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TRADE POLICY REVIEWS: FIRST PRESS RELEASE, SECRETARIAT AND GOVERNMENT SUMMARIES

Thailand: December 1999

Thailand appears to be recovering strongly from the past two years of economic turmoil, but any temptation to delay reforms should be resisted, says a WTO report. In the first Trade Policy Review of Thailand since the 1997 financial crash, the WTO says the Thai economy has benefited from major reforms which have led to greater transparency, stronger governance and better prudential supervision, both in the private sector and in government.

Thailand’s reforms point to strong recovery but efforts should continue, review says

The report notes that despite the severe recession — real GDP dropped 12% in 1997–98 —the government has resisted protectionist pressure. "One of the most striking aspects of the Government’s policy response to the crisis … is its liberalization of several aspects of its trade and foreign investment regime in order to speed up structural adjustment," the report says.

The crisis is blamed on weaknesses in the way the financial and other sections of the corporate sector were governed: poor accounting practices, lack of transparency in management, inadequate supervision of banks and financial institutions. Because company data was in adequate, financial risks could not be assessed properly. A seemingly fixed exchange rate régime led operators to borrow heavily in foreign currencies, precipitating a financial crisis when the exchange rate collapsed in July 1997. Many of these issues are now being addressed although further work is needed, the report goes on.

Focusing on Thailand’s trade policy, the WTO report welcomes further streamlining of import and export procedures, and the continuing trend for tariffs to be reduced even though some have risen, for example on motor vehicles and clothing, and some high peaks (for example 80%) remain. It expresses concern about the lack of a single publication containing all regular ("MFN") and preferential import duty rates.

Thailand has encouraged regional trading partners within the Association of Southeast Asian Nations (ASEAN), the Asia-Pacific Economic Cooperation (APEC) forum, Asia-Europe meetings, South Asia, and the Greater Mekong region to liberalize faster and further in the context of regional trading arrangements, in the conviction that liberalization will assist economic recovery.

The report notes that the Thai government’s concerns in the WTO include regret that some of its main exports such as agri-food and textiles and clothing still face quantitative restrictions, few of which have been eliminated. Thailand is active both in the WTO Agriculture Committee, and in Textiles Monitoring Body.

The Thai government also favours general ("MFN") tariff reductions in its export markets over preferential (Generalized System of Preferences — GSP) schemes because some of these preferences are withdrawn when a country becomes more developed or the product enjoying preferences gains a sufficient share of the market. The Thai government’s view is that the withdrawal of preferences eventually disrupting Thai exports, the WTO report notes.

Various domestic reforms are also underway, the report says. These include improving government transparency, tougher measures to deal with corruption and improved integrity of the customs régime. State-owned enterprises are being privatized and a 1999 competition law aims to ensure that these companies do not become private monopolies, although enterprises which are not privatized are not covered, the report says. The government is also reviewing its import-export and investment legislation to make trading and investment regulations more transparent, predictable and stable.

The government has also continued to open up the financial sector to foreign investment, as part of its efforts to deal with the financial crisis, the report goes on. New commitments were made in the WTO financial services negotiations in December 1997, six months after the crisis erupted. "These commitments, and in particular the elimination of the 25% limit on foreign equity participation, should strengthen the financial sector by attracting new foreign capital and expertise and by increasing competition," the report says.

However it expresses concern about provisions allowing offshore banking (International Banking Facilities) to operate as a conduit for domestic borrowing, and whose nature may have magnified the crisis. "A new Financial Institution Law is being drafted to consolidate the supervision of the financial sector and ensure prompt corrective action, but apparently no amendments to the International Banking Facilities or associated tax privileges are envisaged," the report says.

Further liberalization is also taking place in telecommunications and transport, but remains to be "bound" within the framework of the WTO’s General Agreement on Trade in Services (GATS), the report notes.

Thailand has also modified its intellectual property legislation in order to implement the WTO TRIPS Agreement — as a developing country it has to implement this by 1 January 2000. Among the measures taken are an amended Patent Act (which allows for parallel imports) and a new Intellectual Property and International Trade Court. Some problems remain with enforcement, the report adds, partly because the Thai authorities say they lack cooperation from right holders in conducting raids or taking cases to the courts.

