Asia Trade column, Indo-Pacific, Latest news, Thailand

ASIA TRADE: What drives Thailand’s quest for EU trade deal

The European Union and Thailand announced the resumption of bilateral free trade agreement talks. So, what shapes this decision?

Launched with fanfare in 2013, EU Thailand free trade agreement negotiations were intended to help Thailand mitigate the impact of losing Generalised System of Preferences benefits to the EU in 2015.

But following a military coup in 2014, negotiations were suspended.  Over the years of the suspension, the prospect of relaunching talks waxed and waned.  The two sides crafted a joint understanding document to guide bilateral discussions in 2021 after a Thai election resulted in a pro-military government.

It was not until this month, however, that the two parties opted to pursue a formal launch of talks.

Challenges of automotive supply chain

Thailand was an early example in Southeast Asia of how to power economic growth through the deep integration of regional supply chains.

The automotive and automotive parts industries, led by early Japanese investments, have long dominated Thailand’s economy.  By 2018, when trade peaked, the sector accounted for 12 percent of the country’s economic growth, with more than half a million direct jobs.

In 1990, World Bank figures show Thailand exported about US $45 billion in goods and services – at constant 2015 US$.  By 2000, the figure had exploded to US$ 145 billion and increased again to US$ 229 billion a decade later.

The momentum continued, albeit at a slower rate, peaking in 2018 at US$ 303 billion.  The decline in trade flows pre-dated the impact of Covid-19, which has had a strongly negative impact on the Thai economy.

Today, Thailand’s global trade exports are dominated by machinery and electronics, which accounted for 31 percent of total goods exports, followed by plastic and rubber and transportation at nearly 12 percent each.  These export figures show the continuing importance of the auto and auto parts sectors.

Despite an early lead in manufacturing and production, Thailand has faced a range of challenges.

A substantial flood in 2011 inundated auto and auto parts production facilities, resulting in significant supply chain disruptions.  Flooding also hit the sector about a decade later.  Foreign manufacturers recognised the risks of being vulnerable to supply disruptions caused by weather conditions and took steps to adjust production to compensate.

The Thai political situation has long been unstable.  Under the seven-decade reign of King Bhumibol Adulyadej, the country experienced at least 10 coups and 17 different constitutions.  Most of these, however, resulted in fairly limited impact on economics and trade flows.

But in the period leading up to the 2014 coup and direct takeover by the military, the situation changed.  Large-scale public protests paralysed parts of the country for prolonged periods.

Thai elections in 2019 returned a government dominated by pro-military parties and candidates.  While it appears discontent with the government has continued, the culture of public protest diminished.

Legacy of volatile politics

Foreign investment figures show wild swings in investor activities.  For example, in 2009, World Bank data shows nearly US $15 billion in inbound foreign direct investment, followed by a collapse to just US $ 2.5 billion the following year.

The volatility in politics and investment accelerated the dispersion of supply chains across the region.  Thailand was a founding member of the Association of Southeast Asian Nations and decades of greater integration meant that other locations across the region also enjoyed preferential access to member markets.

ASEAN’s web of free trade agreements, including with key partners in Northeast Asia, made it easier than ever for other members of ASEAN to become part of supply chains.

Given the outsized political importance attached to the automotive sector, various ASEAN members have made attracting and developing domestic auto and auto parts production a priority.  Even Cambodia worked hard to build up automotive production factories and encourage the development of parts manufacturers.

Hence, while Thailand had an early advantage in this sector, domestic political conditions and changing economic opportunities in the region have eroded Thailand’s leading position for autos and auto parts.

Thailand seeks new post-pandemic trade policy course

This changing landscape, coupled with a need to continue to diversify its economy, helped push Thailand to think harder about new trade policies.  Thailand chaired ASEAN in 2019 and the key deliverable for the year was the conclusion and signature of the Regional Comprehensive Economic Partnership – known as RCEP – in Bangkok.

RCEP brings together Thailand, the remaining 9 members of ASEAN, Australia, China, Japan, New Zealand, and South Korea.  The agreement came into force for most members in January 2022 and is now in place for all 15 participants.  Thailand has been working to educate the business community on potential benefits to be obtained from this Asian mega-regional trade deal.

Thailand has also been flirting with the idea of joining the Comprehensive and Progressive Trans-Pacific Partnership talks.

Thailand has considered membership at several points across the long negotiation phase of the original agreement and again once the CPTPP agreed to start talks on membership for the United Kingdom.  At this point, however, domestic enthusiasm for joining appears to be limited.

In the meantime, the Thai government has opted to push a diversification agenda by relaunching talks with the European Union.

These talks will be challenging, particularly around the EU’s trade and sustainable development agenda.

The EU has agreements in place with ASEAN members Singapore and Vietnam.

Negotiations with Indonesia have been ongoing at a slow pace since 2016, with 13 rounds completed.

Other suspended ASEAN talks with Malaysia and Philippines may be restarted shortly as the EU works to complete a set of bilateral agreements before returning to a possible bloc-to-bloc negotiation at some point in the future.

The decision to start negotiations with Thailand could be reinforced or upended by elections in Bangkok.

The Thai Prime Minister just dissolved the Parliament in preparation for voting, likely to take place in early May 2023.  The composition of the new government is, of course, unknown at this point and members may or may not be keen to tackle trade in new ways, including through talks with the EU.

Thailand, like many other trade-dependent economies, has been badly impacted by disruptions caused by the Covid-19 pandemic and associated lockdowns.

For Thailand, the damage hit an economy already under strain.  Regardless of election results, it is important that the incoming government work harder to maintain key trade and investment opportunities to build future growth momentum.

 

Deborah Elms is founder and executive director of the Asian Trade Centre in Singapore.

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