Foreign Exchange: Thailand Weighs the Pros and Cons of Several Big Trade Deals
Despite strong displays of interest across multiple governments, Thailand has remained cautious in committing to the major pan- regional trade blocs being mooted by global economic superpowers. The nation’s trajectory could, however, be solidified in the short- term as Prime Minister Prayuth Chan- ocha at a Washington, D. C. event in March 2016 declared it an eventuality that Thailand would join the Trans- Pacific Partnership ( TPP), which will stand as the world’s largest free trade agreement ( FTA) should it be ratified, bolstering Pacific Rim trade by billions, if not trillions, of dollars.
The TPP can benefit Thailand in many ways and is expected to positively impact growth in major export- oriented industries as well as service sectors, while also boosting the competitiveness of local corporates and providing the impetus for important regulatory reforms. At the same time, barriers to Thai interest in joining the TPP include stringent patent and copyright stipulations which may have cost- based impacts for the nation in sectors such as healthcare.
Although doubts remain as to whether the agreement will be ratified, particularly given the current political climate in its largest member, the U. S., Thailand’s progress in readying itself for TPP membership would benefit economic growth regardless of whether the agreement is ratified.
At the same time, ongoing negotiations with China to join the Regional Comprehensive Economic Partnership ( RCEP), a proposed FTA between ASEAN, China, India, Japan, Australia, South Korea and New Zealand, offer an alternate, complementary growth path.
HISTORIC TRADE DEAL
Thailand is not the only major Pacific Rim economy which has announced interest but has, as of yet, refrained from committing to the TPP, with others who have been involved in the dialogue but have yet to sign on including Colombia, Indonesia, the Philippines, Taiwan and South Korea. The TPP’S 12 current members are Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the U. S. and Vietnam, which together account for 40% of the world economy – USD 295 billion of global income – and could benefit from USD 1.9 trillion in trade gains when the agreement is finalized. TPP members met in Auckland in February 2016 to officially sign the agreement. Each member must now ratify the treaty nationally, and although this could pose a problem for the U. S., Japan and Australia, it is widely expected that a final agreement will come into effect in 2018.
TPP membership offers a host of potential benefits for its participants, the most obvious of which is the reduction or elimination of an estimated 18,000 tariff and non- tariff barriers. Export- oriented sectors such as automotive manufacturing, electronic components and textiles would readily stand to benefit. Fair trade practices are also encapsulated in the TPP, as well as regulations calling for small and medium- sized enterprise ( SME) support systems – a significant consideration for Thailand, where the Asian Development Bank reports that as of 2015, SMES accounted for 77.9% of total employment, 38.7% of GDP and 29.5% of total exports. Additionally, the TPP is expected to increase and improve cooperation between various production and supply chain entities, helping commodity producers and farmers connect with traders and manufacturers, while also reducing poverty via mechanisms for small- scale producers.
Joining an expansive FTA also supports Thailand’s bid to seize new opportunities in international markets. It would be a significant step forward following years of shelved negotiations on an EU-Thailand Free Trade Agreement ( FTA) despite strong interest from the private sector and similar such deals being recently struck by regional neighbors Singapore and Vietnam. Prime Minister Prayuth Chan- ocha as well as his economic team have made the enhancement of free trade and international cooperation key points of focus as the nation’s economic growth remains modest and regional competition increases.
FEAR OF MISSING OUT
Thailand could also risk losing out if it does not join the deal, given that one of its fastest- rising regional competitors, Vietnam, is a member, as well as Malaysia, Brunei Darussalam and Singapore. A 2013 report by the Asian Development Bank found that non- signatory ASEAN countries would suffer greater losses in the event of TPP expansion if they were non- members under a TPP12 scenario – whereby all 12 original signatories ratify the agreement domestically. This would mean that these nations are likely to insist on strengthening the centrality of the ASEAN Economic Community and the RCEP as major policy options.
Competition and productivity could also drop off should Thailand choose not to
sign, as the nation’s regional competitiveness has already been lagging lately, sliding one spot to 32nd of 140 economies on the World Economic Forum’s 2015/ 16 Global Competitiveness Index, well ahead of most ASEAN neighbors but remaining behind Korea ( 26th), Malaysia ( 18th) and Singapore ( 2nd).
The TPP is considerably far- reaching, establishing regulations for intellectual property rights, food safety, state- owned enterprise sector reform, environmental protection and financial regulations, as well as trade. While Thailand relatively outperforms the region in some of these areas, it has not yet developed a comprehensive regulatory framework for others, most notably including intellectual property rights, and reforms will be needed to ensure TPP compliance.
However, the country’s purchasing power is also not as strong as many developed TPP members, meaning greater involvement in international trade would be advantageous, particularly given China’s ongoing economic slowdown. Room for interpretation also exists in terms of the pros and cons of opening the nation to increased competition, and given the backdrop of Thailand’s GDP growth being measured at an unexceptional 2.8% in 2015, FTAS can be viewed as a means of encouraging efficiency and innovation, while also opening up opportunities to prepare the country for future international competition.
As it stands, there are two ways in which the TPP can come into force: either the deal is ratified two months after each nation completes its own ratification process, or a minimum of six countries, which represent at least 85% of the total GDP of the original 12 nations, ratify the deal within two years. According to a February 2016 article in The Diplomat, this means the agreement’s success will hinge on domestic ratification in the U. S. and Japan, which together represent just under 80% of the GDP of all signatories. This will prove to be one of the biggest challenge to TPP ratification, as even if the U. S. and all other signatories apart from Japan sign, they will still fall short of the 85% requirement by 2%.
Furthermore, the U. S. is currently in the midst of an election year and is unlikely to move forward on the TPP until at least 2017. Both of the country’s presidential hopefuls have publicly opposed the TPP, at least in its current form, putting the future of the deal in serious doubt.