Notes to Editors

trade policy reviews are an exercise, mandated in the WTO agreements, in which member countries’ trade and related policies are examined and evaluated at regular intervals. Significant developments which may have an impact on the global trading system are also monitored. For each review, two documents are prepared: a policy statement by the government of the member under review, and a detailed report written independently by the WTO Secretariat. These two documents are then discussed by the WTO’s full membership in the Trade Policy Review Body (TPRB). These documents and the proceedings of the TPRB’s meetings are published shortly afterwards. Since 1995, when the WTO came into force, services and trade-related aspects of intellectual property rights have also been covered.

For this review, the WTO’s Secretariat report, together with the policy statement prepared by Thailand, will be discussed by the Trade Policy Review Body on 15 and 17 December 1999. The Secretariat report covers the development of all aspects of Thailand’s trade policies, including domestic laws and regulations, the institutional framework, trade policies by measure and by sector.

Attached to this press release is a summary of the observations in the Secretariat report. The Secretariat report and the government’s policy statement are available for the press in the newsroom of the WTO internet site (www.wto.org). These two documents and the minutes of the TPRB’s discussion and the Chairman’s summing up, will be published in hardback in due course and will be available from the Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.

Since December 1989, the following reports have been completed: Argentina (1992 and 1999), Australia (1989, 1994 and 1998), Austria (1992), Bangladesh (1992), Benin (1997), Bolivia (1993 and 1999), Botswana (1998), Brazil (1992 and 1996), Burkina Faso (1998), Cameroon (1995), Canada (1990, 1992, 1994, 1996 and 1998), Chile (1991 and 1997), Colombia (1990 and 1996), Costa Rica (1995), Côte d’Ivoire (1995), Cyprus (1997), the Czech Republic (1996), the Dominican Republic (1996), Egypt (1992 and 1999), El Salvador (1996), the European Communities (1991, 1993, 1995 and 1997), Fiji (1997), Finland (1992), Ghana (1992), Guinea (1999), Hong Kong (1990, 1994 and 1998), Hungary (1991 and 1998), Iceland (1994), India (1993 and 1998), Indonesia (1991, 1994 and 1998), Israel (1994 and 1999), Jamaica (1998), Japan (1990, 1992, 1995 and 1998), Kenya (1993), Korea, Rep. of (1992 and 1996), Lesotho (1998), Macau (1994), Malaysia (1993 and 1997), Mali (1998), Mauritius (1995), Mexico (1993 and 1997), Morocco (1989 and 1996), New Zealand (1990 and 1996), Namibia (1998), Nicaragua (1999), Nigeria (1991 and 1998), Norway (1991 and 1996), Pakistan (1995), Papua New Guinea (1999), Paraguay (1997), Peru (1994), the Philippines (1993), Poland (1993), Romania (1992 and 1999), Senegal (1994), Singapore (1992 and 1996), Slovak Republic (1995), the Solomon Islands (1998), South Africa (1993 and 1998), Sri Lanka(1995), Swaziland (1998), Sweden (1990 and 1994), Switzerland (1991 and 1996), Thailand (1991 and 1995), Togo (1999), Trinidad and Tobago (1998), Tunisia (1994), Turkey (1994 and 1998), the United States (1989, 1992, 1994, 1996 and 1999), Uganda (1995), Uruguay (1992 and 1998), Venezuela (1996), Zambia (1996) and Zimbabwe (1994).

The Secretariat ’s report: summary

TRADE POLICY REVIEW BODY: THAILAND
Report by the Secretariat – Summary Observations

The principal economic development since Thailand’s previous Trade Policy Review in 1995 has been the financial crisis that erupted in mid-1997. This crisis manifested itself initially in a sharp depreciation of the Thai currency (the baht). Real GDP dropped 12% over the period 1997–1998 and unemployment rose sharply. Notwithstanding the severity of the crisis and the consequent recession, the Thai Government has, by and large, resisted protectionist pressures, opting instead for measures aimed at reinforcing its already increasingly outward-oriented trade and investment policies so as to foster economic recovery.

