Analyzing the Benefits of Joining the Asia-Pacific Trade Agreement (APTA) for Malaysia, Thailand, and Vietnam

Transcription

1 Analyzing the Benefits of Joining the Asia-Pacific Trade Agreement (APTA) for Malaysia, Thailand, and Vietnam Final Output (Output 1.4) Piriya Pholphirul* Graduate School of Development Economics National Institute of Development Administration Prepared for Trade and Investment Division, UNESCAP c * Mailing address: Serithai Road, Klong-Chan, Bangkapi, Bangkok Corresponding piriya.p@nida.ac.th. The author would like to thank Miss Jirawan Piyasupasit for her excellent research assistance.

2 I. Introduction In July 1975, seven ESCAP member countries (Bangladesh, India, Laos, the Republic of Korea, Sri Lanka, the Philippines, and Thailand) met in Bangkok and agreed on a product list for mutual tariff reductions. After the meeting, these countries considered signing the first trade agreement among developing countries, namely the Bangkok Agreement. Aimed to promote economic development through a continuous process among ESCAP members, the Bangkok Agreement was finally established and ratified by five of the seven countries, excluding the Philippines and Thailand. However, the Lao PDR has not yet issued customs notification on the tariff concessions granted. Thus, it is not considered an effective participating member. In 2001, after the first and the second round of negotiations (in 1979 and 1985), the People s Republic of China, the most populous country and the fastest-growing economy in the region, joined the Bangkok Agreement. The entry of China to the Bangkok Agreement made the Bangkok Agreement the only regional preferential trade agreement linking the two most populous countries of the world: China and India. The third round of negotiations offered a maximum of 50 percent Margin of Preference (MoP) on tariffs with respect to agreed items, using 2001 as the base year and including a wider coverage of products. The concession lists were agreed upon by the member countries during the third round of negotiations. During the first session of the Ministerial Council of the Bangkok Agreement in November 2005 in Beijing, the Asia-Pacific Trade Agreement (APTA) was signed under the revitalization process. To establish APTA as a true Asia-Pacific trade bloc, one of the revitalization processes was to further liberalize trade among existing members and expand membership as a regional-wide preferential trade agreement of the Asia-Pacific. All developing member countries of ESCAP were eligible to accede to the Agreement. One of the most distinguished gains from joining the APTA was that members would have access not only to the two most populous and two of the fastest growing countries in the region, namely India and China, but also to opportunities to trade in major world markets, such as the Republic of Korea, and in newly developing markets in South Asia, such as Bangladesh and Sri Lanka. However, since intra-trade among the APTA members is still low (at around 10 percent of the total trade volume), the Participating States and UNESCAP, as the secretariat to APTA, identified a priority list of prospective member countries. Malaysia, Vietnam, and Thailand were selected as three prospective new members from ASEAN under APTA. For these countries, the potential gains from joining APTA are needed to be investigated in-depth and presented to them to help them reflect upon the potential benefits should they join. The main purposes of this study are to analyze the country-specific benefits for Malaysia, Vietnam, and Thailand if they decide to join the agreement, including future policy implications. 1 In this regard, the research plan is presented in the seven sections that follow. In the next section, the overall economic situation and trade regime of Malaysia, Thailand, and Vietnam will be analyzed. The features of bilateral c 1 This paper aims to deepen and strengthen analysis from Pholphirul (2006), which explains the potential gains if Thailand decides to be a member of the Bangkok Agreement. Pholphirul (2006) calculated some indicators and made estimates using a pool gravity model and found that trade can be increased in these industries within the Bangkok Agreement. 2

3 trading agreements between those prospective countries and APTA participating states are identified by examining volumes, trends, and shares of trade. This section will also update the status of free trade agreements, whether they have already been signed, are under review, or under negotiation by prospective countries and their partners. In addition, the Herfindahl-Hirschman Index (HHI) of three potential countries will be computed to measure the extent of the countries export diversification Section III analyzes the similarities of trade patterns of the prospective countries with each APTA Participating State by estimating three quantitative trade indices: 1) the Spearman s Rank Correlation between the Revealed Comparative Advantage (RCA), 2) Trade Intensity Index (TII), and 3) Intra-Industry Trade (IIT) Index. The RCA Rank Correlation will be used to discuss gains from trade in terms of whether the trade with APTA is substitutive (competitive) or complementary. The Trade Intensity Index will be used to identify sectors that are highly intensive in the APTA market. And, the Intra-Industry Trade Index will be used to analyze whether there are gains from variety from trading between prospective countries and APTA member states. After analyzing potential gains/losses to Malaysia, Thailand, and Viet Nam, section IV aims, initially, to identify gains/losses within each country s various sectors. First of all, the paper will compare the RCA exports of the three prospective countries with the RCA imports of the member states to identify effects from trade creation and trade diversion at the sectoral level. Secondly, this section will match products under the current concession list based on the HS-6 digits for the products that APTA Participating States import from the prospective countries. Section V forecasts the increase in benefits according to further tariff concessions by estimating export demand from Malaysia, Thailand, and Vietnam to APTA member countries. At last, Section VI discusses some further potential benefits for Malaysia, Vietnam, and Thailand according to expansion of the coverage of APTA to trade facilitation, service liberalization, and investment. Section VII concludes. II. Overview of the Economic Situations and Trade Regimes of the Prospective Countries Being permanent members of ASEAN since it was formed in 1992, Thailand and Malaysia are among the ASEAN-6 that have made significant progress in the lowering of intra-regional tariffs through the Common Effective Preferential Tariff (CEPT) Scheme for AFTA. Vietnam, as one of ASEAN s newer members, is not far behind in the implementation of their CEPT commitments to bring down tariffs on products in the Inclusion List to no more than 5 percent duties. 2 There is no doubt that intra-asean trade has been increasing, not only for Malaysia, Thailand, and Vietnam, but also in other ASEAN economies. The United States, Japan, and the European Union are, as usual, ASEAN s main trading partners. In addition, trade with China has been growing very fast in recent years. Even though intra-regional trade among ASEAN members has continually increased over time from 17.4 percent in 1980 to 22.8 percent in 2002 and 24.9 percent in 2006, intra-trade among ASEAN members is relatively low compared to other trade blocs around the world, such as c 2 ASEAN achieved the original target of the AFTA as scheduled in Tariffs on almost all products traded among the ASEAN-6 were reduced to rates between zero and 5 percent. The ASEAN-4 has been implementing their Common Effective Preferential Tariff (CEPT) commitments in line with timeframes agreed upon at concession. 3

