Trade pacts: Torn between two giants TPP versus RCEP as powers court
WRITER: PHUSADEE ARUNMAS
Since the conclusion of the much-touted Trans-Pacific Partnership (TPP) agreement signed by 12 Pacific Rim countries last month, Thailand has been abuzz with debates about its impact and whether the country should join the trade pact.
Many business leaders and academics are quick to warn that Thailand's overall competitiveness will be subject to significant losses, particularly in exports and foreign investment, if the Thai government stays put and does nothing. The optimists, including Commerce Minister Apiradi Tantraporn, see the negative effects on Thailand as minimal.
The pact could deliver a short-term psychological blow over concerns about increased trade hurting Thai products.
Mrs Apiradi says that while Asean members Malaysia, Singapore, Brunei and Vietnam have joined the TPP, this will not add pressure on Thailand, which already has free trade agreements (FTAs) with every country in the TPP group except Canada, Mexico and the US.
The China-led Regional Comprehensive Economic Partnership (RCEP) agreement will create huge benefits and help offset potential losses caused by the TPP.
The RCEP was launched in November 2012 with the aim of establishing deeper economic cooperation between the 10 Asean members and Australia, China, India, Japan, New Zealand and South Korea, with a focus on trade in goods, services and investment. The 16 countries agreed yesterday, on the sidelines of the Asean leaders' summit in Kuala Lumpur, to push for its conclusion by next year.
Thailand has 12 FTAs in place, including the Thai-Chilean pact that came into effect early this month. The 12 FTAs together generated US$261 billion in trade value or 57.4% of Thailand's total trade last year.
The country is also speeding up free-trade talks with Pakistan and Turkey. Russia has also extended an invitation for Thailand to join an FTA with the Eurasian Economic Union comprising Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan.
The Thai government has never said no to the TPP. Instead it says it wants to carefully analyse the advantages and disadvantages before making a final decision about joining. Bones of contention include intellectual property and pharmaceutical patents.
Prime Minister Prayut Chan-o-cha is scheduled to declare Thailand's official stance on both the TPP and RCEP at the first meeting of the International Trade Development Committee next month. His announcement will dictate Thailand's economic and trade development for the next five years.
The two rivals
The TPP countries encompass about 40% of global trade or $295 trillion a year, with a combined GDP of $28.3 trillion, representing 38% of the world's GDP.
Population in the TPP countries is roughly 800 million or 11% of the world's population. In comparison, the RCEP's 16 member countries represent 29% of global trade or copy0.7 trillion, with a combined GDP of $21.2 trillion or 28% of the world's GDP. The RCEP's population numbers 3.4 billion, making up half the world's population.
Thailand's exports to RCEP countries reached copy27 billion in 2014, representing 56% of total export value. Imports totalled copy33 billion or 58% of Thailand's total imports.
RCEP members made up 70% of foreign direct investment (FDI) in Thailand last year.
Meanwhile, Thai shipments to TPP countries were valued at $92 billion, representing 40.4% of the country's total exports. Imports amounted to $83.4 billion or 36.6% of the country's total imports.
Last year, TPP members represented 45% of Thailand's FDI.
"Given the sheer size of the RCEP, the market offers more potential," says Nopporn Thepsithar, president of the Thai National Shippers' Council (TNSC).
"But from a trade perspective, the TPP is much deeper and wider than the RCEP, as the TPP comes with significant market openings by reducing or eliminating tariffs on almost 18,000 categories of goods, particularly in respect of farm products such as sugar, rice, cheese and beef.
"It also contains guidelines for dispute resolution between foreign investors and governments, requests for governments not to discriminate against foreign investors, and demands for specific countries to improve their labour standards." For the RCEP, the 16 members have agreed to eliminate tariffs on 65% of all goods, amounting to 8,000-9,000 items, under the RCEP plans. Of the 35% of total products not included in the initial agreement, RCEP members are expected to gradually cut tariffs to zero within 10 years after 2017 for 20%, while further talks are needed for the other 15%, which are mostly sensitive items.
Kasikorn Research Center (KResearch) says the TPP will inevitably affect the trade and investment of non-TPP economies. Thailand's exports to North America, particularly the US, may sustain themselves in the short term because the US's tariff privileges for Thailand will run until the end of 2017.
But once those benefits expire, Thailand's competitiveness will be undermined relative to TPP member states such as Malaysia, Vietnam and Mexico, KResearch says. By then, if the US does not renew those privileges or Thailand does not join the TPP, Thai exporters can expect higher import tariffs of 2.7%, versus the current 2.3%.
The effects of trade diversion resulting from the TPP on Thai exports are as follows:
1. Exports that are the least competitive will be the most affected. They will include products of labour-intensive industries such as garments, textiles, shoes and leatherwear.
2. Exports that are relatively competitive now but may lose some lustre in the long term will be moderately affected, including hard disk drives, electronics, rubber products, petrochemicals, and automobiles and parts.
3. Exports that are very competitive now and will remain so in the long term will be the least affected. Among these are products made by highly skilled workers such as jewellery and canned food products.
Meanwhile, many industries in TPP economies are likely to see their competitiveness bolstered. Vietnam, Malaysia and Indonesia (which has expressed an intent to join the TPP in two years) are among those to benefit from common standards and rules of origin being developed, especially for textiles and automotive, KResearch says. This will precipitate trade diversion (raw material procurement or sourcing) and possibly even investment diversion from non-TPP countries to TPP member nations, thus steepening the risk of production relocations.
