TAX AND LEGAL

Thailand reboots FTA negotiations with trading partners

Tanva Mahitivanichcha Tanva Mahitivanichcha

Now that the political climate in Thailand has stabilised, the government is looking to speed up its Free Trade Agreement (FTA) negotiations with key trading partners. Plans include resuming negotiations with the EU and UK post Brexit, as well as talks to join major multilateral FTAs. To be successful in these negotiations, Thailand needs to keep in mind the consequences that non-tariff barriers will have on improving trade as a whole.

 

Free Trade Agreement negotiations

EU and the UK

Having been in limbo since the 2014 military coup, trade negotiations with the EU finally began again in 2019. Announced at a senior ministry meeting earlier this year, the current reboot comes at a good time.  With a slowdown in the global economy and uncertainties due to the ongoing US-China trade war, Thailand must seek new channels for economic growth.  The EU accounts for 9.1% of Thailand’s total trade, and represents the country’s third largest trading partner.  The EU is also Thailand’s second largest investor after Japan.  Yet, Thailand does not have a comprehensive free trade agreement with the EU.

Additionally, neighbouring country Vietnam has already reached an agreement with the EU, which will come into effect later this year.  Other ASEAN countries such as Malaysia and Indonesia have on-going free trade negotiations with the EU. For Thailand to keep pace with its own stated goals, as well as with regional economic development, a successful free trade arrangement with the EU may be crucial.

From the perspective of Pimchanok Vonkorpon, Director-General of the Trade Policy and Strategy Office, Vietnam’s agreement with the EU is the most comprehensive and ambitious one ever signed between the EU and a developing country. That agreement gives Vietnam a trade advantage and is therefore detrimental for Thai exports, especially in terms of electronic circuits and automotive products.

Open negotiations are a necessary step forward, according to Aat Pisanwanich, Director of the University of the Thai Chamber of Commerce’s Centre for International Trade Studies (CITS). He warned that trade with the EU will continue to deteriorate in the second half of 2019 if an agreement is not reached.

At the same senior ministry meeting, Commerce Minister Jurin Laksanawisit also pledged to speed up FTA talks with the UK. With Brexit on the way, long-term impacts are inevitable, and bilateral trade talks with both the EU and the UK are needed.

 

Regional Comprehensive Economic Partnership (RCEP)

With negotiations originally launched in 2012, the RCEP was conceived for the purpose of enhancing economic cooperation between ASEAN nations, China, India, South Korea, Japan, New Zealand, and Australia. Yet s due to its size and ambition, progress on the agreement has been slow, and negotiations have been going on ever since. If agreed upon and put into effect, the RCEP will be the largest trade agreement in the world, with the economies involved accounting for one-third of the world’s GDP.

Deputy Prime Minister Somkid Jatusripitak said that, once signed, each of the participating countries will have to ensure their domestic laws are aligned with the agreement. This part of the process alone would take 18 to 24 months.

According to Thailand’s Commerce Minister, the current aim is to complete negotiations of the RCEP by the end of 2019, so that the pact can be signed by the middle of 2020.

 

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)

Meanwhile, Thailand is considering joining another multilateral trade agreement: the CPTPP. The CPTPP covers the third-largest free trade area in the world, spanning the Pacific Ocean – and unlike the RCEP, is already active, having entered into force at the end of 2018.

As elsewhere, external factors will play a major role in Thailand’s decision. Currently many neighbouring countries – like South Korea and Indonesia– are also considering joining the agreement. If both join, every country on the Asian side of the Asia Pacific rim – barring China – would be a member, creating a very compelling case for Thailand to join as well.

Additionally, with other ASEAN members already signatories, Thailand would want to gain the same access to the Canadian and Mexican markets provided by the agreement.

US businesses have urged Thailand to join, as membership could bring in large investments from US businesses – many of which are keen to support the country’s digital economy and the Thailand 4.0 programme.

However, not everyone is keen on Thailand joining the CPTPP. Civil society groups argue that joining the agreement will increase the cost of medicine, while also strengthening the domination of large multinational corporations in the agro industries.  Moreover, the tax exemption offered by the agreement will greatly benefit US tech giants, helping them grow even larger.

 

Challenges

Non-tariff barriers

Tariffs are typically used to curb the exports of foreign goods, in order to increase consumption of domestic goods. The ongoing US-China trade war is now the exception rather than the rule, as countries generally no longer use tariffs excessively. Taking their place, however, are non-tariff barriers – which are becoming obstacles to free trade in the modern economy.

Non-tariff barriers are often enacted for good and reasonable purposes such as the need to ensure consumer safety. Yet they increasingly have the effect of turning into barriers that, by accident or design, prevent foreign goods from entering the domestic market at competitive prices.

These barriers are often disguised as regulatory compliance requirements, such as product standards and permits. They may include certifications, labels and tests, as well as factory inspections and ingredient disclosures. Frequently, with procedures that places foreign exporters at a disadvantage. Complying with any or all of these requirements may be expensive and time consuming, effectively functioning as obstacles to free trade. While FTAs have been successful at reducing tariff restrictions surrounding trade, reducing non-tariff barriers remains a challenge.

 

Digital economy

Another challenge for FTA negotiations relates to the digital economy. More and more governments – including Thailand’s – are looking for ways to regulate the digital economy through various regulations and taxes. For example, in a previous article we discussed Thailand’s plan to tax foreign digital products and services. Due to this shift towards stricter regulations, FTAs will need to strike the right balance between insisting on regulatory compliance and providing a free market.

Thailand resuming negotiations on FTAs is a step in the right direction for its current economy as well as its Thailand 4.0 initiative. With other countries in the region having already signed agreements with major trading partners, Thailand is already in danger of falling behind, and the timing is right to open the door to new opportunities.

But not all deals are created equal, and as the negotiations take place, the country has to keep in mind the economic challenges of today and tomorrow. A mature and well-considered approach will be needed if Thailand is to gain the greatest benefit out of this new group of FTAs.