Economic environment

Prior to 1997, Thailand’s economic performance had been outstanding, with real GDP growth averaging almost 9% annually since 1990. This strong expansion was partly the outcome of market-oriented structural reforms, undertaken by successive governments during the 1980s, including reductions in barriers both to imports and exports, and the liberalization of the foreign investment regime. Strong growth of the economy was also greatly helped by Thailand’s high saving rate, which averaged more than one third of GDP throughout the 1990s. Nonetheless, savings were insufficient to finance domestic investment and the resulting gap was bridged by inflows of foreign capital averaging 10% of GDP annually, attracted to Thailand by prospects of profitable investments and by its open foreign investment regime. The correspondingly large and growing current account deficit, together with the progressive accumulation of public and private external debt, was not a problem as long as investments in Thailand were allocated efficiently to projects whose returns were at least sufficient to cover the cost of capital. Unfortunately, by 1997 this was no longer perceived to be the case, leaving the Thai financial system vulnerable to a sudden loss of confidence, which led the economy into a severe recession.

This vulnerability was highlighted when commercial banks reported a significant increase in non-performing loans at the end of 1996; in addition, exports declined in 1997, indicating a possible fall in external competitiveness. There followed a dramatic flight of capital and heavy losses of foreign reserves, which culminated in a large depreciation of the Thai baht in July 1997. In turn, the currency depreciation immediately translated into heavy losses in corporations’ balance sheets because of their high reliance on foreign debt, and many faced bankruptcy as a consequence. The outcome of this financial crisis was that real GDP fell by nearly 2% in 1997 and by over 10% in 1998. Increased unemployment and falling personal incomes resulted in many people falling below the poverty line. Hence, the financial crisis became a full-blown economic crisis of major proportions with far-reaching social repercussions.

The origins of this crisis and the resulting deep recession have been attributed mainly to generalized weaknesses in the governance of financial institutions and corporations; these weaknesses included in particular poor accounting practices and a lack of transparency in management as well as inadequate supervision of banks and financial institutions. In the absence of adequate company data, many investments were not based on accurate assessments of financial risks. The financial crisis has thus highlighted the need for a more transparent, competitive, and rules-based business environment. Moreover, the maintenance of a fixed nominal exchange rate until mid-1997, combined with the encouragement of special offshore banking facilities, led banks and companies to borrow heavily from abroad in foreign currencies, mostly on a short-term and unhedged basis, so as to exploit interest rate differentials, thereby exposing themselves unduly to the risk of a sharp decline in the exchange rate.

During the months immediately following the crisis, the Thai economy underwent internal and major external adjustments. A sharp drop in private investment contributed to a fall in domestic demand and a major contraction in imports. The current account moved from a deficit of 8% of GDP in 1996 to a surplus of 12% of GDP in 1998. A correspondingly large swing also occurred on the capital account, which moved from net inflows of nearly US$20 billion to net outflows of nearly US$10 billion.

In response to the crisis, the Thai authorities established a market-based exchange rate system, thereby abandoning the peg to a basket of currencies. Initially, they also tightened monetary and fiscal policies to restore confidence in the economy, but later relaxed both as the recession turned out to be more severe than anticipated. Aware of the far-reaching social consequences of the crisis, the authorities have targeted low-income groups in recent public expenditure increases. One of the most striking aspects of the Government’s policy response to the crisis, however, is its liberalization of several aspects of its trade and foreign investment regime in order to speed up structural adjustment.

Trade and foreign investment regime

Thailand’s trade and foreign investment policies are aimed at promoting economic cooperation in international fora and avoiding frictions with trading partners. Accordingly, the Thai Government has actively participated in the work of the WTO, where it has expressed its regret that only a few quantitative restrictions have been eliminated in areas of significant export interest to Thailand, notably agri-food and textiles; it has called for further efforts to abolish market-access restrictions. Moreover, Thailand has encouraged regional trading partners within ASEAN, APEC, Asia-Europe meetings, South Asia, and the Greater Mekong region to liberalize faster and further, in the conviction that liberalization will assist economic recovery. The Government also favours MFN tariff reductions over GSP schemes because the graduation mechanisms in some GSP schemes can trigger the reinstatement of higher MFN tariffs, thereby eventually disrupting Thai exports.

