1 week Ago
This article is for all nations wanting US President Donald Trump to lower or eliminate reciprocal tariffs, not just Thailand. I feel that the issue is of immediate urgency, and I am writing this article as a special edition. Mark my words.
"The key to successful negotiation is to give what the counterparty wants." Just imagine a situation in which one is negotiating with someone who wants to buy chicken meat. But one offers to sell pork meat instead.
What is the probability of such a negotiation becoming successful? The article is in two parts. The first part will analyse what Mr Trump wants and what the true meaning of "liberation" is. The analysis will focus on Mr Trump's "reciprocal" tariff calculation method.
The second part suggests how to give what Mr Trump wants without hurting one's own economy. I have a feeling that the Thai negotiating team lacks understanding of the first part and has no clue how to properly negotiate, particularly about the cost of appeasing Mr Trump. Many might not agree if I say that Mr Trump wants a free trade world but with fair trade practices and fair currency values.
Before accusing me of being an ignorant Trump supporter, look at the attached table with the 10-year trade history between Thailand and the US. I throw in Thai-China trade data for comparison (see the graphic). Thailand is not an efficient economy that can produce cheap and quality goods to supply the world, as our overall trade balance worsened from a surplus in 2019 to a deficit in 2024.
But look at trade development between Thailand and the US, particularly in comparison to Thailand and China. Do readers think that something is not quite right here? Mr Trump thinks just the same. The US trade deficit with the world astronomically widened almost two thousand-fold from half a billion dollars in 1971 to US$918 billion in 2024.
Is US competitiveness really that bad, or are other countries playing an unfair trade game with the US? Mr Trump then devised a tool called "reciprocal tariffs" to measure the level of the "unfair game". The measurement is not based on the current import tax imposed on US products but on the trade balance in relation to trade volume. Look at two examples: Canada and Thailand.
Canada has a very high level of trade surplus at $63.3 billion with the US, but the country imports $412.7 billion from the US.
Therefore, the calculated "reciprocal tariff" is 63.3/412.7=15.
33%. Do not forget that Canada has a free trade agreement with the US, so the average import tax rate is actually close to 0%. In Thailand's case, the trade surplus with the US is $49.
6 billion, while our imports from the US are merely $63.3 billion. Therefore, the calculated reciprocal tariff for Thailand is 45.
6/63.3=72.03%.
The rate is far higher than for Canada, despite a significantly lower trade surplus. The calculated 72% rate led to the imposition of a 36% tax on all Thai exports to the US. The average import tax rate on US products of 11% is totally irrelevant.
Based on Mr Trump's view of unfair trade practices, lowering or even eliminating the import tax against the US does not answer his question. His real desire is to cut the US trade deficit by half. That is why Mr Trump calls the move "liberation".
The reciprocal tariff is meant to liberate the US from unfair trade practices which comprise (1) unfair import taxes, (2) unfair trade restrictions and, most importantly, (3) unfair currency valuations. Let me say a little bit about the unfair currency valuations. Looking at the attached table, the Thai baht, in theory, should appreciate against the US dollar as the surplus widens.
Instead, the baht has depreciated by 8.6% over 10 years. This unfair currency valuation makes Thai exports appear to be much cheaper in the US than they should be.
How much cheaper? Mr Trump would say 72%. This observation leads to the second part of the article -- the negotiating strategy. The right strategy is to show Mr Trump how each country's trade surplus with the US could be narrowed by 50%.
Lowering the tax rate is most unlikely to be enough because current tax rates imposed on US products are not high. It is 11% in the case of Thailand and 9.4% in the case of Vietnam, which was penalised with a 46% tax rate from Mr Trump.
The solution is buying more from the US, which most countries have offered. The issue is how much and if the country can afford it. In the case of Thailand, the amount that would please Mr Trump is 616 billion baht or 3.
3% of GDP. Surely, Thailand cannot afford it as it would bring Thai GDP growth down by the same amount. The formula is Y = C + I + G + (X-M).
That is why one top research house estimates that the impact of Mr Trump's tariff would lower Thai GDP growth to -1.1 %. Mr Trump probably does not care how Thailand could do it.
Just that we do it. My suggestion is provided in the last column of the attached table. The trick is to let China pay for it.
Concurrent to narrowing the Thai-US trade surplus, the Thai-China trade deficit must also be narrowed from 8.7% of GDP to 5.4% of GDP.
Surely, China will not be pleased and will likely impose retaliatory measures such as import taxes, restrictions on Thai fruit imports, and limiting the number of Chinese tourists visiting Thailand. In short, we would have a trade war with China. If such measures are not acceptable, please explain to a Thai taxpayer like me why the country should have a trade deficit with any country that is more than 5.
4% of GDP. Opposition parties might want to bring this point up with the PM in parliament. If Thailand does not lower the Thai-China trade deficit in tandem with lowering the Thai-US trade surplus, the overall Thai trade balance will worsen and hurt our GDP growth, as shown in the GDP formula above.
When one has less surplus with one country, one must counter with a lower deficit with another country to keep the overall trade balance unchanged. See the last column of the table. I do not understand why several economists say that Mr Trump's reciprocal tariffs would lead the US economy into recession.
If the US trade deficit (X-M) is improved, Y (GDP) should improve too, unless C drops faster than the increase in (X-M) from higher import prices. This point will be discussed in my next article, particularly the cost of waging a trade war with the US. In conclusion, Thailand should offer to halve its trade surplus with the US in three years.
A draft action plan should immediately be submitted, and the actual plan delivered within a month. Meanwhile, it would be nice if Mr Trump could hold off on the tariff hike for now. Chartchai Parasuk, PhD, is a freelance economist.
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