FTA Policies and Trade with FTA Partners

This section briefly describes Thailand's FTA policies and trade with FTA partners as the backdrop for the analysis of the results of the Thai firm survey. It undertakes three related tasks: (i) it reviews the country's evolving trade policies since the 1970s, highlighting the recent coexistence of outward orientation with FTAs; (ii) it examines the direction of trade to show a shift in exports toward FTA partners; and (iii) it analyzes use of FTAs and influences on FTA use, including the risk of Asian noodle bowl effects in overlapping FTAs.

2.1 Overview of Trade and FTA Policies

In the early 1970s, following a decade of import substitution, Thailand gradually started shifting toward outward-oriented policies under the Third National Economic and Social Development Plan.² An escalating tariff structure (ascending from raw materials to finished goods) was used to support exports, but overall tariffs remained high in the 1970s. The 1980s and 1990s saw renewed emphasis on achieving outward orientation (World Trade Organization [WTO] 2003, 2007a). Further tariff reform was facilitated by Thailand's membership of the General Agreement on Tariffs and Trade (GATT) in 1982. Export processing zones, tax incentives, and access to duty-free imports were also introduced to attract export-oriented foreign direct investment (FDI) into manufacturing, which was rapidly growing. Significant tariff reform started in the late 1980s to reduce industrial tariffs. In addition, Thailand became a member of the Information Technology Agreement (ITA) in 1996, which accelerated tariff reduction in electronics.³

As a measure of the economy's growing outward-orientation, between 1993 and 2007 Thailand's average most-favored nation (MFN) tariffs for all sectors fell significantly from 45.7% to 10.0% and for industrial goods from 45.1% to 7.7% (Table 1 [ PDF 19.7KB | 1 page ]). The three sectors of interest to this study had different speeds of liberalization, reflecting the influence of national trade strategy and industrial lobbies. Electronics had large tariff cuts (from 41.6% to 3.8%) during the same period, followed by textiles/garments (82.0% to 14.4%). Meanwhile, auto/auto parts experienced more modest tariff reduction (57.1% to 32.9%) and remained relatively protected.

Thailand's exports surged, reflecting outward-oriented policies, the entry of export-oriented FDI, cheap labor costs, investments in infrastructure, and strategic geographical location. As Table 2 [ PDF 18.6KB | 1 page ] shows, the value of total exports nearly trebled between 1995 and 2007 to $152.1 billion. Electronics also trebled in value to $30.3 billion to emerge as the country's largest manufactured export. The value of auto/auto parts increased twelvefold to $15.2 billion. Targeted to become the “Detroit of Asia,” auto/auto parts is considered a rising star in Thailand and received significant policy support. By contrast, textiles/garments stagnated at under $7 billion due to increased competition from lower-cost competitors like the PRC and Viet Nam. Taken together, the three sectors accounted for around one-third of total exports in 2007.

From the early 1990s onwards, Thailand's outward orientation was tempered with an emphasis on regionalism. Participation in AFTA, beginning in 1993, strengthened economic ties with neighboring ASEAN countries. In the 2000s, a marked shift toward bilateral FTAs occurred as Thailand sought to ensure greater market access and to develop as a strategic investment location in Asia. Tantivasadakarn (2006) pointed out that Thailand's approach to FTAs has two objectives. First, FTAs are used to strengthen ties with important traditional markets such as the US and Japan. Second, FTAs are used to gain access to new markets, classified into three groups: a) potential markets such as the PRC, India, Australia, and New Zealand; b) gateways to other markets, such as Bahrain (gateway to the Middle East) and Peru (gateway to South America); and c) new regional markets such as the countries that comprise the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC). Moreover, as Thailand's major competitors (e.g., Viet Nam and Malaysia) are negotiating to establish FTAs with its major current and potential trading partners, Thailand is forced to move faster toward FTA negotiations to protect market shares in these markets.

Appendix 3 [ PDF 28.2KB | 2 page ] summarizes Thailand's FTAs by status and Appendix 4 [ PDF 25.7KB | 1 page ] lists the market access features for selected FTAs by sector. By December 2009, Thailand had concluded 11 FTAs, was involved in another six negotiations, and was studying the feasibility of six others. The earliest agreements were concluded with Lao PDR in 1991 and with ASEAN in 1993.Later, Thailand signed bilateral FTAs with major regional trading partners including Australia (2005), New Zealand (2005), and Japan (2007). Through ASEAN's concluded FTAs, Thailand also gained access to PRC (2005), Japan (2008), Republic of Korea (2008), and most recently Australia and New Zealand (2009) and India (2009). Turning to FTAs under negotiation, framework agreements were signed with Bahrain (2002) and Peru (2005) for strategic reasons including energy security and gaining access to the Middle East and Latin America. Negotiations on a Thailand-US FTA, which began in 2003, were suspended in March 2006 due to domestic political issues. In addition, there are several FTAs under study, including an East Asian FTA (or ASEAN+3 FTA), a Thailand-Pakistan FTA, a Thailand-Chile FTA, and a Thailand-Mercado Comun Sur (MERCOSUR) FTA.

CGE models are often used to simulate the economic effects of FTAs and a valuable tool of ex ante evaluation. Box 1 [ PDF 15.8KB | 1 page ] shows estimated welfare gains for Thailand from a range of bilateral and ASEAN FTAs from two recent studies. Welfare gains for Thailand seem to differ significantly among FTAs. Two conclusions can be drawn from the results. First, bilateral FTAs with large traditional markets (like Japan) generate larger welfare gains for Thailand than those with smaller markets. Furthermore, ASEAN FTAs generate even larger gains for Thailand than bilateral FTAs with large markets.