4 NAFTA, FTAA, 3 or EU-25, all of which involve more than 50 percent intra-group trade (See Table 1). Table 1: Percent of Intra-Regional Export Volume among Trade Groups YEAR PARTNER APTA ASEAN MERCOSUR NAFTA FTAA EU 25 Intra-Group Rest of the region Rest of the world Intra-Group Rest of the region Rest of the world Intra-Group Rest of the region Rest of the world Intra-Group Rest of the region Rest of the world Intra-Group Rest of the region Rest of the world Intra-Group Rest of the region Rest of the world Intra-Group Rest of the region Rest of the world Source: UNCTAD Hand Book of Statistics in 2007 On-line, Table 2: Intra and Extra ASEAN Trade in 2006 Total trade Country Intra-ASEAN Extra-ASEAN Value (Millions US$) Share to country total (Percent) Value (Millions US$) Share to country total (Percent) Brunei 2, , Cambodia 1, , Indonesia 37, , Lao, PDR Malaysia 73, , Myanmar 3, , The Philippines 18, , Singapore 146, , Thailand 50, , Vietnam 18, , ASEAN 352, ,052, c 3 The Free Trade Area of the Americas (FTAA) is an attempt to expand the North American Free Trade Area (NAFTA) to every country in Central America, South America, and the Caribbean, except Cuba. Negotiation began right after the impletation of NAFTA in

5 Source: ASEAN Trade Database 5

6 Table 3: Selected Key Macroeconomic Variables of Malaysia, Thailand, Vietnam, and ASEAN GDP at GDP per capita Merchandise trade Foreign direct Country current prices at current price Exports Imports Total trade investments inflow US$ million US$ US$ PPP US$ million US$ million US$ million US$ million US$ million Malaysia 186, , , , , , , , Thailand 245, , , , , , , , Viet Nam 71, , , , , , , ASEAN 1,281, , , , , ,404, , , Source: ASEAN Secretariat Table 4: Percentage Growth of Selected Key Variables of Malaysia, Thailand, Vietnam, and ASEAN Country Growth rate of GDP Ratio of exports to GDP Ratio of imports to GDP Merchandise Trade Ratio of total trade to GDP Growth of nominal value of exports Growth of nominal value of imports Growth of nominal value of total trade Year-on-year change in foreign direct investments net inflow percent percent percent percent percent percent percent US$ million percent Malaysia , Thailand , Viet Nam ASEAN , Source: ASEAN Secretariat 6

