FTA FACT BOOK A Free Trade Area or a Free Trade Agreement (FTA) seems new to most Thai people. In fact, it has been part of their lives for over 15 years. Thailand's first FTA was the ASEAN Free Trade Area (AFTA), which Thailand signed, as part of ASEAN, in 1992. Even though FT As have existed in Thai society for more than a decade, it remains an unfamiliar subject for many people. This FTA Fact Book was, therefore, created to explain that unfamiliar subject in order to make Thai people know, understand, and be able to use the FTA to its fullest potential. What is a Free Trade Area? An FTA is an agreement between two most or more countries, such as the ASEAN Free Trade Area, which comprises the 10 member countries of ASEAN. The primary objective of an FTA is to decrease trade barriers to the lowest level in order to create "Free Trade" between the contracting parties. This is regarded a fundamental form of economic integration. At present, a number of countries have expanded the scope of their FTAs to cover the liberalization of trade in goods, trade in services (e.g. tourism, healthcare, communications, and transportation), investment and other areas of economic cooperation, such as cooperation in science and technology, human resource development, and intellectual property. For many countries, FTAs are considered an important economic tool to expand trade opportunities, to create economic alliances, and at the same time, to enhance the competitiveness of domestic goods and services. Since products traded under FT As receive preferential tariff rates that are lower than the rates applied to the same products from a country with which there is no FTA, the products of FTA partner countries have a price advantage over those of the non - member. Countries entering FTA negotiations can decide which products will be covered, the level to which tariffs will be reduced, and the relevant timeframe. Emergence of FTAs FTAs reflect an economic idea that the maximum benefits from international trade are realized when each country produces products based on comparative advantages and exchange those goods among one another. In reality, such benefits will not come about if those countries impose import tariffs and maintain other trade barriers. Tariff and non - tariff barriers distort the actual price of products and undermine the efficiencies that can be obtained through free trade. At present, many countries are still exporting products for which production costs are relatively high compared with those of the rest of the world. For example, the U.S. is exporting cotton and sugar and the European Union (EU) exports dairy products, despite the fact that the average production costs in those two regions exceed costs in developing countries. Therefore, FTAs are a mechanism that can be applied to reduce price distortions that are the result of tariff and non - tariff barriers, as FTAs serve to increase the free flow of goods in order to achieve the highest benefits from international trade. Nevertheless, it is only a theory, and one that each country must apply appropriately to different circumstances to ensure that FTAs create the greatest benefits for the greatest number of its citizens. FTAs and World Trade FTAs are very important to the current world trade. With the exception of Mongolia all members of the World Trade Organization (WTO) are either parties to an existing FTA or are currently undertaking FTA negotiations. According to a study by WTO, there are more than 300 active FTAs around the world, 200 of which were completed in the past 10 years. Nevertheless, the overall picture of world trade will continue to change rapidly, since every region is paying attention to and entering into more FTAs. As the number of FTAs is rising, and with the emergence of Mega - FTA such as Free Trade Area of the America (FTAA) - a comprehensive trade agreement to which all countries in North and South America are signatories - more countries will give higher priority to FTAs as a mechanism to liberalize trade. The main reason for the popularity if FTAs is that they are relatively easier to conclude than negotiations at the WTO. The WTO is based on the principle of consensus, and decisions to reduce tariffs requires the concurrence of all 150. FTAs, in contrast, are agreement between two countries or a group of countries. Therefore, trade liberalization through FTAs will continue to be an important trend in world trade. Characteristics of FTAs FTAs are considered agreements emphasizing facilitation of bilateral trade. At present, FTAs often covers other issues, such as investment and intellectual property protection. The characteristics of a particular FTA depend on the decisions of the parties involved in the agreement. There is no predetermined structure to an