26
MAR 2017
FOOD FOCUSTHAILAND
SPECIAL
REPORT
The policy, when brought into action, would drive
increasing inflation in theUSdue tohigher costsof
importedgoods from tariffbarrier. Inshort-term, the
USeconomicgrowthmayexpand fromdecreasing
deficit,but the impacts -which thepolicyyieldson
theUSeconomyandglobal trade -wouldbemuch
moresevere.Thiscould lead to trade retaliationor,
evenworse, tradewar.Andeveryparty involveswill
bebadlyharmed fromworsenedsluggishglobal trade.
2. Fiscal Policy and Tax Measure
- Trump’s tax
incentive focus on reducing personal income tax and
corporate tax in order to make the country competitive for
investmentandsecure jobs.Theplan,withheavy reforms,will reduce
maximum income tax rate from 39.6% to 25%, and chop corporate
tax from 35% down to 15%. Generally, cutting income tax would
boost consumptionandencourageeconomicgrowth,while lowering
corporate tax would urgeUS investors to return to their homeland.
However, if thegovernment fails tocollect enough taxandeconomic
benefits from thepolicy, thenet resultcouldend in inflation for theUS.
Meanwhile, theplan to increasebudgetspendingon infrastructure,
whichaims to improve the foundation servicesafter a longperiodof
negligence, would doubtlessly create jobs, boost investments from
thepublicsector,andspureconomicgrowth.Nonetheless, thismeans
that the US will be tied to the obligation of long-term government
debt. The larger the debt gets, the riskier of debt default payment.
For debtors, higher interest rates is an option to avoid debt-default
risks.Rising interest ratemeans thebiggercost thesmallandmedium
sizes companies, and it is likely that the cost will be passed on to
thecustomersviamoreexpensivegoodsandservices,whichwould
eventually lead to inflation.
ImpactAnalysisandPolicyTransmissionChannels
ThenewUSPresident DonaldTrump’seconomicpolicieswill affect
Thailand’s food industry primarily in themedium-term to long-term.
The short-termeffects due to the fluctuation in currencymarket and
capital market, as well as the dropping confidence in the policies,
may appear. However, the effectiveness of the implementation of
announcedpoliciesmustbe taken intoconsiderationwhen forecasting
themedium-term and long-term effects.
The impact analysis is stimulated under the assumption that
Trump’s economic policies are approved and implemented (Worse
Case).Twomainpolicies thatwillmost likelyaffectThai food industry
significantlyare; (1) International TradePolicy, and (2) Fiscal policy.
These twopoliciesshouldaffectThai food industry, though indirectly,
via global/theUS economic conditions and currencymarket.
In order to avoid conflicts with the obligations that are agreed
upon, Trumpmayneed to renegotiate theNAFTAand revise its role
inWTObeforeestablisha tariffwallagainst itspartners.The tariffwall
certainlywill create trade retaliationbetween theUSand itspartners,
particularlyChinaandMexico.Thesituationwilldragdown theglobal
trade, as China and the US are the No.1 and No.2
biggest trading nations in theworldwho share
one-fourthof theglobal tradevolume. In the
end, the tariff wall will end up in a lose-
losesituation,and tradeconfrontation.
Nonetheless, inshort term, thepolicy
should benefit the US in reducing
trade deficit. In medium term,
the US may face inflation due to
higher cost of imported goods.
The industries that rely on the
import of raw materials and their
customers will likely be challenged
with increasing sales prices.
For the policy to increase the
government expedition on infrastructure,
as well as to cut income tax and corporate
tax, at first, may help stimulate growths for the
economy, consumption and investment. However, in long term, the
policywouldprompthikingUSpublicdebt.Oneof themainobjectives
of the corporate tax cut is to encourageAmerican investors outside
the US to return to their homeland. Themeasure, which for many,
seemsunlikely tosuccess.Onehas tounderstand that theoff-shore
US investments are mostly aim for market seeking, hence the tax
incentivewillnotbeencouragingenough for themove. It is forecasted
that theUS tax revenuemaynot cover itsexpenditure,which is likely
to increase,andeventuallywould lead to inflationssimilar to tariffwall.
Ina situationwheregoods prices keep rising steadily (inflation),
the Federal Reserve Bank (FED) will be required to raise policy
interest rates (FEDFundRate)whichwould result incapital flows into
theUSmarket. This could result in the selling of stocks and bonds
in Thailand, which would pressure Thai baht to weaken. However,
weakeningcurrencyshouldbenefitThailand’s food industry,asmany
arebaring costs inThai baht (themajority of the costs is domestic).
Nevertheless, Thai food industry has become very diverse. Each
product has its unique supply chain, cost, and market. Hence, it
is likely that the impacts from the weakening currency are varied,
positiveand negative, depending on theproducts.