7 Even though intra-regional trade among ASEAN members was relatively low (at 24.9 percent) in 2006, trade volumes of ASEAN countries with other countries in the region were as high as 60.7 percent. There is an implication that ASEAN would benefit even more if they were to increase trade and investment with other countries. Among ASEAN members, Singapore trades the most (US$146,102 million) while Malaysia, Thailand, and Vietnam are among the ASEAN countries that have high trade volumes US$73,270.2 million, US$50,484 million, and US$18,667.7 million, respectively. However, relatively low and stable intra-asean trade shares (around 20-25%) within the ASEAN bloc and intra-trade volumes for Malaysia, Thailand, and Vietnam, which are prospective members for APTA, indicate opportunities for those prospective countries to gain much if they decide to join other preferential trading agreements, especially one in the Asia-Pacific region. In this regard, APTA is therefore one of the potentially most advantageous trade blocs under consideration for the three prospective countries to reap benefits by becoming members. Even though intra-apta trade was still as low as 10.7 percent in 2006, the intra-trade shares among the APTA members is nevertheless expected to be higher due to stronger performance of the world s most populous and fastestgrowing economies, namely, China and India, including South Korea, one among the world s high performance countries, and Bangladesh and Sri Lanka, other two emerging countries. Before analyzing potential gains for Malaysia, Thailand, and Vietnam, individually, from joining APTA, this section aims to analyze overall the current economic situation, trade and investment regime, the current situation of free trade agreement, and features of bilateral trading between Malaysia, Thailand, and Vietnam with APTA member countries Malaysia Malaysia s Trade and Investment Regime With the third highest GDP per capita among ASEAN economies (US$6,880 of constant price in 2007), Malaysia aims to guarantee rising living standards and economic prosperity with continued efforts to liberalize its trade and investment regime. Trade and trade-related policy instruments continue to be an important part of Malaysia's pro-active industrial development policy. Malaysia's main trade policies aim to improve market access for exports of primary commodities, manufactured products, and services; to develop and promote exports of higher value-added manufactures; to expand trade with major trading partners; to diversify trade into nontraditional markets, particularly developing countries; to strengthen trade and economic cooperation within trade agreements; and to expand bilateral trade and investment links within the Asia-Pacific region. Within this liberalized trade regime, there is no doubt why a degree of openness measured in terms of total trade volumes to GDP ratio in Malaysia was as high as 182 percent in 2006, which was the second highest ratio among ASEAN economies, after Singapore. Exports contributed to percent while imports contributed to 81.8 percent of Malaysia s GDP. During 2006, there was 12.1 percent nominal growth in its merchandise trade, which was lower than average growth of ASEAN economies during the same period (17.7 percent). The manufacturing sector accounted for nearly 85 percent of the country s export volumes. Malaysia has implemented its Uruguay Round commitments by unilaterally lowering tariffs in its annual budget exercises and participating constructively in the Doha Development Round. At the regional level, Malaysia is heading towards a single market by

8 Nevertheless, due to the failure of the WTO meeting at Cancun, Malaysia has been actively participating in a number of bilateral free trade agreements. For example, since early 2006, Malaysia has been negotiating a bilateral free trade agreement with the United States, which was continued from a bilateral agreement between both countries initiated in In addition, the Malaysian government made another significant decision in December 2005, namely, to sign a bilateral FTA with Japan (The Japan-Malaysia Economic Partnership Agreement or JMEPA). Also, since 2005, the country has started talking with Australia, New Zealand, Chile, and Pakistan regarding a possible bilateral agreement as well as preparing ground for free trade agreements with India and Korea. Under the free-trade scheme, the Malaysian government maintains that existing and planned bilateral and regional free-trade agreements are consistent with, and complement, the multilateral framework for trade negotiations. 4 The overall Malaysian trade policy aims to promote and safeguard Malaysian interests in the international trade arena, to spur the development of industrial activities, and to further enhance Malaysian economic growth towards realizing Vision To actively pursue the vision, Malaysia aims to further liberalize WTO, AFTA, and other regional arrangements. Along with trade liberalization, the Malaysian government must make a strong commitment to enhance the competitiveness of Malaysian exports and to create its value-added products. Efforts are being undertaken to increase intra-regional trade and other bilateral mechanisms. Internally, the Malaysian government is actively working and moving the country towards a knowledge-based economy. The main priority is to promote investments and encourage product development in selected and strategic economic sectors, namely, agriculture, manufacturing, and services. In terms of investment regime, foreign direct investment in Malaysia is still relatively low (US$3,964.8 million in 2005), relative to the size of the economy (US$186,960.7 million of real GDP in 2007), or about 0.21 percent. The Malaysian government encourages foreign direct investment, particularly in export-oriented manufacturing and high-tech industries. Thus, the government has allowed 100 percent foreign equity for all investments in new manufacturing projects and offered a number of incentives to foreign manufacturing investors. 5 One of the incentives is, for instance, that export-oriented manufacturers are eligible for customs duty exemption. Currently, Malaysia is among the world's leading sites for semiconductor assembly. Many multinational corporations have manufacturing operations in the country, and Malaysian companies are playing an increasing role in the industry, mainly as contract manufacturers. c 4 Nonetheless, there are some arguments that the simultaneous negotiation of a number of ASEAN-wide as well as bilateral agreements would seem to raise issues of uniformity and consistency that may need to be addressed with a view to minimizing complexity. 5 The main incentives for the manufacturing sector are identified by the Promotion of Investments Act of 1986 and the Income Tax Act of 1967, including investment tax allowance, export credit refinancing, double deduction of export credit insurance, for export promotion, and incentives for R&D activities 8

