The Asia-Pacific Economic Co-operation summit held in Bangkok last October was a major opportunity to place Thailand’s rapidly expanding industrial sector on the global map – a chance the Thai government successfully grasped with both hands. Even during the months leading up to the summit Thailand had been in discussions with a number of potential trade partners for the establishment of bilateral free trade agreements (FTAs) – which it sees as key for the next phase of its economic development. At the summit, it announced that FTAs had been either established, agreed in principle or in the process of negotiation with no fewer than eight countries. Tony Pugliese reports.
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Although the FTAs that are being negotiated are very selective in their coverage, the Thai government has overlooked few chances to promote automotive trade – and Thai automotive exports in particular. The Federation of Thai Industries (FTI) expects that with the resulting improved access to foreign automotive markets, combined with rising domestic demand, Thailand is on course to expand vehicle production to around 1.5 million units per year. It this quest it has the full support of Japanese, European and US vehicle companies alike. Exports are expected to rise to close to 300,000 units next year – even without the help of FTA agreements, and exports are expected to continue to grow from that level.
Post-Asian financial crisis, Thailand attracts most FDI
Since the 1997-98 Asian financial crisis, Thailand has claimed the lion’s share of automotive sector foreign direct investment (FDI) that was headed for the ASEAN trade block. The government has worked hard to promote the country’s image as a stable and progressive environment conducive to the establishment of regionally and globally-focused industries. It has also benefited from political and social instability in competing countries such as Indonesia and the Philippines, and from isolationist trade policy in Malaysia.
Despite having one of the most heavily protected domestic markets among ASEAN’s founding member countries, Thailand has the only really internationally focused automotive industry in the trade block. It has established itself as the backbone of the ASEAN automotive industry, and the main global source of one-ton pickup trucks and is now looking primarily beyond South-east Asia for further automotive industry growth.
In the near term, its yet-to-be-finalised bilateral FTA with Australia appears to offer Thailand the biggest potential to increase vehicle exports, followed potentially by the US – depending on the outcome of negotiations, and Japan. Thailand has a limited FTA already in place with China, which it is cautiously looking to expand, and is in negotiations on a more limited scale with India, Peru, Bahrain and Chile.
While Thailand’s South-east Asian neighbours continue debate the merits and drawbacks of being in the ASEAN Free Trade Area (AFTA), Thailand is fast moving way beyond the reach of its neighbours in the competitiveness stakes. The other major ASEAN countries have hardly considered the prospects of establishing FTAs to improve their prospects for economic development and many have done little to establish an ongoing dialogue with global companies in order to attract export-oriented FDI. Indonesia in particular was singled out by Japanese officials as “not seriously handling the FTA issue”. It remains to be seen whether this will become a source of trade friction between Thailand and other ASEAN member states further in the future.
Thailand-Australia
At the APEC summit in October 2003, the Thai government announced it is negotiating a bilateral free trade agreement with Australia, which it expects to sign in spring 2004 and begin implementation throughout the remainder of the year. A two-year adjustment period will be allowed for the most sensitive industries, but sources close to the negotiations expect the agreement to be fully implemented in the second half of 2004. The draft agreement in its current form, which may be subject to further revisions, covers up to 90 items. The food sector accounts for about 30% of the items, including fresh and processed produce, dairy products, seafood, livestock and meat products. The Thai government expects overall trade between the two countries will increase by up to 15% as an immediate consequence of the agreement.
Manufacturing, and the automotive sector in particular, is a key part of this agreement. Australia is Thailand’s largest export market for vehicles, accounting for close to half of the 170,000 vehicles expected to have been exported in 2003. Most of these, around 70,000 units, are pickups made by Mitsubishi, Toyota, Ford and Isuzu. Thailand is already on course to develop global scale economies in the pick-up truck business, and this agreement is expected to increase demand and boost economies of scale for Thai-made compact passenger cars. With a vehicle market approaching one million units a year, Australia would be a significant addition to the markets to which Thailand has free access.
The agreement in its current form makes provision for free trade of passenger cars under 1600cc and over 3000cc between the two countries, as well as pickup trucks, heavy trucks and components. The main stipulation is that they have a local content of at least 40%. Australia is expected to drop its 5-15% import tariffs immediately and Thailand its 80% import tariffs on large Australian-made cars.