FTA, although it is obvious that any FTA must have three basic commonalities: (1)Trade facilitation and the prohibition of additional trade barrier to the non - parties (2)Coverage of a substantial portion of trade between signatories (3)A clear tariff reduction timeframe that should not exceed 10 years, although certain flexibilities can be allowed in the event there are valid reasons for the expanded time frame. These commonalities are the basic international rules laid down in WTO agreements in order to protect against potential negative effects from FTAs on countries not party to the agreement. Effects of FTAs: Consumer Perspective Tariff reductions promulgated under FTAs reduce the prices of imported goods, which leads to increased consumer purchasing power as consumers can purchase more imported goods with the same amount of budget. Increased competition from cheaper imported goods also drives the price of similar or substitute domestic goods. For example, a tariff reduction on a foreign liquid soap brand will make the imported price of that soap brand cheaper. In effect, the retail price of that soap will be lower, forcing local shower cr?me and soap bar producers (substitute products) to lower their prices or improve the quality in order to complete with the imported liquid soap. Tariff reductions will also lead to the import of products previously unavailable in the market due to tariffs that made them non - competitive. Consumers will, therefore, have more choices as a result of tariff reduction. Effects of FTAs: Producer Perspective By boosting domestic competition, FTAs increase business opportunities for exporters and lessen the burden of entrepreneurs who import raw materials. From the producer perspective, FTAs should increase production and exports, as tariff barriers of the FTA partner have been reduced or eliminated. Certain products previously unable to be exported due to the tariff structure will be available for export. Another group benefiting from FTAs are importers of raw material and machinery used in domestic production, since FTAs help reduce import cost and increase alternative sources for their inputs. This will result in higher levels of efficiency, which will ultimately be reflected in lower production costs. Nevertheless, a group of producers would be harmed by trade liberalization, primarily those business sectors producing for the domestic market, as they compete with imported goods whose prices have gone down. Those businesses have to adjust themselves to the new competition. Those two benefits are businesses that can adjust more quickly to the changes and able to make use of the new opportunities. Coping with the Negative Effects FTA FTAs allow certain measures to protect domestic industries from the negative consequences of trade liberalization. For example, safeguard measure allows party to increase tariffs automatically when a drastic increase of imports takes place and harms domestic industries. Countries are also allowed to maintain quantitative restrictions on a temporary basis. Rules of origin are applied to prevent ineligible goods from enjoying benefits under an FTA. Product standards are applied to prevent an influx of cheap products with low quality. FTA partner will also cooperate to prevent illegal trade of counterfeit goods. These measure are included in each FTA. Tariff and Protection for Domestic Industries Currently, tariffs not only serve as an important source of government revenue that can be used for development project, but also protect domestic industries from competition from imports. To this end, each country tends to set tariffs at high levels, which has both advantages and disadvantages. On one hand, tariffs provide opportunities for industries that are not able to compete on a level playing field to adjust and later become competitive. Many leading industries in Thailand, such as automotive, textile and clothing, and processed food were once protected under high tariffs. On the other hand, protection provides disincentives for producers to adjust, or at least prolongs the adjustment period needed to be able to compete with foreign entrepreneurs, as certain industries continue to demand protection from the government. As a result, consumers in that country have to bear the cost of such protection by paying higher prices for goods and services. This, in effect, is a net transfer of money from consumers to certain producers. FTAs are a mechanism for the government to do away with tariffs. Although FTAs gradually reduce tariffs, they also allows the country to maintain various measures, such as safeguards, anti-dumping, rules of origin, and product standards at the same time, to help those industries adjust and compete in international trade. Agricultural Sector and FTAs In many