Thailand risks missing out on FDI as investors turn to Vietnam and Indonesia

Vietnam and Indonesia have successfully concluded trade negotiations with the United States, prompting concerns that Thailand could miss out on foreign direct investment (FDI). US President Donald Trump announced a trade agreement with Indonesia, under which Indonesian goods will be taxed at 19%, while US exports to Indonesia will face no tariffs.

In return, Indonesia has agreed to purchase $15 billion worth of energy products, $4.5 billion in agricultural goods, and 50 Boeing aircraft, including several Boeing 777s. As the world’s fourth-largest population and a G20 member, Indonesia had a trade surplus with the US of $17.9 billion last year.

Trump confirmed that Indonesia, Southeast Asia's largest economy, will buy $15 billion in US energy products, $4.5 billion in agricultural products, and 50 Boeing aircraft. The deal mirrors that with Vietnam, which also benefits from no tariffs on US exports, while China faces higher tariffs on goods passing through these countries.

Thailand renegotiates with USTR

Thailand, which is now in the process of negotiating with the US Trade Representative (USTR), is aiming for a similar deal. Minister of Commerce, Jatuporn Buruspat, confirmed that official trade talks began on July 16 via video conference, with Deputy Prime Minister and Finance Minister Pichai Chunhavajira discussing new proposals with US trade representatives.

Thailand has proposed reducing tariffs on 10,000 product lines to 0% and put forward additional proposals to the US for further trade benefits.

However, the government has already prepared mitigation measures for businesses potentially impacted by tariffs. These measures are divided into two levels: one for a 36% tariff and another for a 20% tariff, assessing the effects on various industries, including labour.

The trade deals secured by Vietnam (20%) and Indonesia (19%) have put additional pressure on Thailand to conclude its deal with a tariff of around 18%. With competing ASEAN countries such as the Philippines, Malaysia, Indonesia, and Vietnam, Thailand must negotiate to avoid being at a disadvantage.

Thanakorn Kasetsuwan, President of the Thai National Shippers’ Council (TNSC), noted that Vietnam and Indonesia’s trade deals provide them with a significant advantage, with Vietnam having three times the trade surplus with the US compared to Thailand. He believes Thailand’s proposal for a 0% tariff on 90% of US imports has a good chance of success, especially as it leverages the advantage of using products originating in Thailand for preferential trade terms.

As part of its response, the government has also prepared a soft loan scheme worth 200 billion baht to assist businesses. While entrepreneurs do not seek direct financial aid, they are requesting measures such as a freeze on the 400 baht minimum wage and control over interest rates. The relief package aims to support businesses directly affected by the opening of the US market to Thai goods at 0%.

Concern over Thailand being pressured to reduce tariffs to 0% 

Nava Chantanasurakon, Vice Chairman of the Federation of Thai Industries (FTI), expressed concerns that the successful trade negotiations by Vietnam and Indonesia, which agreed to reduce import tariffs to 0% for the United States, could pressure Thailand into making similar concessions.

Comparing the trade balances with the US, Thailand recorded a surplus of US$45 billion in 2024, 2.5 times larger than Indonesia’s. However, there is still confusion over why Indonesia agreed to eliminate tariffs entirely.

“If Thailand is forced to adopt Indonesia’s tax formula, it’s an even bigger concern. This would be a more difficult issue than Local Content because Thailand has a higher trade surplus with the US than Indonesia, yet they have agreed to such terms,” Nava explained.

Indonesia is less dependent on the US market compared to Vietnam, which relies on the US for more than 30% of its exports, while Thailand depends on the US for only 18% of its total exports.

Nava clarified that the FTI would accept a 0% tariff for some product categories, such as pharmaceuticals, where the US has the capacity to produce high-quality medicines. However, he emphasised that sectors like chemicals, which require high investment and are undergoing industrial transitions, should not see their tariffs reduced to 0%.

BOT suggests preparing mitigation measures

Sethaput Suthiwartnarueput, Governor of the Bank of Thailand (BOT), stated that the full impact of Trump’s tariffs on Thailand cannot be assessed until official details of the negotiations are finalised. While other countries that initially faced high tariffs have seen reductions after negotiations, Thailand should aim to negotiate both tariff reductions and mitigation measures for those impacted by the new taxes.

He added that the BOT has been in continuous discussions with all sectors to ensure that the government and private sector work together. Regarding concerns over interest rates and exchange rates, Sethaput mentioned that the BOT has already addressed these issues in earlier meetings with the Monetary Policy Committee (MPC).

Sethaput said the impact of the tariffs on trade and investment will be seen in three main sectors: exporters to the US, which will depend on the outcome of the tariff negotiations; products from other countries that may flood the Thai market due to being unable to enter the US; and industries such as clothing, furniture, computers, and electronics, which are closely tied to SMEs and more vulnerable compared to large export-oriented companies.

Thailand at risk of losing out to Vietnam and Indonesia

Amonthep Chawla, Executive Vice President and Head of Research at CIMB Thai Bank, stated that if Thailand fails to negotiate tax terms comparable to or near those of competitors like Vietnam and Indonesia, the country could face higher import tariffs. This would not be beneficial for Thailand’s future export sector or its ability to attract foreign direct investment (FDI).  

“Ultimately, investors are not only looking at the domestic market in our country, but they also want to use Thailand as a production base to export globally, especially in sectors such as electronics, automotive, parts, or even EVs from China, which are currently considering investing in Thailand. These investors may turn to countries with lower tax costs than Thailand,” he said.

However, he personally believes that while the situation is pressuring, Thailand does not need to follow the exact steps of Vietnam and Indonesia because each country’s context is different. Specifically, Thailand’s agricultural sector is more vulnerable, and its economic structure is more complex. Therefore, tax reductions should consider the potential impact on various sectors, especially agriculture and SMEs, which still rely on protective measures.

Tax rates of 25-30% would still make Thailand competitive

Amonthep added that Thailand may not need to reduce taxes as much as Vietnam or Indonesia but should aim to lower them to below 36%. A tax rate of 25-30% would still be highly feasible and competitive. 

Thailand needs to find more strengths, as history has shown that despite higher wages and electricity costs, businesses still choose to invest in Thailand. Many industries still see Thailand as strong, particularly in sectors where it can build a competitive advantage, such as advanced electronics, medical devices, domestically developed EVs, processed food, and modern services, including the services sector.

“Those affected must be supported by the government, with mitigation measures in place to help them adapt, while simultaneously creating new industries,” he said. “I believe it’s not too late for Thailand. If we are willing to adjust and define a clear position, we may grow more slowly than countries that reduce taxes faster, but we still have the opportunity if we know what we are competing with. What are our strengths, and how can we address our weaknesses? Thailand always has options.”