2.2 Trade with FTA Partners

Table 4 [ PDF 20.1KB | 1 page ] provides trends in Thailand's total trade with its FTA partners (both concluded FTAs and those under negotiation) since 1995. Total trade with concluded FTA partners amounted to $191 billion (or 51.8% of Thailand's exports) in 2008. The country's three major FTA trading partners are in East Asia—ASEAN, Japan, and the PRC. Some way behind are Australia, Republic of Korea and New Zealand. It is striking that trade with concluded FTA partners has grown faster (17.9% per year) than trade with FTAs under negotiation (6.7%) or the rest of the world from 2001 to 2008. Among concluded FTA partners, the PRC, India, and Australia have the fastest trade growth. Among FTAs under negotiation, the US is the largest partner but with moderate growth, while trade with Peru and Bahrain has accelerated.

Table 5 [ PDF 25.3KB | 1 page ] shows trends in Thailand's exports with its FTA partners (both concluded FTAs and those under negotiation) for the three sectors of interest to the study. There are some differences in the export patterns for the three industries.

Around 49% of Thailand's electronics exports occur with FTA partners. The PRC has emerged as the largest and fastest-growing (39.1% per year in 2001–2007) FTA market for Thailand's electronics exports. The most important electronics exports include computer data storage units, monolithic integrated circuits and parts, and accessories of automatic data processing machines.

Some 54% of auto and auto parts exports are with FTA partners. ASEAN and Australia are the largest and fastest-growing FTA markets for auto and auto parts exports. Leading exports include diesel-powered trucks, automobiles with 1,500 to 3,000 cubic capacity engines, and gas-powered trucks.

By contrast, FTA partners only account for around 27% of textiles and garments exports. ASEAN is the largest FTA market and is growing rapidly. The PRC and India are next largest markets and are growing more rapidly than ASEAN. Key exports include brassieres and parts, staple fibers of polyesters (not carded or combed), and men's/boys shirts, trousers, and shorts, as well as women's/girls' trousers and shorts.

2.3 Utilization of FTAs and Possible Determinants

There is considerable debate in academic circles on FTA utilization rates in Thailand and possible determinants.⁵ A lack of official time series data on FTA usage within industries makes it difficult to resolve the issue. Fortunately, two studies using different methods have prepared recent estimates of FTA usage for different years and sources (see TDRI 2006 and Chirathivat 2008).

Chirathivat (2008) shows that the overall utilization rate for Thailand's FTA partners has been rising, nearly doubling from 15.6% to 26.7% between 2005 and 2008. Utilization rates vary by market, with 71.8% for the Thailand-Australia FTA and 27.9% for AFTA. Unfortunately the study does not provide utilization rates by sector.

TDRI (2006) also reveals relatively high FTA utilization rates for AFTA, the ASEAN-PRC FTA, the Thailand-Australia FTA, and the Early Harvest Program under the Thailand-India FTA. The data suggest that AFTA, the region's oldest agreement, had the largest export value under preferences ($4.8 billion) and had a respectable overall FTA utilization rate (51.1%). Under the Thailand-Australia FTA, around $2.1 billion of exports benefited from preferences, and utilization rates were 88.2%.

Different sectors showed different utilization rates (see Table 6 [ PDF 20.9KB | 1 page ]). Among the three sectors shown, auto/auto parts, under AFTA and the Thailand-Australia FTA, had relatively high utilization rates compared to electronics and textiles/ garments. The ASEAN-PRC FTA had exports of $1.4 billion under preferences and a modest utilization rate (38.0%). This FTA was in an early stage and there was relatively low demand for products covered. The Early Harvest Program under the Thailand-India FTA was characterized by low export values but relatively high utilization rates, which may point to a large future use of a full FTA.

The margin of preference is the difference between the MFN tariff rate and the FTA preferential tariff rate for a given product, and significant margins are an incentive for exporters to use FTA preferences. Table 6 shows that AFTA (6.1%) and the Thailand-Australia FTA (4.5%) had high overall margins compared to the other two FTAs. Margins were particularly high in auto/auto parts, moderate in textiles/garments, and negligible in electronics. Thus, Thai auto/auto parts firms had the most incentive to use FTA preferences, followed by textiles/garments firms, and electronics firms the least. Low use in electronics is linked to ITA membership, which provides for lower tariff rates for electronics exporters even without an FTA.⁶

Auto/auto parts firms, under AFTA and the Thailand-Australia FTA, have high utilization rates. This is linked to margins of preference, Thailand having a well-established auto/auto parts sector and some experience of dealing with ROO. Likewise, textiles/garments firms are making some use of the same two FTAs. In spite of ITA, some use is being made of AFTA preferences by electronics firms but not by firms in the other sectors. Kuroiwa (2006) suggested that the low utilization rate of AFTA for electronics could be due to the exporters' inability to comply with the ROO. He found that the electronics industries in the ASEAN-5 countries use less than 40% local content.⁷ More generally, TDRI (2006) suggested that differences in utilization rates among the different FTAs may be due to several factors, including low margins of preference, notable administrative costs of complying with rules of origin, nontariff measures (NTMs) in export markets, and weak competitiveness of Thai firms relative to competitors.

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