countries, tariffs are applied to shore to shore up prices of domestic agricultural products that may otherwise be reduced as a result of international competition. An important rationale for the protection is that the agricultural sector is related to a large number of people; it affects and society at large, and food security is always a great concern of many countries. Furthermore, the prices of agricultural products are naturally sensitive since their shelf life is normally very short (i.e. they decompose very quickly). Therefore, all countries have been extraordinarily cautious about agricultural trade liberalization. Tariff reduction timeframes for agricultural products in general will be longer than other goods. Tariff Rate Quotas - a low level of tariff applied to specific quantity of imports, while a much higher level of tariff gets applied to additional imports - are allowed to be in place. The agreement also provides for a Special Safeguard that allowed for an automatic increase of a tariff when imports of a particular agricultural product drastically increase and injures domestic producers. Thailand's FTA Policies Exports have been an important locomotive for Thailand's economy. At present. It creates an annual income of over 3 trillion baht, which is equal to half of the country's annual GDP. FTA s are, therefore, used to maintain the current economic status and competitiveness of Thai exporters by expanding export opportunities and enhancing price competitiveness in significant international markets, such as the U.S., Japan , and ASEAN, and newly developed markets, such as China and India. Furthermore, Thailand is negotiating FTAs with various economic groups such as EFTA (Switzerland, Ireland, Norway, and Liechtenstein) and BIMSTEC (India, Sri Lanka, Bangladesh, Bhutan, Myanmar, Nepal). On the bilateral level, Thailand has negotiated FTA s with many countries, such as Australia, New Zealand, India, China, Peru, and Japan. On the regional level, Thailand as a member of ASEAN is negotiating FTA s with China, Korea, Japan and India. Negotiations are currently with Bahrain and the U.S. Thailand's Concerns about FTAs Thailand uses the following criteria for FTA negotiations: 1)The agreement should be comprehensive, covering liberalization of trade in goods, trade in services, investment, and other areas of economic cooperation. In order to provide maximum benefits, the agreement should be flexible and compatible with the different levels of economic developments of the parties to the FTA. 2)FTAs should be consistent with WTO principles, which state that agreements should cover a substantial portion of all trade between the parties and should be transparent by allowing WTO members to access relevant information. 3)FTA negotiations should be based on the principle of reciprocity. As a developing country, Thailand should obtain reasonable flexibility in terms of commitments and liberalization timeframe when negotiating with developed countries. 4)FTAs should cover other non-tariff measures such as Sanitary and Phytosanitary (SPS) measures, technical barriers to trade, and quantitative restrictions. 5)FTAs should contain a provision to safeguard against the adverse effects on domestic industries, by providing for measures such as anti-dumping measures (AD), countervailing duty measures (CVD), safeguards, and an equitable dispute settlement mechanism. 6)FTAs should promptly bring about real substantive economic benefits. FTA negotiations might contain an Early Harvest program for early tariff reduction and trade liberalization. Thailand's FTA Strategies Thailand negotiates FTA based on the principle of "free and fair trade", and enters negotiations when it is clear that the overall benefits exceed the costs. FTAs should allow longer timeframes for liberalization and contain safeguard mechanism for sensitive products. The negotiation process must be transparent and allow all groups in society to participate. From the consultations between the public and representatives of the private sector, relevant government agencies and academics, the following negotiating strategies have been established: 1. Agriculture - Emphasize Thai agricultural products with high competitiveness such as rice, tropical fruits, rubber and processed food - Allow appropriate timeframe for adjustment for sensitive agricultural products - Cover market access problems arising form SPS and environmental issues and establish cooperation to facilitate trade by entering into Mutual Recognition Arrangements (MRA), which can provide for appropriate Technology transfer - Determine appropriate standards for agricultural imports to ensure safety for Thai consumers 2. Industry - Emphasize Thai industries that have demonstrated export competitiveness, such as the fashion (e.g. clothing and apparel, jewelry, leather products and footwear) automotive and parts, computer and electronics, furniture, household machinery, and decoration industries - Include non-tariff measures, such as product standards, in order to remove unnecessary barriers, and enter into relevant MRA - Accept rules of origin that reflect actual production processes in the country and improve upstream industries 3. Services - Gradually liberalize service sectors, starting from service sectors with high competitiveness, such as tourism, healthcare services, construction, and design - Support high-potential industries, such as ICT, logistics, entertainment, and industry repair - Provide at least 10 years to allow sensitive sectors, such as banking, insurance, telecommunication, and transportation, to make the appropriate adjustments. 4. Trade-related Intellectual Property Protection - Maintain the current level of IPR protection at the equivalent level to that in WTO - Seek cooperation form FTA partners to facilitate applications for IPR protection in foreign countries, such as the protection of Homali Rice and the registration for trademark of Thai Homali rice. - Encourage FTA partners to provide protection for IPR that is beneficial to Thailand, such as traditional knowledge and recognition of the sources of genetic resources. - Encourage cooperation in technology transfer, utilization of patent information, and skills enhancement of Thai inventors to undertake further research and development. Preparation of Private and Public Sectors for FTAs FTAs will be most beneficial when all parties cooperate and prepare for the changes. The share of data, information and opinions between negotiators (i.e. Ministry of Commerce, Ministry of Finance, Ministry of Agriculture, Ministry of Industry, and Ministry of Foreign Affairs) and private sector representatives, business associations, academia, and other independent organizations is important for successful conclusion of the negotiations. Therefore, all parties involved need to work together to cerate unity in the negotiations and maximize the benefits from the agreement. Participation of the Public Sector Individuals can participate in formulating Thai FTA negotiating positions via various business organizations such as the Federation of Thai Industry, the Thai Chamber of Commerce, the Thai Bankers' Association, and other professional associations. Moreover, independent farmers, producers and ordinary people can provide input directly to the Department of Trade Negotiations at the Ministry of Commerce. The department will then coordinate the input it has received from various organizations to formulate positions that beat serve the country's interests. Preparation of the Public Sector The government must prepare for trade liberalization under FTA by undertaking various economic reform initiatives as follows: 1) Establishing a committee to evaluate results of FTA and to propose appropriate adjustment mechanism 2) Improving and streamlining customs procedure and expediting the VAT refund process 3) Setting up standards for domestic and imported agricultural and industrial products in order to protect local producers and consumers 4) Establishing an early warning system to safeguard against abrupt negative consequences form FTA to domestic industries. Imports need to be closely monitored to ascertain any dumping or import surge that would injure local producers. With the information received, the government can promptly apply appropriate measures such as safeguards, anti-dumping, and countervailing duty. 5) Reform the structure of customs duty and ensure exchange rate stability 6) Develop basic infrastructure to facilitate trade especially land, maritime and air transportation 7) Encourage the Thai private sectors to invest in foreign countries 8) Reform the educational system and develop human resources to serve production and services sectors in which Thailand has competency 9) Strengthen local Small and Medium Enterprises (SMEs) in order to increase competitiveness and FTA utilization 10) Expand cooperation between the public and the private sectors to effectively monitor the results of FTA negotiations, to consult on any potential problems that may arise as a result of an agreement, and to create a better understanding among the public of benefits of FTA s 11)Establish support programs to provide funding to the agricultural sector, particularly by channeling funds to the affected segments to increase their competitiveness. In addition, there needs to be more funding for adjustment of the agro-industrial, industrial, and service sectors. Preparation of the Private Sector The private sector also has to adjust to FTAs in order to increase their competitiveness, which would allow them to make use of FTA at its fullest potential. 