Demand for large Australian cars in Thailand is not expected to be significant, especially given that Mercedes-Benz, BMW and Volvo are currently building regional-scale production plants in the country. Car companies in Australia have also struggled to achieve adequate economies of scale, but Thailand is unlikely to make a great difference. A total of 360,000 passenger cars were produced in Australia last year, split between four models – from Mitsubishi, Toyota, Holden and Ford. Holden, a unit of General Motors, made around 146,000 of those cars.
Mitsubishi nevertheless has already begun marketing its Australian-made Diamante model in the country – at the Bangkok motor show last November. It follows the launch earlier this year of the 3800cc Holden Lumina. Industry insiders expect there will be additional opportunities for exports of Australian-made components and heavy trucks to Thailand.
Honda recently began exporting the Accord to Australia from Thailand. Bringing down trade barriers further is expected to result in other companies adjusting their production strategies in favour of Thailand exports. General Motors in particular has long indicated its wants to replace Europe with Asia as its main source of passenger cars for export to Australia. In 2003, GM Thailand expects to export 20,000 pickup trucks and 15,000 Zafira MPVs to Australia. Toyota and Honda in particular are expected to adjust their respective regional production strategies, allowing Thailand to replace Japan as the source of compact cars for sale in Australia.
Thailand-USA
Increasing trade with the US is key if Thailand is to achieve is ambitious export targets over the near and medium term. It recently began negotiations with the US government to improve access for its main export items, which are automotive products – including pick-up trucks and components, agricultural products and electrical goods. The USA typically not keen on developing the selective free trade programmes that Thailand seems to favours, preferring instead all-encompassing deals. High on the US’s agenda is the inclusion of genetically modified crops and produce, something Thailand and most of the rest of the world are reluctant to embrace.
Nevertheless, a deal is expected to be successfully negotiated sometime in 2004, if only as a preliminary precursor to a more comprehensive free trade programme between the two countries. Implementation of a FTA could potentially come as early as the end of 2004, or in early 2005.
In the automotive sector, the US currently imposes tariffs of 25% on pickup trucks, which Thailand sees as the main reason for its trade deficit with the US in vehicle trade. In component exports, it is Thailand that has the trade surplus. Thailand also views these trade restrictions as the main reason for its flagging export performance in the US, with countries such as Mexico and increasingly China gaining market share.
Thailand-China
Thailand plans to tread very cautiously when it comes to liberalising trade with China, which is understandable given China’s unlimited supply of low-cost labour and its potential to develop huge economies of scale internally. Despite this, the two countries were quick to establish a FTA that has been in place since October 2003. This allows for the duty-free trade of fresh produce between the two countries, and fresh fruit imports from China since have risen sharply since October. A broader agreement is unlikely to be put in place until much further in the future, but the infrastructure in now in place for additional deals to be made in the future.
Tentatively, FTI officials talk about possibilities in liberalising automotive sector trade in selected areas, such as pick-up trucks and also for compact and sub-compact cars. Nothing appears to be on the table at this stage, however. The Thai government recognises that China has some very strong car manufacturing companies and that at best it would have to be extremely selective in its choice of automotive products. But Thailand is hoping that by developing better trade ties with China, it may attract some of the huge amounts of FDI currently heading for China. It hopes that global manufacturers will wish to diversify their production networks and choose Thailand as an alternative supply base for the Chinese market. It is clear that any deal would have to involve global manufacturers in the early stages of negotiations.
Thailand-India
Thailand and India are currently locked in negotiations for the establishment of a bilateral Free Trade Agreement – for selected items. A total of 84 products have so far been identified for inclusion in an “early harvest” scheme – which the two countries (particularly India) hope will lead to a broader free trade programme. Currently, India accounts for around 3% of Thai exports.
India is keen to develop free trade in the area of automotive components, and is said to be particularly interested in developing alternative sources of gearbox/transmission parts. Thailand is less keen to import Indian automobile parts, and has yet to identify Indian automobile products other than raw materials such as steel that it would like to import. At the top of Thailand’s list of desirable imports from India are diamonds, for use in industrial precision machinery.
