just imagine how nice the US budget position would be with 20% or more import tariff revenue?
Thailand’s reciprocal tariff rate is 36%, half the calculated rate of 72%, and the country is waiting to negotiate the rate down. Unfortunately, Thailand is not on the priority list of 20 economies scheduled to have discussions with the US negotiation teams. Many Asean economies such as Vietnam, Indonesia, Malaysia, and Cambodia are said to be on the list.
Thailand’s trade surplus with the US is $45.6 billion, which is far higher than Malaysia’s $24.8 billion surplus and Indonesia’s $17.9 billion. Yet we are not even on the list. What is wrong with Thailand?
This is my observation and I could be wrong. The reason why Thailand is not on the priority tariff discussion list, or might not even be on later lists, is because Thailand has not offered to resolve the export “fronting” situation for Chinese-made products. The problem for Thailand is that it allows Chinese manufacturers to re-label their products as “Made in Thailand” to avoid higher US import tax. The evidence is in the attached table.
Before backing up this accusation, I should explain that Mr Trump, during his first term in office, provided incentives for Chinese manufacturers to relocate their production facilities to other countries. Mr Trump raised the import tax on Chinese products nine times from 3.1% (January 2018) to 19.3% (February 2020).
I have three interesting observations from the table. First, to avoid Mr Trump’s high import tax of 19.3%, China moved some production facilities to Thailand, causing Thailand’s trade surplus with the US to increase to an unusually high level.
Second, from the data, Thailand barely manufactured new exported products to the US as most of the components were imported directly from China. Therefore, imports from China rose hand-in-hand with exports to the US.
Third, Thailand might not have “manufactured” those new exports because there was no rise in manufacturing activities logged by the Manufacturing Production Index (MPI). On the contrary, MPI growth stayed negative during the six-year period shown in the table. Where were the factories to produce these new exports to the US? How many workers were employed?
I have a feeling that products are made in China and then boxed in Thailand, with a “Made in Thailand” label. A friend of mine in the industry told me that a large percentage of these products never even touched the ground in Thailand.
They were made in Chinese factories, stamped with “Made in Thailand” there, and shipped directly from Chinese warehouses to US clients with falsified invoices indicating Thailand as the point of origin. No wonder MPI growth kept contracting despite booming export volume.
To emphasise the seriousness of the “fronting” problem, Thai exports to the US rose 34.1% in March, causing the Thai-US trade surplus to widen to a historically high level of $4.6 billion, while the MPI for the month declined by 0.7%. Isn’t it a fact that before one can export, one has to manufacture the products first? This phenomenon does not seem to apply to Thailand. Data like this does not bode well for trade negotiations with the US.
It would be a waste of time for the US negotiation team to talk with Thailand as long as the country does not seriously address the fronting issue. China will just simply backdoor their products through Thailand and enjoy lower US import tariffs.
I have a hunch that the fronting problem may not be so serious in other countries like Vietnam, Indonesia, and Malaysia. Why? Because they all have MPI growth and high GDP growth to show with the export boom.
What would happen if the US gives importance to the fronting problem and the Thai government fails to resolve the issue? Thai reciprocal tariffs would remain at 36% or higher. Higher tariffs than our peers would push manufacturers to move their production facilities to countries with cheaper reciprocal tax rates like Indonesia (32%) and Malaysia (24%). It would be unfortunate if Vietnam can negotiate its rate lower than 36%. With Vietnam’s strong competitiveness, Thai production bases could leave for Vietnam.
Trade with the US is important to the Thai economy. The Thai-US trade volume was roughly 6.0% of GDP without fronting for Chinese products. Mr Trump’s trade policy would cut trade volume by 20%, which would, in turn, reduce Thai GDP growth by 1.2%. This may be the reason why the IMF and the World Bank both cut Thailand’s projected 2025 GDP growth to 1.8% and 1.6%, respectively.
By the way, I’ve been invited to moderate an economic discussion organised by the Bangkok Post, titled “Resilient Thailand”. Representatives from both the IMF and the World Bank are tentatively scheduled to be speakers. It would be a great opportunity to ask them why Thailand received the deepest cut in GDP growth, second only to Cambodia. More importantly, I would ask them about their views on Thailand’s over-reliance on the tourism industry, which is likely to be affected by Mr Trump’s trade policy.
Tourism is an issue of deep concern for Thailand. Incoming foreign tourist numbers shrank by 6.9%, 8.8%, and 7.6% in February, March and April, respectively — the first time this has happened in five years. Surely this is not a good sign as tourism is Thailand’s last engine of growth. But tourism not only adds income to GDP. The tourism industry provides foreign exchange and liquidity to the Thai financial system. In 2024, the industry generated 1.4 trillion baht of liquidity. If 10% of that is gone, it would be difficult for the country to avoid a liquidity shortage.
I only have best wishes for the Thai negotiation team as they carry the hopes of the nation. Of course, I have no idea when the US will schedule the meeting. My advice is that the proposals should focus on numbers and action plans, not the broad concept. Just tell the US exactly by how much the country aims to narrow the trade gap with a specific timetable, and what policies would be implemented to narrow the gap. The US team really has no interest in hearing that “Thailand fosters peace”.