9 Table 5: Malaysia s Bilateral and Regional Trading Initiatives with Non- ASEAN Partners Partner Type Title Scope Status Japan Bilateral Regional Japan-Malaysia Economic Partnership Agreement (JMEPA) ASEAN-Japan Comprehensive Economic Partnership FTA: trade in goods, agriculture, services, and investment with flexibility for sensitive sectors; economic cooperation in several sectors Goods, services, investment liberalization by 2012; facilitation; economic and technical cooperation Negotiations started 2003 and signed in December 2005 Negotiations started in 2003, commenced in 2007; commitment to conclude by United States Bilateral Malaysia-US TIFA a possibility of FTA Trade and investment; Signed in May 2004 Australia Bilateral Regional Malaysia-Australia FTA ASEAN-Australia and NZ FTA Comprehensive Comprehensive for goods, services and investment within ten years FTA negotiations began in April 2005, to conclude mid-2006 Agreement in November 2004 to establish an FTA> Next round of negotiation was on April 2008 New Zealand Bilateral Malaysia-NZ FTA FTA: to address high tariffs, NTMs, MRAs, facilitation of investment flows in agriculture Agreement in March 2005 to conclude negotiations by end of 2005 India Bilateral Regional Malaysia-India FTA ASEAN-India CECA To enhance exports of goods and services and expand cooperation in advanced sectors (biotechnology, software development) To enhance trade volume of sensitive list items, special products, services investment and petroleum Decision in December 2004 and develop joint study report by mid-2006 Framework Agreement signed in October Recent round of negotiation was on February 2008 Korea Bilateral Regional Malaysia-Korea FTA ASEAN-Korea FTA Trade in goods and services, investment promotion, economic and technical cooperation To expand two-way trade and investment by liberalizing and integrating markets; at least 80% of goods at zero tariff by 2009 Negotiations to start after taking into account ASEAN- Korea FTA talks, which started early 2005 Negotiations commenced early Recent round of negotiation was on April 2008 China Regional ASEAN-China CECA Framework Pakistan Bilateral Malaysia-Pakistan FTA EU Regional ASEAN-EU FTA FTA on goods by 2010 for ASEAN-6; FTA for services trade and investment to be implemented within mutually agreed upon timeframes Liberalization of trade in goods, services, investment, and economic cooperation Liberalization of trade in goods, services, investment, and economic cooperation Framework agreement entered into force on 1 July 2003 Negotiations commenced in April 2005; Negotiations for trade in goods and investment to be finalized by end of 2005 Initiated in May 2007 under ASEAN-EU ministerial meeting. Recent round of negotiation was on April 2008 in Bangkok Source: Summarized by Author. Detailed information from and WTO Secretariat Analysis 9

10 Malaysia s Bilateral Trade with APTA During the period , Malaysia consistently ran trade surpluses with the world. Its export volumes increased from US$98,229 million in 2000 to US$160,669 million in 2006, or approximately 9 percent annually increase. Import volumes have increased from US$81,289 million in 2000 to US$131,127 million in 2006, an annual increase of approximately 8.9 percent. Relative stable growth of Malaysia s exports and imports during five-year periods could be used to explain the success of Malaysia s stabilized policy on trade and exchange rates. However, as far as Malaysia s bilateral and regional trading status is concerned, Malaysia is participating in bilateral agreements with two major APTA members, Korea and India, and implementing a regional agreement with China, the ASEAN- China FTA, which was planned to begin by To determine whether Malaysia will indeed benefit from being an APTA member, bilateral trade between Malaysia and each APTA participating state will be analyzed. Figure 1: Exports and Imports of Malaysia: (US$ Thousand) 180,000, ,000, ,000, ,000, ,000,000 80,000,000 60,000,000 40,000,000 20,000, Export 98,229,760 88,004,488 94,058, ,707, ,639, ,962, ,669,232 Import 81,289,536 73,078,960 78,673,784 82,443, ,156, ,583, ,127,048 Source: Comtrade Data, United Nations. 10

11 Table 6: Annual Growth of Malaysia s Exports/Imports to/from APTA, ASEAN, and the World (Percentage) APTA ASEAN World APTA ASEAN World Year Exports Imports Average Source: Author s calculation using Comtrade Data, United Nations. Even though trade volumes between Malaysia and APTA member states were still relatively low (14.6 percent) compared to the volumes traded with ASEAN countries (25.7 percent), APTA started to gain more trade with regard to its total exports during While the average growth of Malaysia s trade with ASEAN increased around 9-10 percentage points annually, trade volumes between Malaysia and APTA member countries has increased much more. Export volume from Malaysia to APTA countries has increased by 2.7 times from US$8,612 million in 2000 to US$23,527 million, or approximately 18.6 percent annually increase. Import volume has increased from US$7,648 million to US$24,321 million, or 22.2 percent annual increase. Since imports have grown more than exports from/to APTA member countries, Malaysia could not maintain a trade surplus with the APTA member countries and run a deficit in Among its APTA partners, on the export side, China takes in most of Malaysia s export volume (49.5 percent in 2006), followed by the Republic of Korea (24.7 percent in 2006), India (21.8 percent in 2006), Sri Lanka (2.3 percent in 2006), and Bangladesh (1.8 percent in 2006). Even though Malaysia s exports to all APTA member countries increased significantly in terms of their volumes, we can observe that China is the only country among APTA members in which export share from Malaysia is noticeably increasing, from 35.2 percent in 2000 to 49.5 percent in 2006 among APTA countries, while in other APTA countries export shares have remained constant or have decreased somewhat. An increase of export share to China can explain the importance of the Chinese economy to Malaysian exports, which were offset by reductions of export share to South Korea (from 38.1 percent in 2000 to 24.7 percent in 2006). Results are similar on the import side. Malaysia s import shares from China have increased from 42.4 percent in 2000 to 65.3 percent in 2006 of all imports from APTA countries, offset by reduction of import share from South Korea (from 47.9 percent in 2000 to 29 percent in 2006). China is not only the largest trading partner among APTA members, but it also has a strong influence on Malaysia s economy. In 2006, Malaysia s exports to China were about US$11,638 million, which was nearly 4 times the amount accrued from export volumes in 2000 (US$3,028 million). The volume of Malaysia s imports from China was approximately US$15,883 million, which was an increase of nearly 5 times from that in 2000 (US$3,028 million). Even though China maintains a trade surplus with Malaysia, broken down by sector (2-digit Harmonized System), there was a high degree of intra-industry trade between Malaysia and China, which focused on electrical, electronic equipment (HS-85) and nuclear reactors, boilers, machinery, 11