On the domestic front, a long-term priority is to ensure greater government transparency and accountability. A 1997 Constitutional amendment introduces the right of the Prime Minister to request a referendum, provides for a National Counter-Corruption Commission and establishes an independent advisory body in charge of consumer protection. In addition, the customs authorities have set up a special task force to create transparency, resolve complaints, and thereby improve the integrity of the customs regime.

Economic infrastructure should also benefit from the planned privatization of state-owned enterprises; a 1999 competition law is aimed at ensuring that such enterprises do not become private monopolies in the privatization process. However, the law does not extend to those enterprises that will remain state-owned. Recurrent legislative delays reflect the difficulties faced by the Government in passing necessary legislation through Parliament. These difficulties include opposition to the sale of domestic enterprises to foreign interests.

As a consequence of legislative delays, after seven years of parliamentary deliberations, a new legislative framework for foreign investment has yet to obtain approval. Meanwhile, conditions for foreign investment continue to be determined according to the latest ministerial announcement. The authorities have also relied on such announcements to implement border tax changes, regulate trade defence, change the conditions for export assistance, implement changes in direct and indirect internal taxes, and amend government procurement rules. Although use of ministerial announcements has the advantage of flexibility, it reduces the stability, predictability, and perhaps the overall coherence of the trading and investment regime. Accordingly, the Government is reviewing import-export and investment legislation to ensure that it reflects the actual openness of Thailand’s trading system and provides a clear and stable framework for business decisions.

Policies and measures affecting trade and foreign investment

Border measures

The Government has continued to streamline actual import and export measures in order to facilitate international trade. Thus, for example, the authorities are in the process of amending the legislation on customs valuation, which should reduce the incidence of arbitrary "uplifts". Furthermore, despite complex licensing legislation, which remains un-notified to the WTO, Thailand maintains few import licences, quotas, or other quantitative restrictions on imports. Few trade defence measures are in place, although a new Anti-Dumping and Countervailing Duty Act in 1999 replaced the previous much debated regulations notified to the WTO. As a result, border measures consist essentially of tariffs. In this context, the publication of a single and comprehensive tariff containing MFN and preferential duties would, as already noted in Thailand’s 1995 Review, greatly enhance the transparency of the import regime.

The trend in tariffs is downwards although rates have fluctuated since 1995. In September 1999 applied MFN tariffs averaged 18%, compared with 23% in 1995. But tariff peaks can be as high as 60%, down from 100% in 1995; they protect domestic producers of agri-food products, clothing and motor vehicles. The simple average of bound tariff lines will be 26% for industrial products and 34% for agri-food products, once the Uruguay Round of tariff reductions is fully implemented. However, 31% of national tariff lines covering industrial tariffs are unbound. Under the 1997 Information Technology Agreement, Thailand is committed to eliminating MFN duties on products accounting for approximately one quarter of total trade. Reductions were due to start in 1999.

Tariff increases during the period under review have in several cases caused applied MFN tariff rates to exceed WTO bound rates, but the authorities note that in such cases MFN bound rates apply to WTO Members, on condition that a certificate of origin is provided at Customs. Such certificates are likely to complicate trading procedures as does the fact that tariff rates tend to be higher for non-members than for Members of the WTO.

Thailand is actively implementing tariff reductions under the ASEAN Free-Trade Agreement (AFTA). By the year 2000, Thailand’s AFTA tariff will slightly exceed 7%, less than half of the applied MFN rate. This divergence between MFN and AFTA tariff rates may have contributed to trade diversion, particularly in an environment of falling imports and GDP. The share of imports from ASEAN members in total imports has increased since the last Review of Thailand in 1995.

The financial crisis created the concern that bank failures would deprive producers of access to export finance. The authorities therefore have greatly expanded the number and funding of export financing schemes, some of which involve preferential terms. For example, the value of exports financed under the Packing Credit Facility amounted to 10% of total exports in 1998. The authorities have also taken advantage of transitional provisions contained in the WTO Agreement on Subsidies and Countervailing Measures to introduce additional tax incentives in favour of exports. Generally, however, Thailand competes on world agri-food and other markets without any significant export subsidies.

