Thailand faces a tough balancing act in economic ties with major powers

Thailand’s economic relationship with China, Japan and the United States is at a crossroads, and the government faces some tough challenges in addressing the concerns of miffed parties.

Trade and investment with China have already been under close scrutiny of the public amid reports of large trade deficits, grey Chinese businesses operating in Thailand, and the dumping of toxic waste into public spaces and rivers.

At the same time Japanese automakers, who have invested in Thailand for decades, are feeling left out. They are complaining about the lack of a level playing field vis a vis Chinese battery electric vehicles (BEVs), which enjoy lower tariff and excise tax rates.

Meanwhile, the US government is threatening a new trade offensive. It is accusing Thailand, along with several other countries, of helping China evade US tariffs by using Thailand as a transshipment route to export Chinese products to the United States.

Grey Chinese businesses are known to exploit corruption in Thailand to run scam centers, buy citizenship illegally, and use nominees to operate restricted businesses reserved for Thai citizens, such as agriculture. These issues have raised concerns over the actual benefits of foreign direct investment (FDI) from China.

“We get no benefit from the zero-dollar FDI,” says Somchai Jitsuchon, research director at the Thailand Development Research Institute.

“Corruption in the country enables Chinese grey businesses to operate here; they do the same in other corruption-ridden countries,” says Yuthana Sethapramote, an economist at the National Institute of Development Administration.

Arguments over unfair tax regime

Japanese car manufacturers are calling on the Thai government to change tariff and excise tax rates, citing the unfair preference given to Chinese electric vehicles. Currently EVs imported from China are subject to zero tariff under a free trade agreement, whereas Japanese cars face 20 per cent tariffs, and European models face a much higher rate of 80 per cent.

In recent years, the Thai government has tried to promote the use of clean energy. As part of this endeavor, it set an excise tax rate of 2 per cent for automakers who invest in local BEV assembly, known as completely knocked down (CKD) units, and 10 per cent for imported completely built units (CBUs).

To enjoy lower excise tax rates, manufacturers must meet local investment requirements in Thailand.

However, Japanese automakers, especially executives from Toyota Motor Thailand, have complained that Chinese EV-makers enjoy low tax rates despite failing to make substantial investments in Thailand as pledged, and doing minimal assembly work in their local factories.

Some argue that the eight-percentage-point difference between the excise tax rates on CBUs and CKDs would not make a significant difference to Chinese automakers, as they can manufacture BEVs in China 30–40 per cent cheaper than in Thailand.

Consequently, many prefer to export CBUs to the Thai market. BEVs are dominating with a 30 per cent market share in the first half of this year totalling 104,418 units, more than 50 per cent of which were imported, mostly from China.

Rising oil prices have also contributed to the growing demand for BEVs, driving a 93 per cent growth in sales in the first half of the year.

High competition from Chinese BEVs

Facing fierce competition from Chinese automakers, Honda Automobile Thailand requested tax reductions on imported Japanese cars to align with the zero import tariffs granted to EVs from certain countries, with the aim of making Japanese imports more competitive.

Meanwhile, a Toyota Motor Thailand executive called for an immediate tax hike on imported EVs to level the playing field and filter out companies that are not genuinely committed to long-term local manufacturing.

Local economists also suggest that the government adjust its tax rates.

“I think the tax regime should be reviewed as it has been implemented for a while,” says Yuthana.

Somchai shares a similar view, stating that the government needs to look at tax issues. He adds that Thai consumers are shifting toward buying BEVs partly because they want to participate in reducing pollution and because Chinese vehicles are affordable.

Japanese automakers, he thinks, may have been slower in responding to the demand for EVs.

As Japanese manufacturers express their frustration with Thai tax policy, Indonesia is offering to host Toyota’s production base if it moves from Thailand, promising greater support.

Indonesia’s proactive move raises concerns of Thailand losing its reputation as ASEAN’s car manufacturing hub, given Indonesia’s advantages: it is ASEAN’s largest economy, has rich reserves of raw materials required for battery production, a population over three times larger, and unlike Thailand, Indonesia is not an aging society, which offers manufacturers greater market prospects.

Prime Minister Anutin Charnvirakul is trying to alleviate the situation by pledging government support to foreign investors, especially Japanese carmakers who have long invested in Thailand. He has assigned Deputy Prime Minister Ekniti Nitithanprapas to revamp the tax regime related to the electric automobile industry.

Senior officials at the Ministry of Finance say that the new excise tax structure will be ready by September.

Ekniti, who also serves as Minister of Finance, stated that lower excise taxes would strictly require the use of locally produced parts. Imported fully-built vehicles from companies without local factories would face higher taxes to protect local investors, boost employment and safeguard state revenue.

Some senior officials don’t see the threat of Japanese automakers moving from Thailand to Indonesia.

Danucha Pichayanan, secretary-general of the National Economic and Social Development Council, emphasized that Toyota was unlikely to shift its manufacturing base to Indonesia.

Thailand’s 30-year-old, deeply integrated automotive supply chain provides a massive competitive advantage, making relocation risky despite declining exports of traditional internal combustion engine vehicles, according to Danucha.

Furthermore, Japanese investors have already diversified their investments across ASEAN, maintaining some vehicle production in Indonesia.

US accusation against Thailand and other countries

Meanwhile, US President Donald Trump’s administration has accused several countries of helping China illegally dodge US tariffs, depriving the US government of tens of billions of dollars in annual revenue.

In a report published recently, the White House stated that more than 40 countries had participated in a shadow logistics network facilitating the flow of Chinese goods into the US using false labeling.

China’s biggest enablers in the “Great Transshipment Scam” include the European Union, Mexico, Canada, India, Japan, and South Korea, according to the Office of Trade and Manufacturing Policy.

Southeast Asian countries, including Indonesia, Thailand, Malaysia and Cambodia, also play “an important role” in the network, the trade policy office said.

US manufacturing sectors hit hardest by transshipments include electrical equipment, integrated circuits, aluminum products, and motor components, according to the report.

Thailand is currently negotiating with the US on trade issues after Trump tapped Section 301 to impose a 12.5 per cent tariff on Thailand following a US Supreme Court decision that ruled his previous tariff hike as illegal.

“I think US officials look at the statistical volume of imports from China, which is quite similar to the amount of exports to the US market over the past few years,” says Somchai, referring to Thailand’s large trade deficit with China and trade surplus with the US.

He further notes that transshipment does not significantly benefit Thailand due to its low value addition, so the government must take serious action to promote domestic supply chains and develop local content for exported products.

“Thailand has been facing many challenges in dealing with major trading partners, while the geopolitical situation also remains highly volatile,” adds Somchai.

By Thai PBS World’s Business Desk