Thai economy at risk of five major threats if US tariff talks fail, warns SCB EIC

The Siam Commercial Bank’s Economic Intelligence Centre (SCB EIC) indicated that any delays in the negotiation process could become a turning point, severely impacting various sectors of the Thai economy, particularly if the US imposes higher reciprocal tariffs on Thailand compared to key competitors like Vietnam, South Korea, and Japan.

The five major risks Thailand faces if talks fail are as follows.

1. Export market share loss in the US:

Thai exports, particularly in electronics and electrical appliances, may lose market share in the US to competitors. Most of Thailand's key rivals are currently subjected to lower reciprocal tariffs than Thailand. 

Additionally, Thailand could face the risk of being targeted for tariff evasion, as seen with Vietnam, leading to increased trade costs and potentially stricter rules on product origin verification.

2. Agricultural and livestock sectors at risk:

If Thailand agrees to open its market to US goods without conditions, sectors such as agriculture and livestock—especially pork, chicken, and maize—could be severely impacted. 

The production costs in Thailand are significantly higher than in the US, and the country relies heavily on domestic production. Smallholder farmers would be particularly vulnerable. 

While Thai consumers may benefit from lower prices, there is an increased risk to food security. Producers in the domestic supply chain may suffer, especially those with higher production costs.

 

3. Domestic demand will weaken in the second half of the year:

Private sector investment is expected to decline, and consumer spending could slow significantly, especially in Q4. The uncertainty surrounding US import tariffs and reciprocal tariffs on Thai products could lead to delayed investment plans. If Thailand's competitors face lower tariffs, foreign investment may shift to other countries.

Furthermore, the recent agreement between the US and China to lower reciprocal tariffs, which had previously exceeded 100% in the past 1-2 months, may reduce the incentive for companies to relocate production from China to Thailand for export.

Additionally, private sector consumption will continue to weaken and is expected to slow further in Q4. This period will coincide with the full impact of US import tariffs on Thailand’s economy, potentially leading to a decline in employment, which would dampen domestic spending sentiment, especially as consumer confidence has yet to recover.

4. Potential further rate cuts by the MPC:

The Monetary Policy Committee (MPC) may reduce the policy interest rate twice this year to align with deteriorating economic conditions. If the US talks fail, Thailand will face greater downside risks, which could prompt the MPC to consider more than two interest rate cuts to stimulate the economy.

5. Government should carefully assess the pros and cons of market liberalisation:

The Thai government must evaluate the benefits and drawbacks of opening the market to US goods. Negotiations for lower tariffs must strike a balance between the reduced reciprocal tariffs and the impact on Thai businesses that may face increased competition from foreign imports.

The government could consider opening markets for some products with conditions rather than implementing full market liberalisation, alongside providing support for affected businesses, including short-term liquidity, new market opportunities, and capacity-building for domestic producers to enhance competitiveness.

Thailand faces ‘twin influx’ risk if US-China tariffs are reduced to 0%

Krungsri Research has projected that Thailand could lose up to 162 billion baht in long-term export value, with the hardest-hit sectors being those heavily reliant on the US market, such as textiles, leather goods and footwear. Together, these sectors account for 13.6% of Thailand’s GDP in 2023.

The overall impact is expected to slow Thailand’s GDP growth in 2025 to just 1.5%, with export growth dropping to 1.6%, a significant deceleration compared to the 14.9% export growth in the first five months of the year.

To mitigate the severe effects of a 36% tariff, Thailand has proposed a wide-ranging elimination of tariffs on US goods, including liquefied natural gas, aircraft, maize, and industrial machinery, in an effort to reduce the US trade surplus with Thailand, which is currently valued at US$46 billion. 

If Thailand can secure a deal similar to that between the US and Vietnam, where the US imposes a 20% tariff on Thai goods and Thailand imposes 0% tariffs on US goods, it is expected to significantly reduce the impact on Thai exports, limiting losses to just 17.4 billion baht—9.3 times smaller than with the 36% tariff.

However, this option comes with significant negative consequences, notably the risk of a 'twin influx.' While it could help reduce export challenges, the proposed 0% tariff on US goods might result in a massive increase in imports from the US to Thailand.

Krungsri Research predicts that over the long term, imports from the US could rise by 27%, or 188 billion baht, leading to a flood of US goods entering the market alongside the continued influx of Chinese goods. 

This situation stems from oversupply in China’s manufacturing sector, trade rerouting, and trade evasions resulting from the US-China trade war.

The most affected sectors from this increased import flow would be agriculture, food, and beverages, where US goods could flood the market at rates higher than 100%. Other sectors such as automobiles, transport equipment, textiles, leather goods, and plastics could also see double-digit increases in imports from the US.

This influx of imports would erode the competitiveness of vulnerable domestic sectors, particularly agriculture, which employs nearly 28.6% of Thailand’s workforce in 2024. This could hinder Thailand’s long-term growth potential.

Thailand is in a highly precarious situation, facing both domestic structural issues and political uncertainty, compounded by slower-than-expected recovery in tourism. Gaining greater access to the US market in exchange for tariff reductions may not be worthwhile if it means opening the door to a twin influx of imports.

With stricter trade policies emerging from both the US and China, Thailand’s options for a well-coordinated response are limited. At a minimum, Thailand should accelerate market diversification and engage in trade negotiations with other countries to regain a degree of economic independence. 

This approach would enable Thailand to focus more on addressing structural issues rather than constantly being forced to adopt defensive policy responses to the agendas of other nations.

This situation can be likened to walking across a swaying suspension bridge between two perilous cliffs. Avoiding one danger may lead to falling into another. Achieving balance and finding a safer, more secure path forward will be crucial for Thailand to navigate this trade crisis successfully.