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23 Mar 2018

International Economy

Little impact expected on China from US trade measures but watchful for Thailand (Current Issue No. 2906)

       US President Donald Trump has signed an executive memorandum to slap tariffs worth USD60 billion on Chinese exports, reasoning that China has infringed on US intellectual property per Section 301 Anchorof the 1974 Trade Act.  Although this round of trade measures is the most serious so far against foreign goods since the present US administration began its trade protection initiatives, the impact on Chinese exports is forecast to be limited, perhaps accounting for only 11 percent of their total exports to the US, currently valued overall at USD505 billion.

Washington is expected to announce a list of products subject to trade protection measures within the next 15 days. The list is likely to cover more than 1,300 items that include IT products, clothing and toys.  Afterward, there will be a 30-day period opened to allow the public to express opinions. Thus, the next 45 days will be critical for both countries to engage in trade talks and seek mutual agreement. The list of products subject to this US retaliatory move will be crucial toward gauging the extent of US pressure on China. Washington will have to thoroughly review its interests and the impacts of possible retaliations by China and other affected countries if they decide to reciprocate against the trade measures of the US.     

​KResearch believes that negotiations between the US and China should come to a solution that does not trigger a new trade war. It is possible that the new measures may impact only specific categories of Chinese products that the US may be able to source from other suppliers to meet domestic demand without hurting US consumers. For instance, the US may choose to impose tariffs on smartphones, clothing and toys made by Chinese companies. In such case, the repercussions on Thailand would be little because the majority of Thai products in these categories are not a part of Chinese supply chains. However, if the US imposes levies on other products such as tablets, computers, electrical appliances and/or automotive parts and equipment, that would inevitably affect supply chains using Thai export products, in particular, integrated circuits and hard-disk drives.    

Given official enforcement of US trade measures against China, regardless of their form, close attention should be paid to potential changes in regional supply chain in two aspects, even though the US does not impose such measures on Thailand. First, the shipment of Thai smartphone parts and components might be redirected to Vietnam. This is because Vietnam may, to a certain extent, replace China as a production base for such products. At the same time, Thailand may be able to sell smaller quantities of intermediate raw materials for computers and electrical appliances to China but we could still benefit from this if Thai producers can expand their production capacities to replace Chinese exports and serve increased demand for reassembly in the US, or at production bases in other countries. However, such gains hinge on factors that include the interchangeability of such products, Thai producers’ capacity to increase their output and any advantage in logistic costs.

Nonetheless, since Thailand may not be spared from new US trade measures, Thai operators should expedite preparations for possible repercussions and closely monitor the next US currency manipulation report scheduled for release in April.  If Thailand remains on the list of countries that the US accuses of currency manipulation, which may indirectly lead to appreciation and more volatilities of the Thai Baht, this situation will then affect our overall external trade and the profit margins of Thai exporters who are likely to face greater risk amid a highly volatile forex market.