12 etc. (HS-84). On the import side, Malaysia imports nuclear reactors, boilers, machinery, etc. (HS-84), amounting to more than percent of industry imports. On the export side, China was a main market for animal, vegetable, and fat Oil (HS- 15) and rubber and articles thereof (HS-40) of Malaysia s exports, which made up approximately percent and percent, respectively, of industry exports. Another country which might be a potential recipient for Malaysia s exports is India. Even though trade shares with India were still lower than those with China and South Korea, Malaysia has more of a trade surplus with India. In 2006, Malaysia s exports to India were about US$5,124 million, while its imports from India amounted to only US$1,331 million. Joining APTA can possibly open opportunity to Malaysia for deeper market access to India, especially for exports of mineral fuels, oils, and distillation products (HS-27) of which export share to India is percent of industry exports. On the import side, Malaysia imports percent of ships, boats, and other floating structures (HS-89) for industry from India. Overall, traded items between Malaysia and APTA member countries are focused on mineral fuels, oils, distillation products (HS-27), electrical and electronic equipment (HS-85), nuclear reactors, boilers, and machinery (HS-84), and iron and steel (HS-72). Table 7: Malaysia s Export/Import Shares to/from APTA Member Countries: Year Bangladesh China India South Korea Sri Lanka APTA Exports ($ million) , , , , % 35.2% 22.3% 38.1% 2.6% 100.0% , , , , % 44.0% 18.1% 33.8% 2.2% 100.0% , , , , % 49.6% 16.6% 29.4% 2.2% 100.0% , , , , % 52.3% 19.5% 23.4% 2.3% 100.0% , , , , % 50.9% 18.1% 26.7% 2.1% 100.0% , , , , % 49.4% 21.0% 25.2% 2.3% 100.0% , , , , % 49.5% 21.8% 24.7% 2.3% 100.0% Imports ($ million) , , , % 42.4% 9.5% 47.9% 0.1% 100.0% , , , % 50.4% 10.2% 39.1% 0.1% 100.0% , , , % 55.7% 5.8% 38.2% 0.1% 100.0% , , , % 58.1% 5.4% 36.4% 0.0% 100.0% , , , , % 61.5% 7.3% 31.1% 0.0% 100.0% , , , , % 65.9% 5.5% 28.4% 0.1% 100.0% , , , , % 65.3% 5.5% 29.0% 0.1% 100.0% Source: Author s calculation using Comtrade Data, United Nations. 12

13 Table 8: Malaysia s Top 5 Export/Import Commodities to/from APTA Member Countries in 2006 (HS-2 Digits) Exports Imports HS Code Volume Share of Share of HS Code Volume industry export industry import (2-digit) ($ Million) (%) (2-digit) ($ Million) (%) Bangladesh , , , , , China 85 3, , , , , , India 27 2, South Korea 27 2, , , Sri Lanka Total of APTA 27 6, , , , , , , Source: Author s calculation using Comtrade Data, United Nations. Nonetheless, even though Malaysia s trade shares with Bangladesh and Sri Lanka were much lower than those with other APTA countries, there are opportunities for Malaysia to expand its market depth in these two countries by joining APTA since there are not any trade agreements as yet among these countries. In addition, Malaysia has a large trade surplus with both countries. In 2006, Malaysia s exports to Bangladesh were about US$422 million, while its imports from India were only 13