Deunden Nikomborirak, research director for economic governance at the Thailand Development Research Institute (TDRI), says the pact will trigger a new supply chain climate in which global production in certain industries such as automotive and parts will relocate to TPP members to enjoy rule of origin.
Thailand's falling exports are not only from soft global demand, but also hidden structural problems, she says. The absence of TPP membership will curtail Thailand's competitiveness, as the FTAs Thailand is party to offer a relatively small market.
Ms Deunden says Thailand's exports have continuously and rapidly fallen, putting the country's structural problems in stark relief. Thai shipments are forecast to contract for a third straight year in 2015, down by about 5%, after falling 0.3% in 2013 and 0.4% in 2014.
"Joining FTAs will temporarily help resuscitate Thai exports, as the actual problem for this sector is the competitiveness of Thai products themselves," she says.
"It's a must for Thailand now to rev up production restructuring to raise product values." The TDRI reports the positive impact for TPP members is expected to accrue mostly to automobiles and parts, textiles and garments, agricultural products, and services -- sectors that will enjoy lower tariffs and more foreign direct investment.
The TNSC's Mr Nopporn says 2016 purchase orders are expected to shift towards TPP members, which produce similar raw materials and products as Thailand.
In the longer term, a negative impact is anticipated to overall trade and investment, as the pact calls for more technology transfer and support among TPP members, he says.
"More importantly, the TPP will stress the assistance mechanism for member countries, which covers labour standards, environmental protection, government procurement improvement and guidelines for dispute resolution between foreign investors and governments," he says.
"With the TPP led by the US, we believe it will use its capacity to transfer technology and financial management to members, particularly Vietnam, as it wants to develop Vietnam as a new production base in place of China. Japan is also expected to benefit."
Auto industry impact
The SCB Economic Intelligence Center (EIC) says Thailand will remain a key global production hub for Japanese car makers. Rather than obstruct, the TPP will complement Thailand's positioning with other existing and overlapping trade agreements, the EIC reports.
Although Thailand has not taken part in the deal, the 12 countries accounted for 42% of Thailand's total exports of automotive products in the first seven months of 2015. Japan and the US, two automotive superpowers, are in the trade pact, and Australia alone accounted for almost a fifth of Thai auto exports.
The EIC expects minimal impact, if any, on the Thai auto industry for two key reasons. First, Thailand's position in the Japanese automotive production network will not be altered by the trade pact; on the contrary, it will complement existing FTAs. And second, TPP is more about the interaction between the two heavy hitters, Japan and the US.
Japanese car makers have continued to favour Thailand in their global value chain, with the country long serving as a key investment destination for Japanese car makers. The high level of capital accumulation over the years could be seen in increasing localisation of R&D activities, the highest value-added process within the production value chain.
On the same day the TPP reached its final agreement, Toyota held a press conference for its Thai R&D unit, emphasising its recent performance and capability. It is reported that as much as 40% of the design and development of the newly launched Revo pickup was conducted by the Thai unit. Trucks made here are exported to destinations around the world.
Other Japanese car makers are planning to increase their R&D capacity in Thailand, boosting the nation's position as a production hub for global markets. The rise of Indonesia possibly poses more of a threat than the TPP.
In addition, Thailand already has trade agreements with key markets for Japanese cars. Car makers, not limited to the Japanese, have long enjoyed tariff privileges through these agreements, producing and exporting cars from Thailand. The three countries that Thailand has no FTAs with -- US, Mexico and Canada -- make up a mere 5% of Thai car exports.
TPP or RCEP?
"What needs close monitoring is how far the trade liberalisation can be executed by the two blocs," Ms Deunden says.
For the RCEP, negotiations on market access, particularly on mutual tariff cuts, seem to be running smoothly. But services and investment liberalisation have seen little progress. This comes despite the fact that Asean is due to kick off the Asean Economic Community at the end of December.
Ms Deunden says the RCEP still contains a spate of limitations such as issues of government procurement, domestic regulations and public enterprises. In contrast, the TPP has those issues in place.
"During this period, the government must conduct an in-depth study of potential losses from the pact, and information available from the study should be empirical," she says. "More importantly, Thailand needs to rev up wrapping up the RCEP talks and make optimal use of existing pacts."
TDRI research has found that Thailand's use of benefits from existing FTAs is minimal: only 60% with Japan, less than 60% with South Korea, less than 50% with India and 70% with Australia.
Authorities in charge are being urged to investigate obstacles to full utilisation.
"Don't pay much attention to the TPP or the RCEP, as they are just pacts to open markets," Ms Deunden says. "What is more important is our ability to sell and export once the markets are open and reform the country's trade and investment regulations to streamline foreign trade and investment."
Isara Vongkusolkit, chairman of the Thai Chamber of Commerce, says it is difficult to identify which is better between the RCEP and the TPP. He says Thailand must do a thorough study of the impact of the TPP, particularly on areas of concern such as intellectual property and the digital economy, as the US is much more advanced in technology and pharmaceuticals.
"The private sector supports the Thai government in joining both trade blocs, as they will more or less benefit the Thai economy," Mr Isara says. "It's quite worrisome that Thailand has yet to come up with a clear stance on the TPP while several Asean members have already signed it."
The chamber is studying the pros and cons of the TPP, with the research to be completed this year and submitted to the government.
Mr Nopporn agrees Thailand should join both trade blocs, but he is resolute the country needs to revamp its internal structure.
"If Thailand fails to revamp itself, opportunities opportunities will immediately become threats," he says.
"More importantly, we can't rely mainly on the RCEP, as Japan's economy remains weak, China is undergoing an economic restructuring, and India will take about five years to see economic stability."
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