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28 Oct 2024

Econ Digest

A new round of trade war may trigger another wave of production relocation with Thailand likely to partially benefit from industries where investments are already established

คะแนนเฉลี่ย

Trade protectionism against China is one of the election campaigns for US president in this November 2024 and has been discussed extensively, especially a tariff increase on Chinese imports by 60% and on other countries by 10-20%. This move is expected to cause inflation risks in the US and may trigger another wave of production relocation out of China.

•    The first round of the US-China trade war in 2018 brought a significant shift in the global production chain

After 6 years since the start of the first round of trade war, the US has continued to record high trade deficits with China since July 2018, when US President Donald Trump used Section 301 (Unfair Trade Practice Section 301) to increase tariffs on Chinese goods under unfair trade practices, aiming to reduce the US trade deficits with China. However, at present, the US still maintains a high trade deficit with China of USD279 billion, accounting for 26% of the total US trade deficit in 2023, while China remains the world's largest exporter, accounting for 14% of the world’s exports.

However, trade relations between the US and China have changed. Third-party countries, such as ASEAN nations and Mexico, have become production bases for Chinese goods destined for exports to the US. The US now imports the most from Mexico instead of China, and has increased imports from ASEAN countries, while China has shifted its largest export market from the US to ASEAN countries.

Based on the first round of the trade war, the impact on the structure of US imports from China varied depending on the differing tariff increase rates on Chinese goods.

- Group 1 products that are subject to the highest rates of 25% are products from which the US has reduced its imports the most. Products in this category are primary and intermediate raw materials such as HDDs, tires, vehicles and parts, aircraft, telephone equipment, pet food, steel and aluminum. US imports of these products has decreased to from USD234 billion in 2017 to USD130 billion in 2023.
- Group 2 products that are subject to an additional 7.5% tariff are intermediate and semi-finished products such as air conditioners, washing machines, televisions, computers, agricultural products and textiles. As a result of tariffs that are not as high as in the first group, US imports of these products have decreased slightly from USD100 billion in 2017 to USD90 billion in 2023.
- Group 3 products that have not been subject to additional tariffs in the first round of trade war are finished consumer goods such as smartphones, tablets, notebooks, ready-to-wear clothing, shoes, digital cameras, games, toys, and furniture. US imports of these products have increased from USD167 billion in 2017 to USD212 billion in 2023.

Notably, Group 3 products that have not been subject to import tariffs in the first round of trade war, but the US has increased its imports both from China and other sources, reflecting that the global production chain has adapted to the risk of trade protectionism policies. The US has also increased its imports of Group 3 products from China because China is a cost-effective production base for finished products. However, the trade war and COVID-19 have caused businesses to manage risks by diversifying their production bases to ASEAN and USMCA (United States-Mexico-Canada Agreement) countries, which will see increased US imports from Vietnam, Thailand, Mexico, and India in Group 3 products such as solar cells, electrical appliances, tires, medicines, automobiles and parts, etc.

•    Regardless of the 2024 US election outcome, trade protectionism against China is expected to continue, and a new round of trade war may prompt another wave of production relocation out of China.

While the Democratic Party advocates for trade protectionism against China by specifically imposing tariffs on Chinese goods in strategic products, the Republican Party will continue the new round of the trade war by comprehensively imposing tariffs on imports from China. In addition, it pledges to impose 100% tariffs on imports for countries that shift away from using the US dollar. If a new round of the trade war occurs, Group 3 products that have not been subject to additional tariffs in the first round of the trade war will be hit the hardest, and it may trigger a new wave of production relocation out of China.

•    Should another wave of production relocation occur, Thailand is expected to partially benefit from industries where investments are already established.
Group 3 products are mostly finished goods that rely on China’s strength in low production costs with Vietnam and Mexico likely to benefit the most.
- Vietnam will benefit from value-added products such as notebooks, tablets, smartphones, headphones, toys and furniture.
- Mexico will benefit from products like pickup trucks, trucks and parts, and furniture.
- Thailand is likely to benefit from industries where investment already exists such as semiconductors, solar cells, digital camera parts, medical gloves, rubber gloves, fruit juice, TV equipment, PCA, and toys, etc.

In summary, although the new round of US trade protectionism or the trade war has gained political popularity and continued to be used as a tool for negotiating with China and other countries to maximize the US’s trade benefits, it has a significant impact on the global economy and the US economy. Moreover, the potential retaliation from other countries could have an even greater negative impact on the outlook of global trade and economy. However, Thailand, as a country that may benefit from the relocation of production bases out of China, will only partially benefit if another wave of production base relocation occurs. This is because, for the products that will benefit the most from such relocation, Thailand has a limited advantage in terms of production costs compared to Vietnam and Mexico.

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