Substantial progress has been made to expedite the customs clearance process for exports, as part of an overall strategy to achieve an export-led recovery. In order to conform with quantitative restrictions maintained by trading partners, export quotas are in place on textiles and clothing products destined for Canada, the European Union, Norway and the United States; and on cars exported to Chinese Taipei.

Internal measures

Numerous tariff and other tax concessions are intended to neutralize the effect of relatively high tariffs on exports, investment, and production. Several of these measures are administered by the Board of Investment (BOI), which grants not just tax but also non-tax incentives, such as the right to own land or to invest in activities otherwise closed to foreigners. Changes in incentives may be introduced by ministerial notification and do not need to be approved by Parliament, provided they fall under the purview of the Investment Promotion Act. A number of incentives have been notified to the WTO as subsidies or as trade-related investment measures; the authorities intend to abolish the latter by 1 January 2000. Overall, investment incentives may have resulted in an inefficient allocation of capital, as witnessed by the large number of unprofitable investments, which contributed to the recent crisis.

Thailand has modified its intellectual property legislation in order to implement the WTO Agreement on TRIPS. In particular, the Patent Act, as amended, introduces the principle of national treatment and eliminates the requirement that products under a patent must be manufactured locally. Parallel imports are considered necessary to maintain competitive prices of products protected by intellectual property rights. In 1997, the Intellectual Property and International Trade Court began to handle all civil and criminal cases involving intellectual property. Despite the several steps taken to improve enforcement, the authorities consider that, in practice, this remains extremely difficult, partly because of insufficient cooperation from right holders in conducting raids or taking cases to the courts.

The Thai Industrial Standards Institute has participated actively in the work of the WTO Committee on Technical Barriers to Trade; it considers that harmonization of international standards, transparency, avoidance of unnecessary obstacles to trade, and non-discrimination would be beneficial to Thailand as well as to other developing countries. All new Thai standards and regulations are now systematically based on international norms, and conformity assessment procedures have been greatly simplified in cases where mutual recognition agreements have been established. Meanwhile, however, rather stringent food and drug regulations, in effect, create a system of exclusive importers, as only one applicant holds the information required for registration and licensing, thereby preventing parallel imports of such products.

The authorities report that Thailand’s regulations on government procurement have recently been amended with the objective of enhancing openness, transparency, and fair competition. The authorities have indicated that procuring agencies allow foreign bidders to compete for contracts unless at least three domestic products meeting national standards are available. Most domestic products are given a price preference margin in procurement. Government contracts for consultancy and engineering services must be awarded to domestic companies as the leading firm. All public-sector imports above US$7 million must have a related countertrade transaction.

Sectoral trade policies

Thailand has continued to participate actively in the work of the WTO Committee on Agriculture, urging Members to proceed with tariff reductions and eliminate market-access restrictions. The authorities report no significant export subsidies and Thailand has also shown restraint in the use of domestic subsidies likely to affect trade, particularly since the recent depreciation of the baht. Production and trade of several key agri-food products are organized through marketing boards and other government-supervised organizations.

High tariffs protect the domestic meat and dairy, fruit and vegetable, sugar, beverage and tobacco manufacturing industries. Thailand does not apply quantitative restrictions on agri-food imports; many of the tariff quotas established under the Uruguay Round are not used in practice to restrict imports; instead, lower or zero duties are frequently applied when imports of the products concerned are needed for the domestic processing industry. For the few products whose importation is impeded by high tariffs, partners to the AFTA will have unlimited access to Thailand’s market as of 2000 at rates not exceeding 20%, thereby generating substantial pressure on certain domestic agri-food sectors.

Thailand has continued to liberalize the energy market and has undertaken in various international fora to enhance efficiency through greater competition, including by majority foreign-owned companies. A transparent regulatory framework has been announced for the year 2000 in the petroleum, electricity, and gas sectors, followed by corporatization and eventual privatization of selected state-owned enterprises. In the WTO, Thailand has not bound tariffs on most petroleum products, and has not included any energy-related sectors in its GATS Schedule of Commitments.

