Survey Findings

This section presents the main findings from the survey of 221 firms in textiles/garments, electronics, and auto/auto parts. The sample covers firms of different sizes (small and medium enterprises [SMEs], large firms, and giant firms) and ownership (domestic and foreign). The sample and sampling methodology are described in Appendix 5 [ PDF 19.8KB | 1 page ]. The survey dealt with issues that can be arranged under six headings:

1. awareness and use of FTA preferences;
2. ranking of FTAs and net benefits;
3. business strategy responses;
4. burden imposed by multiple ROO;
5. harmonization of ROO; and
6. institutional support for enterprise adjustment.

3.1 Awareness and Use of FTA Preferences

FTA texts, particularly for comprehensive agreements, tend to be long and written in complex legal and technical language. Given their complexity, an important issue is the extent to which business has studied the detailed provisions in Thailand's FTAs and is fully aware of their implications.

Some firms claimed to be aware of provisions in Thailand's FTAs. Of the sample firms, 43.5% (87 firms) claimed to have thorough and detailed knowledge of the FTA provisions that affect their business. Another 26.0% of sample firms claimed to have some knowledge of some aspects of the relevant FTA provisions. Larger firms tended to be more knowledgeable of FTAs than smaller firms were. While 66.2% of large firms and 65.0% of giant firms claimed that they have thorough knowledge of FTA provisions, only 23.6% of SMEs provided the same response (Figure 1 [ PDF 37.4KB | 1 page ]). Expectedly, a high proportion of SMEs (44.3%) reported that they have no knowledge at all of FTA provisions that affect their business.

Textiles/garments had the highest proportion of firms that claimed to be knowledgeable of FTA provisions (53.4%). However, without more detailed case studies of firms, it is hard to verify these claims. The levels of awareness of FTA provisions may reflect that the sample firms are mostly in (or near) major cities in Thailand and have access to information on FTAs, training, and other FTA-related services provided by government and business associations. Awareness levels are likely to decline with increasing distance from the capital city and ready access to FTA services.

Negotiating multiple FTAs requires investment of scarce resources. Yet there is speculation about the utilization of preferences in Thailand's concluded FTAs and plans for preference utilization in FTAs under negotiation. The pattern of current and future preference utilization should be examined. Another issue is how much FTAs have influenced behavior of businesses and the formulation of their business plans.

Utilization of preferences in existing Thai FTAs seemed reasonable and set to rise. Survey results suggest that 24.9% of respondents (55 firms) used Thai FTAs. When future use is factored in, the use/plan-to-use rate rises to 45.7% of respondents (100 firms). The utilization rate from survey findings generally accords with the utilization rate (26.7% in 2008) provided by Chirathivat (2008) based on certificate of origin data from the Thailand Ministry of Commerce. Table 7 [ PDF 20KB | 1 page ] provides a breakdown of the pattern of FTA preference utilization. Larger firms were more likely to use FTA preferences than SMEs were.

It is interesting to consider which FTAs were important to firms that used or planned to use preferences. Around 32.4% of firms reported the five FTAs in effect (AFTA, ASEAN-PRC FTA, Thailand-Australia FTA, Thailand-New Zealand CEPA, and Thailand-India FTA). Meanwhile, 67.5% of these firms reported the FTAs under negotiation (US-Thailand FTA and Japan-Thailand EPA) to be the most important for their business. Thus, the evidence seems to suggest moderate levels of utilization of preferences in existing Thai FTAs as of 2007–2008, but FTA utilization rates in Thailand are likely to increase when the major FTAs under negotiation become effective.

Meanwhile, 26.0% of sample firms did not use preferences, mostly domestic SMEs. In-depth interviews with firms revealed interesting insights on why firms are not keen on using FTA preferences. Apart from the non-FTA preferences available to firms, such as ITA, the demand for products from the FTA partner may be too small relative to the administrative cost associated with utilizing FTA preferences. Furthermore, MFN rates are also available to firms, which can sometimes be more competitive than FTA preference rates.

3.2 Ranking of FTAs and Net Benefits

The US-Thailand FTA and the Japan-Thailand EPA were the most important FTAs for the sample firms. Table 8 [ PDF 24.9KB | 1 page ] provides a ranking of the importance of Thai FTAs. Of the 221 firms, 22.6% of them chose the US-Thailand FTA while another 21.7% selected the Japan-Thailand EPA as being most vital to their businesses. A couple of FTAs under negotiation thus emerged as being relatively more important for the sample firms than those already in effect. Other FTAs indicated include AFTA (14.5%), Thailand-Australia FTA (8.1%), Thailand-PRC FTA (Early Harvest Program [EHP]) (2.7%), ASEAN-PRC FTA (2.3%), Thailand-India FTA (EHP) (0.9%), and Thailand-New Zealand CEPA (0.4%). These findings underscore the role of Thailand's FTAs in strengthening its ties with large, traditional export markets (e.g., the US, Japan, and ASEAN) and gradually improving access to new markets (e.g., the PRC, Australia, New Zealand, and India).

