Section 301 Investigations on Thailand: Misguided Search for Excess Capacity

On 11 March 2026, the United States initiated investigations under Section 301(b) of the Trade Act of 1974 into structural excess capacity in manufacturing — the persistent gap between the industry’s production capacity and market demand — with Thailand among the 16 economies under review. Thailand’s manufacturing has faced weak domestic demand while also undertaking technological upgrading, which has caused underutilization of older capacity. The resulting excess capacity is not due to a deliberate policy to encourage overproduction for export to US markets, as the US alleges.

Under the investigation, the United States argues that Thailand’s manufacturing industries,  particularly machinery, auto parts, and rubber products, including tyres, which together account for about 45 per cent of Thailand’s exports, have significant excess capacity. In these sectors, capacity utilisation has been below 60 per cent for two consecutive years, and only one-third of industries have recovered to pre-pandemic levels. The U.S. attributes this to government subsidies and policies that suppress domestic demand while encouraging overproduction. It also suggests, without explicitly naming China, that China uses Thailand and other countries to produce exports using excess capacity, potentially through both direct investment and transhipment, causing large US trade deficits and obstructing efforts to reshore supply chains and create American jobs. The US trade deficit with Thailand, particularly in the three accused sectors, has been evident in recent years. Figure 1 shows widening deficits in electrical machinery and mechanical appliances, and relevant sub-sectors, and in total trade between the two economies.

However, three underlying reasons for the trade deficit have little to do with the US’ claims of excess capacity. 

First, while excess capacity has been revealed in various sectors, especially food manufacturing, this persistently low capacity utilisation largely reflects weak domestic demand rather than policies that encourage over-investment or suppress domestic demand. The weak demand largely stems from diminished private-sector confidence in spending and investment, partly due to political and policy uncertainties. In 2024–25, growth in private consumption and investment remained well below their 2018 levels of 4.6 per cent and 4.3 per cent, respectively, despite government stimulus, such as a 10,000-baht cash transfer to over 14 million vulnerable citizens, continued agricultural and household debt relief, and investment incentives. These incentives are activity- or location-based rather than trade-conditioned, and thus do not cause trade distortion while also remaining consistent with the WTO Agreements on Trade-Related Investment Measures (TRIMs) and Subsidies and Countervailing Measures (SCMs). However, the US’ evolving domestic-origin rules — to eliminate China from supply chains — are compelling Thailand to reinstate local content requirements, risking a revival of TRIMs inconsistencies.

Second, in the three accused sectors, the decline in capacity utilisation may also reflect the post-pandemic shift toward greater automation and digital technology. The concurrent shift toward higher-skilled labour and focus on production efficiency has left older capacity underused and effectively redundant. The result is a downward trend in capacity utilisation after Covid-19, most visibly in sectors where technological progress is faster than average.

…the appropriate US response should be case-by-case, rule-based trade-defence instruments

Figures 2 to 4 illustrate these patterns for selected sectors. Rubber tyre and tube manufacturing (red lines) has seen continuous improvement in labour productivity — a partial proxy for upskilling — and a gradual post-pandemic recovery in the Manufacturing Production Index, yet capacity utilisation has steadily fallen below 60 per cent. The same pattern is evident in domestic appliances (green) and computers and peripheral equipment (blue). In the manufacture of motor-vehicle parts and accessories (orange), labour productivity has steadily risen after 2023, and capacity utilisation is relatively high (around 75 per cent) — but still has not recovered to pre-COVID levels.

Third, although Chinese investment has risen sharply, from 14 per cent of total FDI inflows in 2017 to 22 per cent in 2025, concerns that Thailand might become a conduit for China’s excess capacity remain confined to a few sectors. In automobiles, Japan still dominates the Thai market. Chinese-branded vehicles produced in Thailand are mostly sold domestically while exports remain minimal, accounting for only about 0.05 per cent of the global auto market. In auto parts, only a few Chinese firms, some in partnership with Thai enterprises, currently produce in Thailand, and their output (EV batteries, pressed body parts, engines, and drivetrain components) is almost entirely consumed domestically to meet Thailand’s local content requirements.

In machinery and electronics, Chinese investment is rising alongside investment from Taiwan, the EU (particularly the Netherlands), Singapore, and Japan, keeping the sector diversified. The risk of Chinese excess-capacity exports appears confined to a few sub-sectors, most notably solar cells, where the US has already imposed remedial tariffs. In electrical appliances, Japan still dominates export production while Chinese firms target both domestic and global markets.

Tyres are the exception. Chinese firms have invested heavily and shifted toward export-oriented production, making this the sector where China’s excess-capacity spillover is most evident. This is in contrast to incumbents such as Japan’s Bridgestone and Yokohama, and the US’ Goodyear, which serve both domestic and international markets. The US has already imposed a 25 per cent Section 232 tariff on Thailand-produced tyres under the auto-parts category. 

Based on the above analysis, the US claim that excess capacity in Thailand is induced by government subsidies and policies suppressing domestic demand appears unjustified. The risk of exporting excess capacity is observed in some sectors, but not across all sectors as alleged. In addition, OECD-based estimates show that Thailand’s FDI-based exports typically generate domestic value-added above 40 per cent, exceeding the general Rules of Origin threshold, which would rule out transhipment as a widespread phenomenon. Transshipments from Thailand to the US, while present in a few sectors, remain limited.

Imposing tariffs on the basis of excess capacity would therefore be unfair to Thailand. Indeed, Thailand’s widening trade surplus with the US in 2025 partly reflected US trade-policy uncertainty and the front-loading of imports in anticipation of tariffs, along with a rise in US import prices. Given the possibility of such firm-specific risks, the appropriate US response should be case-by-case, rule-based trade-defence instruments, such as anti-dumping duties (ADs) to regulate the sale of products below fair market value, or countervailing duties (CVDs) to offset unfair government subsidies of exported goods.

Ultimately, the outcome lies in the US’ hands. Meanwhile, Thailand should prepare itself by strengthening domestic supply chains, attracting quality FDI, advancing legal reforms, and diversifying export markets, while also managing unprecedented external shocks to ensure the country’s sustainable growth path.

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