Summary and Policy Implications

This study dealt with a pressing policy issue for Thailand—how do the country's FTAs affect the behavior of exporting firms? Using a relatively large sample (221 firms) in three key sectors (textiles/garments, electronics, and auto/auto parts) in Thailand, the study analyzed FTA use, costs and benefits of FTAs, ROO, and demand for services for business adjustment. Where possible, these issues were examined by sector, firm size, and ownership.

Key findings from the study are as follows:

• FTAs with Thailand's major traditional markets—especially the Japan-Thailand EPA and US-Thailand FTA (of which the latter is still under negotiation)—were more important for the sample firms than those with nontraditional markets;
• Firms typically reported that FTAs have had more positive impacts (e.g., market access, concentration of production, new business opportunities, and preferential tariffs) than negative ones (e.g., increased competition);
• The evidence suggests reasonable use of preferences in existing Thai FTAs. Also, more firms used (or planned to use) tariff preferences in FTAs than otherwise thought. Survey results show that 24.9% of respondents (55 firms) used Thai FTAs, and 45.7% either used or planned to use them; the utilization rate generally matches up with the utilization rate (26.7%) provided by Chirathivat (2008) based on certificate of origin data.
• Over half the firms, particularly foreign electronics and auto/auto parts firms, reported that FTAs have influenced their business plans;
• Around of 14.9% of firms saw ROO as an obstacle to using FTA preferences, and larger firms were more likely to do so. About 26.2% of firms said that multiple ROO would add to business costs (typically less than 1% of sales);
• Most firms said that the adoption of harmonized ROO would reduce transactions costs under FTAs;
• The sample firms, particularly domestic firms, still desired more institutional support services for enterprise adjustment to FTAs. Services demanded include provision of information on implications of FTAs for business, upgrading of technical standards and quality, training on FTAs, financial support for upgrading technology and skills, and adoption of Electronic Custom (e-custom) to speed up and simplify procedures for ROO certification; and
• A majority of firms have consulted on FTAs with government and business associations.

The findings point to several recommendations by which businesses can benefit more from FTAs. These can be grouped under four headings:

Policies to build awareness of impacts from FTAs

Although the enterprise survey indicated high awareness among sample firms, other studies (e.g., TDRI 2006) have suggested that awareness varies among Thai firms (especially SMEs). Accordingly, they may not fully capture benefits from FTAs and are less likely to change their business plan to cope with potential losses. Furthermore, many firms are unsure whether are eligible to use the preferences. To increase awareness of FTAs, the government should do the following:

• Provide timely information on FTA provisions and progress of FTA negotiations;
• Encourage business associations and interest groups, including SMEs, to become more involved in FTA negotiations and provide opportunities to do so;
• Arrange regular conferences to educate the firms, particularly SMEs, on potential impacts of FTAs and ways in which firms can utilize preferences; and
• Assess the affects of concluded FTAs (including surveys of firms) to help mitigate the losses of the losers and help intensify the gains of the gainers.

Policies to encourage utilization of FTA preferences

Some Thai importers and exporters might perceive customs procedures and procedures for using FTA preferences as complex. Hence many firms do not deal with the customs procedure by themselves but hire custom brokers to do it for them. From the firms' perspective, obtaining a Certificate of Origin will increase the complexity of the whole procedure. This is because, in addition to knowing the process, the firms need to know the harmonized system codes of their products, their cost structure, and relevant ROO. To encourage utilization of FTA preferences, the government can do the following:

• Make custom procedures more clear and transparent. Every firm should be treated equally. In addition, the custom procedures should be speeded up in line with international best practices;
• Arrange workshops or conferences to introduce importers and exporters as well as business association, to a new e-customs system that streamlines import and export procedures as well as reduces documentation costs;
• Create a campaign to build understanding that using preferences is not as complex as the firms think;
• The government should negotiate for the best tariff preference in FTAs to significantly reduce tariffs. Specifically, the government should go for the lowest tariff rate, compared to the MFN rate, in targeted products;
• Put efforts to accelerate tariff reduction in textiles/garments under AFTA in order to take advantage of FTAs between ASEAN and major importing countries and regions such as the EU, Japan, and the US; and
• In the Thailand-India FTA, the government should negotiate to include more tariff lines to create market access for a wider range of products.

Policies to increase competitiveness of local firms

Despite notable tariff preferences in some FTAs, many firms are still unable to increase their exports to FTA partners. This is largely due to firms' technological gaps relative to international standards. Production costs are sometimes high relative to those of competitors, so that tariff preference is not enough to increase exports. The government can increase enterprises' competitiveness, particularly that of Thai SMEs, through the following measures:

• Restructure tariffs that are unnecessarily high and distorted. At present, tariffs on many inputs are high (for example, some auto parts and inputs for garments), resulting in high prices for finished products, which cannot compete internationally;
• Since competitiveness is dynamic and changeable, encourage further international technology transfer, particularly through capital goods imports, technology licensing, and FDI, to businesses;
• Continue to improve and upgrade existing metrology, standards, quality, and other technology support services, particularly for SMEs, so that Thai firms reach world standards in these areas;
• Promote both public and private R&D (via tax incentives, access to new technologies, and closer linkages between firms and R&D institutions) to move Thai products up the supply chain and add value to the products. As lower-wage countries (e.g. Viet Nam, Cambodia, and the PRC) become increasingly prominent in labor-intensive manufactured exports, Thailand is losing its competitive advantages in many products such as garments; and
• Support industrial clustering in the three sectors—through infrastructure improvements, new business development services, and simplification of business procedures—to strengthen linkages among supply chains and technological upgrading of firms.

Dealing with the Asian "noodle bowl" effect

The firm survey indicates that the Asian "noodle bowl" effect is emerging as an obstacle for some firms and that it is likely to intensify after 2010 as FTAs involving Thailand proliferate in the region. This is a regional and international issue involving Thailand, other East Asian countries, and the WTO. Nonetheless, the government could contribute in this direction by doing the following:

• Advocate the benefits of harmonized ROO within ASEAN so that ROO become less influential to the choices of suppliers among members of ASEAN;
• In the negotiation of future Thai FTAs, consider negotiating an ROO that is as competitive as possible, at least for all traded products; and
• Support accelerated reduction of MFN tariffs within the WTO until ROO become meaningless under completely free trade (zero MFN tariffs). In addition, advocate global harmonization of ROO.

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