The tough business of striking a fair trade deal with Trump’s US

In an era marked by aggressive power plays and shifting global alliances, the economic strategies of powerful nations are shaking up the developing world.

Countries like Thailand and other smaller economies are being compelled, under immense pressure from the current United States administration, to accept trade deals widely criticized as unfair.

Central to these deals is the drastic reduction of tariffs on US goods—in some cases slashed to zero—which has left policymakers, economists and local industries scrambling to adapt.

How Trump has turned traditional policy on its head

The global trade landscape changed dramatically with the election of Donald Trump as US president. His administration’s pivot from established free trade norms to a protectionist, high-tariff approach caught much of the world off guard.

Teerana Bhongmakapat, former dean at Chulalongkorn University’s Economics Faculty, describes a sense of shock among Thai policymakers and economists as they face the very real threat of a 36 per cent US tariff rate.

“Partly because they could not keep up with changes in the US since Trump took office in his first term, shifting their policy from free trade to a high tariff system," he observes.

The sudden reversal was a fundamental departure from decades of predictable American policy.

Indeed, the Trump administration’s willingness to wield tariffs as a tool of negotiation and coercion has forced countries like Thailand into a defensive posture. Faced with the threat of punitive tariffs, these nations are compelled to rapidly reduce their own barriers to imports from the US.

In Thailand’s case, this would mean slashing tariff rates for American goods to zero, a move that would have significant implications for the domestic economy, particularly sectors dependent on some level of protection.

Stuck in a free trade mindset

Teerana is sharply critical of the Thai response, suggesting that policymakers and officials remained anchored to the old paradigm of free trade, failing to fully appreciate the evolving dynamics of global trade policy.

This, he argues, left them ill-prepared to negotiate with an administration intent on upending the status quo.

“The Thai side was still preoccupied with the free trade system and did not study deeply the issue of the 'optimum tariffs' in trade policy,” Teerana notes.

Optimum tariff theory: A brief overview

In essence, the optimum tariff theory posits that a country possessing significant market power can enhance its own welfare by imposing tariffs on imports.

This stands in contrast to the more common view that tariffs generally decrease overall welfare.

The concept itself is not recent. Its origins date back to the 19th century, and it has remained a topic of ongoing debate among economists for many years.

The consequences are not purely economic. There is a political and psychological dimension at play as well.

The abrupt shift challenges deeply held assumptions about the reliability and predictability of US policy, exposing a vulnerability in the way small nations prepare for and respond to global shocks.

Somjai Phagaphasvivat, an independent scholar in economics and politics, characterizes Trump’s approach as “openly aggressive and unpredictable”.

“President Trump is openly aggressive — he hates the left. If someone can stand up to him, he backs down, aiming to gain votes. China can still resist,” he says.

This perception of Trump’s negotiation style as forceful, tactical and ultimately shaped by domestic political considerations has real consequences for the way smaller countries engage with the US.

Thailand’s geopolitical position

Despite being forced to make significant concessions, Thailand is not without leverage.

Somjai notes that “Thailand still has some bargaining power with the US, but probably not as much as Vietnam and Indonesia, because these two countries are considered very important by the US in countering China's influence.”

Vietnam’s strategic stance vis-à-vis China in the South China Sea disputes and Indonesia’s prominence as the world’s largest moderate Muslim state and a G-20 member with vast economic potential makes them particularly valuable to US interests in Asia.

Thailand’s position is somewhat distinct. While it is an important US ally in the region and seen as a potential counterweight to Chinese influence, its relationship with China is less adversarial than those of Vietnam or Indonesia.

Laos and Cambodia, by contrast, are more fully aligned with Beijing. For Thailand, the challenge is to maintain enough autonomy to protect key sectors—such as agriculture—even as it is pressured to open its markets to US goods.

The scope of liberalization

The US push for tariff reductions is often accompanied by demands for greater liberalization of financial services and investment.

Somjai observes that liberalizing financial services for US companies could actually strengthen Thailand’s ambition to become a regional financial hub.

However, “it doesn't mean opening up completely”, he cautions.

The balance, he contends, lies in selectively liberalizing investment, particularly in digital enterprises, while maintaining strategic control over critical areas.

Allowing foreign ownership up to 100 per cent in certain digital businesses could attract much-needed investment without sacrificing national interest.

Similarly, the removal of non-tariff barriers can spur investment and innovation.

“The US can't relocate all factories back to the US; they still need friend-shoring,” Somjai points out.

Thailand thus finds itself at the center of a global struggle to secure supply chains and maintain economic resilience.

Comparisons with Vietnam and Indonesia

Somjai notes that Thailand may be able to negotiate a tax rate lower than 30 per cent, but was “unlikely to achieve the 19-20 per cent level that Vietnam and Indonesia, who have reduced tariffs to zero for all US goods, have achieved”.

This reflects the differences in strategies and bargaining positions of Southeast Asian nations.

Vietnam and Indonesia’s willingness, or necessity, to fully liberalize their markets for US goods may win them greater concessions or protection in other areas, while Thailand’s more cautious approach could limit its gains but also preserve domestic interests.

The future of free trade

The ripple effects of Trump’s tariff policy extend well beyond bilateral relationships.

After Vietnam and Indonesia made major concessions to the demand of no tariffs on US-made products, the pressure mounts on Thailand to toe the line.

As Somjai puts it: “Global free trade systems would be affected by Trump's tariff policy, but many countries would pursue more free trade agreements with each other without the United States.”

The fragmentation of traditional trade alliances could lead to a more multipolar world, where regional blocs and alternative systems of settlement gain in importance.

Nobel laureate Paul Krugman has long warned that high tariffs of the kind championed by Trump threaten to push many small economies into crisis.

The imposition of steep tariffs not only distorts trade but also undermines the stability of the global economic order, potentially causing major countries slower growth and making it more difficult for small nations to compete and grow.