Study of Consequences from Entering into an FTA with EFTA

Transcription

1 Study of Consequences from Entering into an FTA with EFTA

2 Study of Consequences from Entering into an FTA with EFTA DRAFT REPORT November 30, 2004 By HWL (Thailand) Ltd. 2/2/2005 HWL (Thailand) Ltd. 1

3 Index to Contents: INTRODUCTION...5 PART I: QUALITATIVE ANALYSIS OF COSTS AND BENEFITS OF A FREE TRADE AGREEMENT WITH THAILAND...7 i) Theoretical considerations...7 ii) EFTA s FTA strategy iii) Patterns of sector-specific protection...16 PART II: QUANTITATIVE ANALYSIS OF COSTS AND BENEFITS TO THAILAND..19 iv) Methodology...19 v) Status quo in trade...19 vi) EFTA as a market...37 vii) Competitive assessment...43 viii) GTAP analysis...51 ix) Conclusion...61 APPENDIX B: DESCRIPTION OF GTAP EXPERIMENTS...64 APPENDIX C: THAILAND S RCA AND EFTA S TARIFFS, BY PRODUCT...66 APPENDIX D: THAI-EFTA S 2003 TRADE FLOWS BY SITC DIVISION...68 APPENDIX E: CONCORDANCE BETWEEN 2-DIGIT SITC REV. 3 IN TABLE 8 AND 6- DIGIT HS CODES...70 APPENDIX F: CONCORDANCE BETWEEN 2-DIGIT SITC REV. 3 IN TABLE 9 AND 6- DIGIT HS CODES...76 APPENDIX G: CONCORDANCE BETWEEN GTAP SECTORS IN TABLE 2 AND 6- DIGIT HS CODES /2/2005 HWL (Thailand), Ltd. 2

4 Index to Tables & Charts: Table 1: Summary of Agreements between EFTA and Other Countries...9 Table 2: EFTA Member Average Import Tariffs in Excess of Fifty Percent...17 Table 3: Thailand Average Import Tariffs in Excess of 20 percent...18 Table 4: Thailand s Total Exports ($ Million)...20 Table 5: Thailand s Total Imports ($ Million)...21 Table 6: Thailand Top Export Commodities (2-digit HS Codes)...22 Table 7: Thailand 2003 Top Export Destinations (ranked in 2003 $)...23 Table 8: Thai Exports to EFTA (2000, 2001, and 2003)...24 Table 9: Thai Imports from EFTA (2000, 2001, 2003)...25 Table 10: Structure of Thai-EFTA Trade by SITC Section (2003)...26 Table 11: Switzerland s Export Trends ($ Million)...27 Table 12: Switzerland s Import Trends ($ Million)...28 Table 13: Norway s Export Trends ($ Million)...29 Table 14: Norway s Import Trends ($ Million)...29 Table 15: Iceland s Export Trends ($ Million)...30 Table 16: Iceland s Import Trends ($ Million)...30 Chart 1: Commercial Services Trade: Imports and Exports by EFTA and Thailand...32 Table 17: Foreign Direct Investment Inflows and Outflows by Host and Source Economy.34 Table 18: Top EFTA Countries by Market Capitalization...35 Table 19: Average Import Tariffs (Thailand / Switzerland / EFTA)...36 Chart 2: Swiss, EFTA and Thai Average Import Tariffs...37 Table 20: EFTA Nominal GDP and its Components in Current U.S. Dollars, Table 21: Per Capita Gross Domestic Product (current $)...40 Table 22: EFTA & Thailand Basic Economic and Demographic Indicators...41 Table 23: Economic Structure of Thailand and EFTA Economies...41 Table 24: Exports of Goods and Services as Percentage of GDP...42 Table 25: Imports of Goods and Services as Percentage of GDP...42 Table 26: Trade in Goods as Percentage of GDP...43 Table 27: Trade in Services as Percentage of GDP...43 Table 28: Net Value of Exports for Norway (2002) /2/2005 HWL (Thailand), Ltd. 3

5 Table 29: Net Value of Exports for Iceland (2002)...44 Table 30: Net Value of Exports for Switzerland/Liechtenstein (2002)...45 Table 31: Net Value of Exports for Thailand (2002)...46 Table 32: Revealed Comparative Advantage by Industry...48 Table 33: Thailand s RCA: High RCA and Low EFTA Tariffs...50 Table 34: Thailand s RCA: High RCA and High EFTA Tariffs...51 Table 35: Simulation results for proposed Thailand-EFTA FTA; Trade flows...54 Table 36: Simulation results for proposed FTA; GDP, income, and welfare...55 Table 37: Simulation results for proposed FTA; Capital and changes in returns to factors of production...57 Table 38: Simulation results for proposed FTA; Value of exports by sector...58 Table 39: Simulation results for proposed FTA; Value of imports by sector...59 Table 40: Simulation results for proposed FTA; Output and the composition of value added by industry /2/2005 HWL (Thailand), Ltd. 4