1) Improve productivity, administration, cost management, and application of new management techniques and state of the art technology 2) Improve product styles and quality by uplifting quality and standards that are compatible with the demands in high-end markets. This would decrease competition from the low-end products and make Thai brands become better known internationally. 3) Raise funding for research and development in order to increase new technology in production 4) Develop human resources, especially skilled labor and specialized workforces, to better suit demands from business sectors and new industrial technology 5) Proactively develop and expand markets. Create new products that meet the demands of the market and increase marketing channels to consumers. The private sector also needs to expedite the production process and shipment process. 6) Develop stronger relationships between the private sectors of FTA partners by, for example, establishing chambers of commerce. Progress of FTA Negotiations Thailand has entered FTA negotiations with 8 countries namely Australia, China, India, New Zealand, Bahrain, Peru, the U.S., Japan and 2 economic groups namely BIMSTEC and EFTA. Moreover, Thailand and other ASEAN countries are negotiating five FTA with dialogue partners. The details of those FTA s are as following: (1) FTAs that are already entered into force FTA Negotiation Started Negotiation Completed Signed Date of Entry Into Force -Thailand-Australia August 2002 March 2004 5 July 2004 1 January2005 -Thailand-New Zealand May 2004 November 2004 19 April 2005 1 January 2005 -ASEAN- China (Economic Cooperation) Tariff elimination on certain products November 2001 October 2002 4 November 2002 1 January 2004 -Thai- China Early Harvest on Fruits and Vegetables January 2003 June 2003 18 June 2003 1 October 2003 ASENA- China (trade in goods) January 2003 October 2004 29 November 2004 20 July 2005 -Thailand- India ( 82 products for Early Harvest) December 2002 October 2003 9 October 2003 1 September 2004 - Thailand-Japan February 2004 February 2006 3 April 2007 1 November 2007 (2) FTA that are concluded but are not entered into force FTA Negotiation Started Negotiation Completed Signed Date of Entry Into Force -Thailand-Peru (Early Harvest) 29 January 2004 October 2005 19 November 2005 The agreements are under internal process for Implementation -ASEAN- China (Trade in Services) (only some sectors Professionals, Education, Healthcare, Tourism And Maritime Transportation January 2003 December 2006 14 January 2007 The agreements are under internal process for Implementation (3) FTA s that are under negotiations FTA Negotiation Started Remarks -Thailand- India (the rest of the products, services, and investments) April 2004 8 Oct. 2003 -Thailand- Peru (the rest of the products, services and In vestment) - - -Thailand- EFTA September 2005 - -BIMSTEC - Liberalization of trade in goods - Liberalization of trade in services and investment September 2004 December 2005 Signed (8 Feb. 2004) -ASEAN-China (Economic Cooperation) -Trade in service liberalization (the rest of sectors) -Investment Agreement January 2007 January 2013 - -ASEAN-Korea (Economic Cooperation) -Dispute Settlement Mechanism -Trade in Goods -Trade in services and agreement on investment 30 June 2005 Signed Dec. 2005 Other ASEAN have signed except Thailand -ASEAN-India (Economic Cooperation) -Trade in Goods 8 October 2003 Signed 8 October 2003 -ASEAN-Japan -Liberalization (goods, services, investments), trade rules, trade facilitation and cooperation April 2005 Signed 8 October 2003 (4) FTAs that are currently suspended -Thai-Bahrain (Tariff reduction of 626 product lines) 7 June 2002 Signed 29 December 2002 -Thailand -U.S. 28 June 2004 Suspended after dissolution of the parliament in Feb 2006 Status of Free Trade Agreements (FTA) Between Thailand and Foreign Countries Thailand has entered into Free Trade Agreements with nine (9) countries and two (2) regional groups of countries (ASEAN and BIMSTEC) and, as part of ASEAN, is in the process of negotiating four (4) additional agreements, as follows: 1) FTAs have been concluded and implemented with ASEAN for the ASEAN Free Trade Area (AFTA), Australia, New Zealand, Japan, China (as part of Early Harvest Scheme for ASEAN-China FTA) and India (82 items of Early Harvest Scheme). 2) FTAs have been signed with Peru (Early Harvest Scheme), but have not yet become effective. 3) Full FTAs are currently being negotiated with India and Peru; Negotiations are underway for FTAs with BIMSTEC and EFTA; and, as part of ASEAN, FTAs are being negotiated between ASEAN-China (for investment), ASEAN-India, ASEAN-Korea, ASEAN-Japan, ASEAN-Australia-New Zealand 4) Negotiations are beginning for an FTA between ASEAN-Europe.