After two decades of double-digit growth, Thai manufacturing was severely affected by the financial crisis that broke in mid-1997, after which the authorities substantially increased border taxes on several consumer products. In particular, tariffs on motor vehicles were raised from around 40% to 80%. Production capacity has increased in the automotive sector as new joint ventures with foreign multinationals have started supplying domestic and export markets. Investment incentives in the automotive sector, some of which are due to be amended by 1 January 2000, include local-content provisions, themselves attached to end-use provisions, import and excise duty concessions, and corporate tax exemptions.

The textile and clothing industry provides an example of the recent tariff instability in the manufacturing sector, causing unpredictability for importers. After a continuous process of tariff reduction from 1994 to 1996, whereby tariffs on clothing were reduced from 100% to 45%, and then to 10% for some products (in early 1997), tariffs were raised to 60%, ostensibly on fiscal grounds, but also to assist crisis-stricken industries: Thailand does not protect its textile and clothing industry with import quotas; however, its exports are substantially restricted by quantitative restrictions and safeguards in export markets.

In the course of implementing measures to overcome the crisis, the Thai Government has continued to open its financial services sector to foreign investment. Thailand has made new commitments with respect to insurance, banking, and other financial services, first in its Schedule annexed to the Second Protocol to the GATS (the so-called Interim Agreement) on Financial Services agreed in July 1995, and then, as a result of the WTO financial services negotiations concluded in December 1997, six months after the crisis erupted. These commitments, and in particular the elimination of the 25% limit on foreign equity participation, should strengthen the financial sector by attracting new foreign capital and expertise and by increasing competition. One possible area of concern involves the provisions allowing offshore banking (International Banking Facilities) to operate as a conduit for domestic borrowing, and whose nature may have magnified the crisis. A new Financial Institution Law is being drafted to consolidate the supervision of the financial sector and ensure prompt corrective action, but apparently no amendments to the International Banking Facilities or associated tax privileges are envisaged.

Under a series of concession contracts with the existing public duopoly, private companies have progressively entered a variety of telecommunications markets, creating a thriving market in certain telecommunications services, such as mobile phones and Internet services. The authorities, aware that these markets are unlikely to be truly competitive in the absence of cost-based pricing, transparent and fair interconnection arrangements, and independent regulation, have undertaken to introduce commitments regarding commercial presence in voice telephony and other telecommunications services, by 2006, on the basis of new legislation.

There have also been developments towards greater international competition in the transport sector. The main airline is being partially privatized, and amendments were introduced in Parliament to allow larger shares of foreign ownership in domestic airlines and introduce competition in reservation systems. In 1997, foreigners were allowed to hold a de facto majority in a company owning maritime vessels under the Thai flag.

Thailand included a large number of business services in its GATS Schedule of Specific Commitments; the current regulatory framework allows foreign presence essentially through joint ventures with minority foreign control. In particular, member firms of the "Big Five" multinational accountancy networks supply a large share of domestic audit services under these joint ventures. Recent analyses of Thailand’s crisis have highlighted the lack of transparency and accountability in corporate management and auditing practices, leading the authorities to revise all Thai accounting standards, and require companies to apply international accounting standards, as well as establish an audit committee to oversee companies’ financial reporting process and disclosure. Market access restrictions, including nationality and equity requirements, undoubtedly contributed to the severity of the crisis.

Outlook

The main macroeconomic indicators suggest that Thailand is recovering strongly from the economic turmoil of the past two years. Major reforms, resulting in greater transparency, and strengthened governance and prudential supervision, have underpinned the recovery by improving consumer and investor confidence, both domestically and abroad. Trading partners too have played a key role in the recovery, aided by Thailand’s welcoming and liberal business environment, providing greater efficiency through import competition and direct investment inflows. They have also kept their markets open to Thailand’s exports.

There are still a number of downside risks, however. For example, the continuing need for corporate debt restructuring, reflected in the high level of non-performing loans, could hamper the recovery of private investment. More broadly, the danger remains that as the recovery gains pace, the Government might succumb to pressures to put off fundamental reforms, which although currently well under way, are still incomplete and yet essential for the achievement of a stable basis for sustainable and equitable growth of the Thai economy.