When US Commerce Secretary Wilbur Ross alights in Bangkok for this weekend’s Association of Southeast Asian Nations (ASEAN) summit, his Thai hosts are expected to make their case for more lenient US trade treatment.
On October 25, the Office of the US Trade Representative (USTR) caught Thai officials off-guard by announcing it would punitively retract US$1.3 billion worth of Thailand’s General System Preferences (GSP) duty-free preferential trade over long-lingering labor issues.
The surprise measure, while affecting a minuscule .01% of the kingdom’s total exports, has raised wider market concerns that Thailand could be in US President Donald Trump’s trade war crosshairs, with potential more punitive and damaging measures in the near-term offing.
That speculation has been heightened by Trump’s apparent last minute decision not to attend the ASEAN Summit and related East Asia Summit, events at which Thailand hopes to promote its re-emergence as a regional leader and responsible global actor.
Analysts are now watching for indications, including messaging and upshots from Ross’s meeting with Thai counterparts this weekend, that the US intends next to designate Thailand as a “currency manipulator,” after placing the nation on a watch list in April.
Criteria for listing include an exceptionally large trade surplus with the US, a current account surplus of over 2% of gross domestic product (GDP), and evidence of one-sided and persistent currency intervention by buying dollars in offshore markets representing 2% of GDP.
Only the last criteria is remotely in question in Thailand’s case. If formally branded as a manipulator, Thailand could be exposed to individual industry complaints of “unfair” trade practices and face possible retaliatory measures including tariffs on its products.
“Nobody is clear where Thailand and the US are in their relationship,” said a business consultant who advises foreign investors. “While some in Washington see Thailand as a useful ally against China, Trump is laser-focused on getting better trade deals at any diplomatic cost.”
Bank of Thailand currency interventions, namely through buying US dollars in offshore markets to weaken the baht, are now being more closely watched by Washington after Thailand was recently included in the US’s expanded “major trading partner” definition.
Thailand’s stock of foreign reserves rose in the second and third quarter of this year, though at a much slower rate than last year, when the BoT intervened more heavily to stem the baht’s rise. By mid-2019, Thailand had stockpiled $220.5 billion in foreign reserves, the 12th highest level in the world.
But that type of monetary maneuver is now under heightened US scrutiny after Thailand turned in a $19.3 billion goods trade surplus with the US in 2018, running afoul of Trump’s bid to narrow the two sides’ trade imbalance. Thailand’s trade surplus with the US is on track to rise again this year.
The threat of being branded a currency manipulator has hamstrung the Bank of Thailand’s ability to stall the Thai currency’s rise. The Thai baht is up 7.8% against the US dollar so far this year, hitting a six-year high of 30.2 to the greenback on October 25, making it the best performing currency in Asia.
That rise has crimped the kingdom’s export competitiveness, notably at a time China’s renminbi is down around 3% so far this year, while Southeast Asian export rivals Indonesia and the Philippines are up only 2%.
While it’s difficult to quantify the net economic impact of the baht’s comparative rise, Thailand is clearly losing tourism market share to cheaper destinations in the Philippines, Cambodia and Vietnam – in all of which Chinese tourist arrivals are rising even as they slip in Thailand.
Financial analysts say the BoT would normally intervene more heavily in forward and spot markets to crimp the baht’s rise vis-à-vis regional competitors, but doing so now would be too visible to a more watchful US Treasury Department.
“The BoT is a bit cornered,” says a research analyst at a major investment bank who requested anonymity. “The central bank would normally intervene much more to depreciate the baht but the US Treasury threat is apparently holding them back.”
The baht’s comparative strength is weakening the export-oriented economy, where shipments contribute around 70% of GDP. And with household debt at around 78% of GDP, the second highest reading in Asia, there is little room for domestic consumption to spark growth.
The Bank of Thailand downgraded its GDP growth forecast for 2019 from a previous 3.3% to 2.8%, based on faltering exports expected to decline 2.5% compared to a previously predicted 0.9%. Thai GDP grew 4.1% in 2018.
With US Treasury Department scrutiny has prevented more overt and aggressive off-shore interventions, the BoT has only limited policy tools at its disposal to weaken the baht and revive exports amid a broad global trade slowdown.
Thailand’s benchmark interest rate is already near a record low at 1.5%, with speculation rising that the BoT may cut to a new low of 1.25% at a planned November 6 monetary policy meeting. Analysts believe the BoT will be reluctant to take rates below 1% for reasons of financial stability amid high and rising household and corporate debt levels.
Because net portfolio inflows are negative alongside a surging current account surplus, now at around 6% of GDP due to falling imports and slack investment, record low interest rates will do little if anything to stimulate grow, analysts say.
Thailand’s flagging growth could conceivably collapse if the US moves to designate the country as a currency manipulator, as part of a larger Trump administration drive to punish perceived unfair trade practices and reduce the US’s Thai trade deficit.
Analysts note that Trump has reserved his biggest trade war salvos for larger economies, namely China, the European Union, India and neighboring Mexico, and so far refrained from hitting medium-sized countries like Thailand.
Although Trump referred to Vietnam as “the single biggest abuser of everyone” in June, in apparent reference to rising transshipment of Chinese-produced goods relabeled as “Made in Vietnam” to avoid US tariffs, he has not yet pressed any punitive trade policies on Hanoi.
While the USTR’s move to retract part of Thailand’s GSP privileges was in the works since June, and is still potentially reversible, many saw the announcement as a tit-for-tat warning against Bangkok blocking imports of US-grown soybeans and other crops that use a chemical recently banned for domestic use by Thai legislators.
The tone and direction of bilateral trade relations will likely be set at this weekend’s ASEAN meeting, though significantly and symbolically in Trump’s absence in what many already view as a downgraded US diplomatic delegation led by Ross.
“Is Thailand next on Trump’s list?” asks one investment analyst based in Bangkok. “The impact of lifting GSP privileges or putting Thailand on a currency watch list has had zero direct impact. It’s the uncertainty of what could be next that’s hurting sentiment.”