14 US$23 million. The main export items from Malaysia to Bangladesh were focused on animal, vegetable fats and oils and cleavage products (HS-15) and plastics and articles thereof (HS-39). For Sri Lanka, Malaysia s exports were about US$534 million, while its imports from India amounted to only US$22 million. The items most traded were animal, vegetable fats and oils and cleavage products (HS-15) and mineral fuels, oils, distillation products (HS-27) 2.2. Thailand Thailand s Trade and Investment Regime Having the fourth highest GDP per capita in ASEAN (US$3,740 of constant price in 2007), which is similar to that of Malaysia, Thailand has maintained its commitment to free trade liberalization. Thailand believes that regional free trade agreements can be an effective catalyst for free trade contributing to long-term economic growth. Therefore, the country s foreign policies are focused on strengthening of regional links with immediate neighbors and deepening ties through free trade agreements in the wider Asian region such as ASEAN, BIMSTEC, and further extension of ASEAN. In addition to a multilateral trading system, Thailand has concluded a network of bilateral preferential trading arrangements with several trading partners such as Australia, Bahrain, India, Japan, Peru, New Zealand, and the United States. In this regard, The FTA negotiations can be used as a means to maintain and strengthen its shares in traditional export markets such as Japan, Europe, and United States as well as to broaden and deepen its trade and investment access in potential markets, particularly China, India, Australia, and New Zealand. A free trade agreement with a far-off country, like Peru or Bahrain, is hoped to be a major step towards further trade expansion and economic cooperation with Latin America and the Middle East, respectively. There is no doubt under these open foreign policies why the country s degree of openness in terms of trade to GDP ratio was as high as percent in 2006, which significantly increased when the baht currency was devalued in Currently exports make up 58.8 percent of the Thai GDP. During 2006, there was a temporary appreciation of the baht coupled with intense competition in the world market; Thailand achieved only 10.9 percent export growth in merchandise trade, which was much lower than the average growth among ASEAN economies (15.8 percent). A lower growth of export volumes indicates that Thai exports are losing their competitiveness in the world market. Losing competitiveness in the world market has become a big challenge among trade policymakers and exporters in the new era. Since long-term growth is still an important issue, Thailand needs to rely not only on its export potential, but also on foreign capital. The foreign investment regime in Thailand is one that concentrates mainly on the provision of fiscal incentives, in particular, taxes and duties exemptions. Unlike many other Asian governments, the Thai government did not have specific industries for selective promotion. There was, however, a general indication that high-technology investment projects were a priority that would help promote the upgrading of Thai industries and, thus, would likely receive promotional incentives. Another important feature of the regime is its emphasis on most-favored nation (MFN) status and non-discrimination. All foreign investors are eligible for similar rights and subject to similar obligations under domestic laws, while local and foreign investors are eligible for the same tax and non-tax incentives offered by local investment promotion agencies such as Thailand s Board of Investment (BOI) Thailand continues to operate a liberal foreign 14

15 investment regime by encouraging investors from all areas. Foreign direct investment (FDI) inflows to Thailand increased by 20.1 percent during the , which was nonetheless lower than the growth of FDI inflows in Malaysia during the same period (52.8 percent). So far, Thailand's investment climate is favorable by international standards, although investors seem to be sometimes hindered by heavy regulatory burdens, shortages of skilled labor, and infrastructure deficiencies, especially investment areas outside Bangkok. 6 Table 9: Thailand s Bilateral and Regional Trading Initiatives with Non-ASEAN Partners Partner Type Title Scope Status Japan Bilateral Regional Japan-Thailand Economic Partnership Agreement (JTEPA) ASEAN-Japan Comprehensive Economic Partnership FTA: trade in goods, agriculture, services, and investment, and NTBs for sensitive sectors Goods, services, investment liberalization by 2012; facilitation; economic and technical cooperation Negotiations started 2002; agreement in principle in May 2005; signed in November 2007 Negotiations started in 2003, commenced in 2007; commitment to conclude by United States Australia New Zealand India Bilateral Bilateral Regional Bilateral Bilateral Regional Malaysia-US FTA Thailand-Australia FTA ASEAN-Australia and NZ FTA Thailand-NZ Close Economic Partnership Thailand-India FTA ASEAN-India CECA Korea Regional ASEAN-Korea FTA FTA: trade in goods, agriculture, services, and investment, IPRs, and NTBs FTA: trade in goods, agriculture, services, and investment, and Rule of Origin Comprehensive for goods, services and investment within ten years FTA: trade in goods, agriculture, services, and investment, and Rule of Origin To enhance exports of goods on early harvest scheme of 82 items, services, and cooperation in service sector (tourism, construction, healthcare, ICT) To enhance trade volume of sensitive list, special products, services investment and Petroleum To expand two-way trade and investment by liberalizing and integrating markets; at least 80% of goods at zero tariff by 2009 Agreed to sign Trade and Investment Framework Agreement between the US and Thailand (TIFA) in 2002, started for negotiation in Now US asked to suspend the negotiation due to political development in Thailand in FTA negotiations began in May 2002 and signed in November 2005 Agreement in November 2004 to establish an FTA. Recent round of negotiation was on April 2008 Started negotiation in May 2004 and singed in May 2006 Initiated in October 2003, signed in September 2004 on 82 sensitive items, expanded to 3,000 items in September Now India requested to suspend further negotiation and wait until the ASEAN- India FTA concludes. Framework Agreement signed in October Recent round of negotiation was on February 2008 Negotiations commenced early Recent round of negotiation was on April 2008 c 6 FDI inflows to Thailand, in growth terms and volume terms, were claimed to have decreased further due to constitutional and legislative changes under political developments in