The majority of the firms that selected the US-Thailand FTA or the Japan-Thailand EPA were larger firms, accounting for more than half of large firms (56.6%) and 64.5% of giant firms.⁸ Meanwhile, AFTA was the most popular among smaller firms. Of the 32 firms that selected AFTA to be the most important to their business, 75% were SMEs.

A distinct pattern of interest in given FTAs emerges by sector and ownership, reflecting linkages with global supply chains. The US-Thailand FTA was overwhelmingly the most important FTA for textiles/garments, particularly for domestic firms. Meanwhile, the Japan-Thailand EPA was the most important FTA for electronics and auto/auto parts, particularly for foreign firms.⁹

Among the concluded FTAs, firms saw AFTA as the most important to their business, followed by the Thailand-Australia FTA. Expectedly, these two FTAs were popular among auto/auto parts firms, given the lower FTA preferential tariff rates and higher tariff margins relative to other FTAs (see Table 6). However, even if AFTA preference is low for textiles/garments, it did not seem to be important for firms in this sector.

The 59 firms that had no response are noteworthy too. The majority of these are SMEs. Some firms are domestic electronics producers that supply parts and components to exporters (i.e., indirect exporters). Meanwhile, others are covered under agreements such as the ITA, which eliminate duties on selected information technology (IT) products.

On the net benefits of FTA, firms typically reported more positive than negative impacts. Around two-thirds of the sample (131 firms) reported at least one positive impact of FTAs to their business, while only 13.1% (29 firms) reported at least one negative impact (Figure 2 [ PDF 36.5KB | 1 page ]).¹⁰ The positive impacts of FTAs were reported to include wider market access that results in higher export sales (81 firms), concentration of production (58 firms), intermediate goods/raw materials that are easier to import due to lower preferential tariffs (44 firms), and new business opportunities including joint ventures (41 firms).

Meanwhile, the main negative impact of FTAs was increased competition from imported products (22 firms), while documentation of FTA use for clients and competitive disadvantage with other FTAs were chosen as reasons by 6 and 3 firms, respectively.

Figure 2 shows a breakdown of the impacts of FTAs by firm size¹¹. The positive impacts are visible across all firm sizes. Accordingly, market access was indicated as a benefit by 32 SMEs, 38 large firms, and 11 giant firms. Interestingly, improved market access was generally perceived as positive across all three sectors, while increased competition was especially seen as negative by auto/auto parts firms and to some extent by textiles/garments firms.

3.3 Business Strategy Responses

Over half the firms reported that FTAs had influenced their business plans. Some 45.9% of respondents (100 firms) reported that they had changed or would change business plans in response to FTAs. Another 13.3% (29 firms) may do so. The positive response rate to FTAs (59.2% combined) was significantly higher than the rate of those that did not plan to change business plans (31.7%).

Figure 3 [ PDF 41.4KB | 1 page ] shows the distribution of the firms across firm sizes that reported business strategy responses to FTAs. Larger firms seemed to be more responsive to FTAs than smaller ones, as higher proportions of large and giant firms had changed or would change business plans compared to SMEs. Only 33.7% of SMEs reported that they had or planned to change business plans, lower than the 60.0% and 48.3% of large and giant firms, respectively.

One striking feature of the group of firms that have changed or will change business plans is that the majority chose the US-Thailand FTA and Japan-Thailand EPA as the most important FTAs to their business. This indicates that firms seem to anticipate the impact of FTAs on their business, since these two FTAs have not yet taken effect as of early 2010. Meanwhile, domestic firms dominate the groups that reported no change in business plans in electronics and auto/auto parts.

3.4 Burden Imposed by Multiple Rules of Origin

The growing number of FTAs in Thailand has triggered concerns that the attendant rules and administrative procedures might increase the cost of doing business. If the country's agreements were mutually consistent, especially concerning ROO, then the costs of a new FTA would be minimal for business. If not, such costs could be notable. Box 2 [ PDF 29.9KB | 1 page ] shows the typical procedure for firms to avail themselves of FTA preferences, which requires the Certificate of Origin. The key issues relating to ROO in Thailand are as follows: Are ROO an obstacle to using FTA preferences? Does this observation vary by firm size? If multiple ROO are a problem, would this significantly add to business costs? And are there benefits from harmonization of ROO?

A few firms saw individual ROO as an obstacle to using FTA preferences. Table 9 [ PDF 29.9KB | 1 page ] shows whether firms perceive ROO as an obstacle to using FTA preferences. Around 14.9% of firms reported that ROO in Thailand's FTAs were an obstacle to using FTA preferences. Meanwhile, another 21.7% said ROO might be an obstacle in the future with the projected growth of Thai FTAs. In general, auto/auto parts firms, with large amounts of components and parts as well as complex manufacturing processes, perceived ROO to be more of a problem than the other two sectors (20.2% of firms in this sector).

