THAILAND’S NEW FTAs AND ITS TRADE POLICIES POST-ASIAN CRISIS: AN ASSESSMENT

Razeen Sally

2005

SUMMARY

Free trade agreements (FTAs) have dominated Thai trade policy in the last two-to-three years, against the backdrop of proliferating FTA initiatives in Asia-Pacific and beyond. But FTAs have also to be seen in the light of other trade-policy developments: China’s and India’s historic integration into the global economy; the agonisingly slow pace of the Doha Round of the World Trade Organisation (WTO); little progress in ASEAN economic integration; and, not least, trade-and-related-economic developments in Thailand since the Asian crisis. In this context, how credible is Thailand’s FTA policy? What can be done to improve it?

Thailand resisted a descent back into protectionism in the wake of the Asian crisis; and tariff and non-tariff barriers in manufacturing have continued to decline, coming closer to relatively moderate levels in other old ASEAN countries. But the momentum for further liberalisation and regulatory reform has slowed down considerably, especially in services.

Thailand and other southeast-Asian countries need a fresh wave of liberalisation and regulatory reform to meet the challenges of globalisation. The rise of China and India presents huge opportunities, but it also further exposes protectionist weaknesses in the region and adds urgency to necessary market-based reforms. For Thailand, tariffs need to come down to under 10 per cent and be rationalised, especially with reductions in peak tariffs and tariff escalation. More needs to be done on non-tariff barriers in agriculture. The legal framework on foreign direct investment (FDI) should be liberalised and simplified, with full foreign ownership allowed in goods and services, and with approval procedures that are more transparent and less discretionary. Much more liberalisation and regulatory reform is needed in services in order to haul a backward and costly services infrastructure into the twenty-first century, especially in financial and telecommunications services. Finally, domestic trade-related regulation, e.g. in customs administration, government procurement, technical and food-safety standards, competition policy and state-owned enterprises, needs to be overhauled to make it more non-discriminatory, transparent and predictable.

By developing-country standards, Thailand is reasonably well integrated into the WTO. In the Doha Round Thailand occupies a middle position compared with ASEAN neighbours. It has been less defensive, and more flexible and pragmatic, than Malaysia, Indonesia and the Philippines.

However, Thailand punches well below its weight in the WTO: it is not nearly as active in the Doha Round as it should be. The government has switched political attention and negotiating resources to FTAs, and given very little political and policy direction to Thailand’s negotiating positions in the Round. This is myopic and mistaken. Thailand has a strong stake in further multilateral liberalisation underpinned by well-functioning rules. A patchwork of discriminatory FTAs is not enough; and, in the absence of a healthy multilateral trading system, will be increasingly damaging.
ASEAN economic integration has been very slow moving and bears little connection to the commercial realities on the ground. While the Common Effective Preferential Tariff has had its timetable advanced, take up of tariff preferences has been minimal, and very little progress has been made on non-tariff issues such as investment and services. The vision of an ASEAN Economic Community looks good on paper, but, like other ASEAN “visions”, has a strong whiff of unreality about it. This is also true of APEC. Both ASEAN and APEC have a travelling circus of summits and conferences peopled by politicians, officials, academics and NGOs, but it is difficult to take them too seriously.
Thailand’s fixation with FTAs fits the general pattern in southeast Asia and the wider Asia-Pacific. With ten FTAs in force or under negotiation, it is following hard on the heels of Singapore, the FTA pioneer in southeast Asia. For Thailand and other countries in the region, FTAs are motivated by security-related and defensive economic concerns, and are seen as part of a benign “competitive-liberalisation” process, a building block of multilateral liberalisation.

For FTAs to make economic sense they should be WTO-consistent and WTO-plus, i.e. comprehensive and with liberalising commitments that go beyond those in the WTO, and with simple, harmonised rules of origin. But this is the exception: the overwhelming majority of FTAs are bitty, quick-fix sectoral deals with politically sensitive areas carved out, and with little or no advance on issues that are stuck in the WTO (e.g. agricultural subsidies, anti-dumping and domestic regulatory barriers). They deliver little, if any, net liberalisation and pro-competitive regulatory reform, and get tied up in knots of restrictive, overlapping rules of origin (ROO) requirements. They divert attention from the WTO, and, more importantly, from necessary domestic reforms.

The emerging FTA picture in southeast Asia is of such weak and partial deals. As things stand, bilateral and collective-ASEAN FTAs are highly unlikely to tackle the protectionist barriers that throttle cross-border commerce in south, southeast and east Asia. They have the hallmarks of “trade-light” agreements.