16 China Regional ASEAN-China CECA Framework EU Regional ASEAN-EU FTA Bahrain Bilateral Thailand-Bahrain FTA Peru Bilateral Thailand-Peru Closer Economic Partnership EFTA Bilateral Thailand-EFTA FTA BIMSTEC Regional The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation FTA on goods by 2010 for ASEAN-6; FTA for services trade and investment to be implemented within mutually agreed timeframes. Early harvest of HS digit was implemented prior 3 months for Thailand under the ASEAN-China framework Liberalization of trade in goods, services, investment, and economic cooperation Early harvest program of 626 products was adopted in Liberalization of trade in goods, services, investment, and economic cooperation by 2015 Comprehensive liberalization of trade in goods, services, investment, and economic cooperation Comprehensive liberalization of trade in goods, services, investment, and economic cooperation Framework agreement entered into force on 1 July Recent round of negotiation was on February 2008 Initiated in May 2007 under ASEAN-EU ministerial meeting. Recent round of negotiation was on April 2008 in Bangkok Initiated and signed in However, since the Golf Corporation Council (GCC) do not allow Bahrain to sign bilateral agreement. The agreement between Thailand and Bahrain was suspended while Thailand-GCC FTA was proposed instead. Initiated in the APEC meeting in 2002, the joint study report is under developed, especially for rule of origin and tariff reduction of the sensitive products. Initiated in March 2004 when the SWISS Prime Ministry visited Thailand. The second of negotiation was on January 2006 in Chiang Mai, Thailand. Initiated in March 2003 under BIMSTEC meeting in Sri Lanka and signed in 2004 in Phuket, Thailand. Recent round of negotiation was on April 2008 in Myanmar. Source: Summarized by Author. Detailed information from Thailand s Bilateral Trade with APTA Thailand s trade volumes increased substantially over the period of Export volumes increased from US$68,786 million in 2000 to US$130,580 million in 2006, or approximately 11.7 percent annual increase. Import volumes increased from US$61,450 million in 2000 to US$128,584 million in 2006, or approximately 13.5 percent annual increase. Thailand s potential markets are composed of ASEAN members. The country s exports to ASEAN increased dramatically from 12 percent of total export volumes in 1990 to 21 percent in An increase in Thailand s export share to ASEAN is offset by the reduction of its export share to other major export markets such as European Union countries, Japan, and the United States, which dropped from 23 percent, 17 percent, and 23 percent, respectively, in 1990 to 15 percent, 14 percent, and 17 percent, respectively, at present. Other important export markets include China (7 percent in 2003), Hong Kong (5 percent), Taiwan (3 percent) and South Korea (2 percent). On the import side, Thailand s imports from ASEAN member countries also increased from 13 percent in 1990 to 17 percent in 2003 and 19.5 percent in 2006, offsetting the reduction in import shares from major countries such as European 16

17 Union countries, Japan, and the United States. At present, Thailand s import shares from European Union countries, Japan, and the United States have decreased from 16 percent, 30 percent, and 11 percent, respectively, in 1990 to 10 percent, 24 percent, and 9 percent, respectively. Other major import markets are China (8 percent in 2003), Taiwan (4 percent), South Korea (4 percent), and the United Arab Emirates (3 percent). Thailand s bilateral and regional trading status with APTA member countries started from its signing of a multilateral agreement with China under the ASEAN-China framework and bilaterally initiated an early harvest program covering HS-07 and HS- 08. In addition, the country has already implemented a bilateral free trade agreement with India. To avoid conflicts and complicated management under different agreements, including APTA, the new potential trade bloc, patterns of bilateral trade between Thailand and each APTA participating state should be reviewed to ensure that that Thailand will actually benefit once it decides to join. Similar to Malaysia, even though trade volumes between Thailand and APTA member states were still relatively low (around 13 percent of Thailand s exports and 15.8 percent of Thailand s imports), trade shares between Thailand and APTA were increasing overtime. Even though average growth of Thailand s trade volumes with ASEAN increased around 14.7 percent for exports and 17.1 percent for imports, trade growth between Thailand and APTA countries was found to increase much more. Exports from Thailand to APTA increased around 3.4 times over six years, from US$5,038 million in 2000 to US$17,006 million in 2006, or approximately 23.3 percent annual increase. Imports from APTA to Thailand increased from US$6,267 million in 2000 to US$20,390 million in 2006, or about 22 percent annual increase. Since imports have grown more than exports from/to APTA members, Thailand faced a trade deficit with APTA countries. Figure 2: Exports and Imports of Thailand: (US$ Thousand) 140,000, ,000, ,000,000 80,000,000 60,000,000 40,000,000 20,000, Export 68,786,608 65,113,240 68,107,864 80,323,272 96,247, ,110, ,580,048 Import 61,450,576 62,057,448 64,645,216 75,824,144 94,402, ,164, ,584,480 Source: Comtrade Data, United Nations. However, among its APTA partners, on the export side, China gained the most market share from Thailand s exports (69.2 percent in 2006), followed by Korea 17