Large firms seemed to be more concerned about ROO than SMEs and giant firms were. Except for auto/auto parts firms, large firms account for the highest proportion of firms that reported ROO were an obstacle to using preferences (25.0% for textiles/garments and 15.2% for electronics). Accordingly, giant firms accounted for the highest proportion of firms that did not see ROO as obstacles. This result suggests that giant firms, which have wider and deeper market penetration, can take advantage of FTA preferences and more easily prove origin of goods than smaller firms.

Interestingly, 46.2% of sample firms said that ROO were not an obstacle to using FTA preferences. One reason was that at the time of the survey, Thailand had only concluded seven FTAs, largely with new markets, while FTAs with the country's traditional markets were still under negotiation. Accordingly, by 2010 firms in Thailand were beginning to see multiple ROO as an obstacle to using FTA preferences, and this trend is likely to become more marked after 2010when more FTAs are concluded.

Some firms said that dealing with multiple ROO in Thai FTAs would significantly add to business costs. Of the responding firms, 26.2% (57 firms) indicated that dealing with multiple ROO would significantly add to business costs, including many electronics firms and a smaller percentage of textiles/garments firms.

While firms of all sizes are concerned about the Asian “noodle bowl” effect, giant firms seemed to complain the most (Figure 4 [ PDF 41.8KB | 1 page ]). Of the giant firms that responded, 35.7% (10 firms) reported that dealing with multiple ROO significantly adds to business costs while only 24.3% of SMEs (26 firms) and 25.3% of large firms (21 firms) shared the same view. As users of multiple FTAs, giant firms are more exposed to the business costs of dealing with multiple ROO than smaller firms.

Firms typically estimated that these costs would be less than 1% of total export sales. Our interviews with firms indicated that business costs of dealing with ROO can take several forms. These include wages of human resources employed to process customs documents and costs associated with changing business strategies to comply with the ROO (such as undertaking separate production runs, limiting product types, and changing import source).

3.5 Harmonization of ROO

There are benefits from the adoption of harmonized ROO. Large and giant firms seemed to recognize the benefits from harmonization of ROO, particularly textiles/garments and auto/auto parts firms, more than SMEs did (Table 10 [ PDF 50.4KB | 2 page ]). This could be attributed to the finding that SMEs are less likely to use FTA preferences than larger firms (see discussion on FTA preference utilization in section 3.1).

Accordingly, examining the profile of firms that saw benefits from the adoption of harmonized ROO (88 firms) reveals that a majority had studied the text of the FTA provisions that affect their business (58.7%). Most firms had also changed or planned to change their business plans in response to FTAs (64.8%) and were currently using or planning to use FTA preferences (61.4%).

3.6 Institutional Support for Enterprise Adjustment

A wide range of institutional support is required to help enterprises adjust to Thai FTAs and to enable firms to utilize FTA preferences effectively. By developing country standards, Thailand has a comprehensive institutional support system made up of government agencies and business associations that provide information, training, technical advice, and other services.¹² Three key issues need analysis in institutional support in Thailand: Which institutions do firms usually approach to get help in dealing with an FTA? What additional services are required from government agencies and business associations for adjustment to FTAs? And to what extent have firms consulted on FTAs with government agencies and business associations?

Use is being made of public and business institutions to deal with business adjustment to FTAs. Table 11 [ PDF 16.7KB | 1 page ] provides enterprise responses on a range of public and private institutions that provide assistance to enterprises in Thailand. Overall levels of awareness and use of public and business support institutions among Thai businesses are typically low, in line with other developing countries. In general, the sample firms make some use of public institutions, particularly the Ministry of Commerce. Furthermore, a few firms make use of business institutions.

Box 3: Government Support for Custom Procedures [ PDF 16.7KB | 1 page ]

Significant demand remains for more support for business adjustment to FTAs. Interviews with firms indicated that a wide range of additional support services are needed to help them to respond effectively to existing FTAs and to take advantage of future FTAs. Table 12 [ PDF 14.4KB | 1 page ] provides responses from firms about the types of services demanded. The main services demanded are more information on the implications of FTAs for businesses, upgrading of technical standards and quality, and more training on FTAs. There are also some requests for financial support for upgrading technology and skills, adoption of EDI, and enhanced consultations during FTA negotiations. Issues such as technical standards and extension services for SMEs and more surveillance of NTMs in partner countries are likely to become more important as more FTAs take effect.

Box 4: Case Study on DENSO Training Academy Thailand (DTAT) [ PDF 14.4KB | 1 page ]

A majority of firms consulted on FTAs with government and business associations. Government agencies and business associations in Thailand organize periodic consultations with businesses on FTAs in general and prior to specific FTA negotiations. More than half of sample firms (62.0% or 137 firms) consulted on FTAs with either government agencies or business associations. Larger firms seemed to be more involved in consultations than smaller ones. Figure 5 [ PDF 36.4KB | 1 page ] shows the proportion of firms in each size category that consulted on FTAs, where the SMEs reported the lowest proportion (43.0%).

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