Thailand’s FTA policy, while conforming to the regional pattern, has specific Thai characteristics. The main one is the Prime Minister’s CEO style of making lightning-fast decisions and expecting them to be implemented quickly. This has come at some cost and led to unanticipated complications. FTAs have been rushed, driven by fuzzy foreign-policy goals, and had very little sense of economic strategy. Careful preparation has been conspicuously lacking. Too many negotiations have been launched, and they have proceeded too fast. High-level policy direction to negotiators has been found wanting, as has consultation with Parliament, NGOs and the wider public.

Most regrettably, there has been little thinking about the link between FTAs and the national economic framework in terms of domestic policies, supporting institutions and priorities for reform. Rather FTAs have been tacked on with little aforethought. The residual logic seems to be narrowly mercantilist: export market access in a few sectors is sought in return for import concessions in a few others, while otherwise preserving the domestic-protectionist status quo. This trade-light approach will make little positive difference to competition and efficiency in the Thai economy, and create complications in the process. To be fair, however, other governments in southeast Asia and beyond are guilty of similar mistakes.

The Thailand-Australia Closer Economic Relations FTA (TAFTA), in force since January 2005, is reasonably comprehensive on trade in goods (though with very long transition periods for some agricultural products), but very weak on services and investment, domestic regulatory disciplines, SPS measures and other WTO-plus disciplines. Overall, it changes little on the ground. The Thailand-New Zealand Closer Economic Partnership Agreement (CEPA), in force since July 2005, is rather similar to TAFTA. However, there was no agreement on services and investment, with negotiations left to the future. There are modest commitments on labour and environmental standards. The Thailand-China agreement to eliminate tariffs on fruits, vegetables and a few other agricultural products, has little aggregate impact, but it has had an appreciable impact in the sectors covered. The early-harvest tariff elimination package in the Thailand-India FTA is hemmed in by very restrictive rules of origin, and the wider FTA negotiations have made very little progress. The recently completed Thailand-Japan FTA negotiations seem to have delivered a rather weak agreement, with carve-outs and long transition periods for agricultural products, cars and steel. ROO requirements look like being very restrictive, especially on agricultural products. Services, investment and other WTO-plus commitments are likely to be weak. FTA negotiations with Bahrain and Peru have been on hold since last year. Negotiations with EFTA are about to commence. The BIMSTEC grouping (bringing together Bangladesh, Sri Lanka, India, Nepal, Bhutan, Thailand and Myanmar) is supposed to complete an FTA by 2017. FTAs with Bahrain, Peru, EFTA and in BIMSTEC should not be taken too seriously: trade levels are small-to-miniscule; South-South trade (i.e. trade in similar products) is difficult to liberalise and delivers relatively few gains; and an FTA with EFTA will likely carve out much of agriculture. Thailand is also involved in collective ASEAN FTA negotiations with China, India, Japan, Korea and Australia/New Zealand.

The Thailand-US Free Trade Agreement (TUSFTA) is the sole and highly significant exception to Thailand’s unserious, trade-light FTA norm. A comprehensive, clean FTA could deliver significant gains for Thailand. The USA’s position is that it wants just such an FTA, with wide and deep commitments on goods, services, investment, government procurement, intellectual-property protection, competition policy and other areas.

Both the USA and Thailand stand to gain from agricultural liberalisation as trade barriers are high at both ends. But key Thai concerns will not be addressed, especially agricultural subsidies and anti-dumping procedures, which the USA leaves to WTO negotiations. The USA is also unlikely to concede much on tariff and non-tariff barriers in rice and sugar, and on SPS measures. On industrial goods, Thailand will have a job to eliminate US tariffs on pick-up trucks anytime soon. Finally, ROO requirements are likely to be very restrictive, especially in politically sensitive US markets such as textiles and clothing.

The USA is making very ambitious demands on services and investment, along the lines of commitments in the US-Singapore FTA. Based on a negative-list approach, it is demanding complete opening of most services sectors, underpinned by strong disciplines to limit discretion and enhance transparency in domestic regulation. On investment, it wants the scope of “covered investment” to be wide enough to include short-term capital flows, a ban on performance requirements, and no special privileges for state-owned enterprises (SOEs). Thailand is particularly worried about opening its long-protected, weak and inefficient banking sector to US competition. Taken together, these demands would require an extensive overhaul of Thai legislation in these areas. At the same time, Thailand wants access to the US labour market for some of its workers (e.g. chefs, masseurs and others in hotel and health-related sectors). The USA is unlikely to concede much here.

The USA is demanding “TRIPS-plus” commitments on intellectual-property (IP) protection, again along the lines of commitments in the US-Singapore FTA. These would cover patents, data exclusivity, plant varieties, copyright and other issues. They would require a large overhaul of Thai IP legislation. It is questionable whether such commitments would be appropriate to a country at Thailand’s stage of development. Legislative changes would be costly, and the domestic generic industry would be at risk. Most sensitive politically, it is possible that limits on compulsory licensing could significantly increase the price of ARV drugs for HIV/AIDS victims. Thai unease is justified, and it is moot whether wholesale concessions to US demands would be worth an overall agreement.