18 Republic (15.6 percent in 2006), India (10.6 percent in 2006), Bangladesh (2.7 percent in 2006), and Sri Lanka (1.7 percent in 2006). Similar to Malaysia, even though Thailand s exports to APTA increased significantly in terms of aggregate volumes, rising exports came mainly from China, offset by falling export shares to other APTA members, especially to the Republic of Korea. Thailand s export shares to China increased from 55.9 percent in 2000 to 69.2 percent in 2006, while export shares to Korea decreased dramatically from 25.2 percent in 2000 to 15.6 percent in For imports, shares of imports from China also increased from 53.8 percent in 2000 to 66.8 percent in An increase of export/import shares from China implies an important influence of the Chinese economy on the Thai economy in terms of trade linkages. For other APTA countries, namely, India, Bangladesh, and Sri Lanka, trade shares between Thailand and India were relatively constant over the period, while trade shares between Thailand-Bangladesh and Thailand-Sri Lanka shrunk. It is clear that, among APTA members, China is potentially the largest market for Thai exporters. In addition, breaking down exports/imports to the sectoral level shows a high degree of intra-industry trade between both countries on electrical, electronic equipment (HS-85) and nuclear reactors, boilers, machinery, etc (HS-84). China is also a major market for Thailand s organic chemicals (HS-29), which amounted to as much as percent of total industry exports. Since data show bilateral trade between Thailand and China is tending to concentrate on manufactured products, rather than agricultural products, joining APTA can potentially benefit both countries beyond the formal agreement of the Early Harvest Program (HS-07 and HS-08). Another potential country for Thai exports is South Korea, which sends about 15.6 percent of its total exports to APTA. Even though export volumes from Thailand to South Korea increased about 2.1 times from US$1,270 million in 2000 to US$2,661 million in 2006, Korea still plays an important role in terms of Thailand s imports. Korea shares around 25 percent of Thailand s imports from APTA. Thailand s import volumes from Korea increased about 2.4 times from US$2,164 million in 2000 to US$5,088 million in Similar to bilateral trade between Thailand and China, there was also a high level of intra-industry trade between the two countries in electrical, electronic equipment (HS-85) and nuclear reactors, boilers, machinery, etc (HS-84). In addition, iron and steel (HS-72) were also important import items from Korea, which amounted to around 9.81 percent of total industry imports. Even though bilateral trade between Thailand and Bangladesh/Sri Lanka was still somewhat lower than trade volumes with China, India, and the Republic of Korea, Thailand continually gained a trade surplus with both countries. In addition, a sectorby-sector breakdown indicates differences in market demands compared to those of China and Korea. For example, exports from Thailand to Bangladesh and Thailand to Sri Lanka consisted largely of salt, sulphur, earth, stone, plaster, lime, and cement (HS-25), plastics and articles thereof (HS-39), manmade staple fibres (HS-55), and sugars and sugar confectionery (HS-17), which were found to be different from what China and the republic of Korea imported from Thailand, for the most part. 18

19 Table 10: Annual Growth of Thailand s Exports/Imports to/from APTA, ASEAN, and the World (Percentage) Year APTA ASEAN World APTA ASEAN World Exports Imports Average Source: Author s calculation using Comtrade Data, United Nations. Table 11: Thailand s Export/Import Shares to/from APTA Members: Year Bangladesh China India South Korea Sri Lanka APTA Exports ($ million) , , , % 55.9% 11.1% 25.2% 3.5% 100.0% , , , % 57.9% 9.7% 24.8% 2.8% 100.0% , , , % 61.8% 7.2% 24.3% 2.6% 100.0% , , , % 68.2% 7.7% 19.0% 1.9% 100.0% , , , % 68.1% 8.8% 17.8% 1.8% 100.0% , , , , % 67.7% 11.3% 16.7% 1.4% 100.0% , , , , % 69.2% 10.6% 15.6% 1.7% 100.0% Import ($ million) , , , % 53.8% 9.9% 34.5% 1.2% 100.0% , , , % 56.5% 10.2% 32.3% 0.6% 100.0% , , , % 59.7% 9.4% 30.6% 0.1% 100.0% , , , % 61.3% 8.9% 29.4% 0.1% 100.0% , , , , % 63.3% 8.8% 27.7% 0.1% 100.0% , , , , % 68.3% 7.8% 23.7% 0.1% 100.0% , , , , % 66.8% 8.0% 25.0% 0.1% 100.0% Source: Author s calculation using Comtrade Data, United Nations. 19

20 Table 12: Thailand s Top 5 Export/Import Commodities to/from APTA Member Countries in 2006 (HS-2 Digits) HS Code (2-digit) Volume (US$ Million) Exports Share of industry exports HS Code (%) (2-digit) Volume (US$ Million) Imports Share of industry imports Bangladesh China 84 2, , , , , , , India South Korea , Sri Lanka Total of APTA 84 3, , , , , , , , (%) Source: Author s calculation using Comtrade Data, United Nations Vietnam Vietnam s Trade and Investment Regime Over the years, Vietnam's economy has been in transition from a centrally planned economy based on agriculture to a socialist market economy. Nowadays, the country is among five remaining one-party communist states. Under communist rule, 20