The USA is likely to demand disciplines on competition policy that would subsume SOEs. This would in any case be in the Thai interest. The USA is also likely to demand better access to the Thai government-procurement market, and procedures for regulatory transparency and cooperation in customs administration. Finally, there will have to be commitments on labour and environmental standards, as required by the US Congress.

TUSFTA has the makings of a one-sided deal: Thailand will have to concede much, but will likely gain little extra access to the US market. Hence the domestic backlash against TUSFTA comes as little surprise. Some arguments against TUSFTA, and against FTAs in general, are nonsensical anti-market polemics, but others are justified, especially on IP issues. But the main problem is the lack of preparation and a credible negotiating strategy on the part of the government. Narrow mercantilism might work politically with other FTA partners, but it comes a cropper with the USA.

What can be done to improve Thai FTA policy?

First, the government needs to stand back, ask searching questions and devise a proper policy for FTA negotiations that goes beyond narrow mercantilism and ad hoc decision making in the middle of negotiations. The key to this is not to look at FTAs in isolation, but to hitch them firmly to a national economic-and-institutional reform agenda. The government should commission an independent review of overall FTA policy, with the specific remit to link it to national economic priorities. Therefore, policy options for FTA negotiations should be related explicitly to options for domestic reforms.

Second, the government should change its attitude to the policy process. It needs to listen to and coordinate better with its experienced negotiators; solicit policy advice from outside experts; consult more with Parliament and the more sensible NGOs; and explain relevant issues intelligently to the public. Business associations could play a fuller role by feeding in market intelligence for more detailed and refined negotiating positions.

Third, there should be fewer negotiations with longer timelines in order to focus political capital and negotiating resources on what is important. The central focus should be on the crucial negotiations with the USA. Trade-light negotiations with India, EFTA and in collective ASEAN FTAs should be put on the backburner. Those with Bahrain and Peru should be suspended indefinitely. And there should be a moratorium on future FTA negotiations.

Fourth, Thailand should ask the USA for a longer negotiating timeframe, say to the second half of 2007. This would allow breathing space to prepare a better negotiating strategy. In the meantime, the government should commission an independent review with the remit to examine the desirability and feasibility of domestic regulatory reforms that a deep-integration TUSFTA would require. This should be done in tandem with, or as part of, the overall FTA policy review recommended above.

Fifth, existing FTAs with Australia, New Zealand, and now with Japan, need to be strengthened in terms of market-access commitments (on goods, services and investment) and WTO-plus issues (e.g. government procurement, competition policy, SPS and other regulatory barriers).

Sixth, special attention should be devoted to the mess on rules of origin that these and other FTAs are creating. There should be a special study, preferably led by the Federation of Thai Industries and the Chamber of Commerce, on how rules of origin in Thailand’s FTAs can be simplified and harmonised to make them less costly and trade distorting. The conclusions should be fed into FTA negotiations and reviews of existing FTAs.

These changes in FTA policy need to be flanked by changes on other trade-policy tracks:

First, Thailand should redirect attention to the WTO, alongside a more focused FTA policy.

Second, and most important of all, Thailand needs a fresh wave of unilateral liberalisation and regulatory reform to limit misguided government intervention and boost competition. This should be the central plank of trade policy. Wherever possible, FTA preferences should be “multilateralised”, i.e. offered to others on a non-discriminatory basis. Finally, the government should devise a more focused policy of adjustment assistance for small rural farmers hit by FTA market opening. In light of the above considerations, the government should commission an independent review to examine options for a fresh domestic liberalisation-and-regulatory-reform agenda. This should have an adjustment-assistance component, but not be conditional on trade negotiations.

Thai FTA policy is flawed, but FTAs are a reality: they cannot be wished away. The challenge is to improve them. But that is not enough. Thai trade policy needs to be rebalanced. It is standing on one shaky FTA leg. It needs to stand on another, stronger WTO leg. And, like a good Pilates student, it needs to rebuild core abdominal strength through further unilateral liberalisation and regulatory change as part of a domestic reform agenda. That, not excessive reliance on cumbersome trade negotiations, is the key to tackling the protectionist barriers that matter in Asia-Pacific. And that is the key to regional economic integration and further integration with the global economy. Therefore a clear and persuasive case for unilateral reforms should be made in Thailand; one that goes against the grain of entrenched interests and prevailing (but wrong-headed) ideology that find it convenient to rely on trade negotiations. Thankfully, the winds of globalisation, blowing more strongly with the rise of China and India, create pressure to move faster with unilateral reforms. Whether that will be strong enough to change policy in Bangkok in a more sensible direction remains to be seen.