6 INTRODUCTION This report contains qualitative and quantitative analyses of a potential Free Trade Agreement (FTA) between Thailand and the European Free Trade Association ( EFTA ), which consists of Iceland, Lichtenstein, Norway and Switzerland. Countries in the EFTA have eliminated tariffs among themselves but unlike the European Union, they have kept their original tariffs against the outside world. This section is divided into three parts. Part I consists of a qualitative assessment of a potential FTA between Thailand and the EFTA ( TEFTA ). Important theoretical considerations of the proposed FTA are explored in Section i), including an assessment of the types of gains that should be achievable in the FTA with EFTA and the potential costs of the status quo. In Section ii) EFTA s strategy regarding free trade agreements in general will be explored, including insights gained from conversations with personnel from EFTA Embassies in Washington. Specific sectors of interest to Thailand, including fruits, vegetables, meat; processed foods; and electronics, are examined in Section iii). Part II contains the quantitative analysis of the costs and benefits of the proposed TEFTA. The methodological approach is described in Section iv). The current situation and trends in economic relations between the two economies will be described in Section v), including merchandise trade, service trade, and investment. 1 Section vi) contains an assessment of the EFTA market. Topics explored include EFTA s economic footprint, the structure of EFTA s economy, and the supply-side of the EFTA members and EFTA as a whole. Section vii) consists of a competitive analysis of Thailand and EFTA to offer an assessment of which sectors are likely to see the largest gains in trade creation due to the proposed FTA. In Section viii), the Global Trade Analysis Project ( GTAP ) applied general equilibrium model of global trade is used to assess the potential economic gains to Thailand of an FTA with EFTA, as well potential costs. 2 Conclusions are provided in Section ix). 1 Investment refers to foreign direct investment as opposed to indirect investment such as portfolio investment. Direct investment implies that the investing firm holds enough equity to permit some level of managerial control. 2 It is well established that market opening improves the net welfare of the country that lowers its trade barriers. However, there are also well-recognized costs on a by-sector basis that may warrant the attention of policymakers. 2/2/2005 HWL (Thailand), Ltd. 5

7 Sections x) and xi) in Part III address a comparative analysis by looking at countries that have signed FTAs with EFTA over the last twelve years, from Turkey in 1992 to Singapore in 2002, including potential expectations in terms of trade dynamics. 3 There are two appendices that include information about the GTAP model and database used to analyze the proposed FTA. Appendix A provides a reference table for GTAP5.4 commodity codes. Appendix B provides information about the regional and sector aggregations used in the simulations and describes the three experiments undertaken. As support for Section vii), Appendix C provides data on Relative Comparative Advantage indicators (RCA). Appendix D lists Thai-EFTA trade flows in 2003 by SITC-Rev. 3 division. 2/2/2005 HWL (Thailand), Ltd. 6

8 PART I: QUALITATIVE ANALYSIS OF COSTS AND BENEFITS OF A FREE TRADE AGREEMENT WITH THAILAND i) Theoretical considerations At the most basic level, a reduction of trade barriers that facilitates free trade on a global basis increases welfare gains to consumers, who are able to consume more than would otherwise be the case at a given level of output. Consumers in this case refer to individuals and businesses. Free trade enables individuals to purchase the same bundle of goods more cheaply, and to consume more than would otherwise be the case. Businesses, too, have access to cheaper inputs and machines, and can use the savings in a variety of ways that makes them better off. At the same time, there are costs involved in reducing trade barriers on a global basis. Industries that face increased competition from imports as a result of freer trade may be forced to contract as the relative prices for import competing products decline. In the world of theory, the resources released by such industries are soon redeployed elsewhere in the economy. In the real world, there is a lag in the redeployment of resources, so the costs of free trade, though generally less than the benefits, must also be considered by national governments. It has been a decade since the conclusion of the Uruguay Round of multilateral trade negotiations that resulted in global tariff reductions. The start of the next round of negotiations has been delayed twice for a variety of reasons. In the meantime, countries have been pursuing less ambitious market opening through a bilateral and regional free trade agreements (FTAs) and sectoral agreements such as the Information Technology Agreement (ITA). Thailand has signed on to the ASEAN Free Trade Agreement and the ITA, and other FTAs are under consideration. One potential shortcoming of such piecemeal liberalization is trade diversion. Trade diversion occurs when a preferential trade agreement such as an FTA diverts imports from a more efficient trading partner to a less efficient supplier that is part of the FTA. EFTA is believed to be the source of significant levels of trade diversion. 4 Trade 4 Lee, Jong-Wha, Park, Innwon and Shin, Kwanho, "Proliferating Regional Trade Arrangements: Why and Whither?" (October 2004) at 9. 2/2/2005 HWL (Thailand), Ltd. 7

9 diversion can be welfare reducing or welfare enhancing for the importing country, but for the exporter whose trade has been diverted, the loss of an import market is generally an unfavorable as demand for the product in question declines. For this reason, preferential trade agreements tend to beget additional preferential trade agreements. EFTA has been active in signing preferential agreements with other countries and trading blocs. Twelve nations listed in Table 1 have signed free trade agreements with EFTA, and the Palestinian Authority has signed a Joint Declaration on Cooperation with EFTA as preliminary step. The EFTA also has a free trade arrangement with the European Union. 5 FTA partners now account for about one-tenth of EFTA s external exports with non-eu countries, the same export ratio that EFTA has with Japan. 6 Many other countries have signed Declarations of Cooperation or Exploratory Meetings held - Thailand is one of them. 5 Sharon Sheffield, Agriculture, GATT, and Regional Trade Agreements, in Mary E. Burfisher, and Elizabeth A. Jones, eds., Regional Trade Agreements and U.S. Agriculture, Agricultural Economics Report No (November 1998) at 95. Individual EFTA members signed bilateral FTAs with the European Union in European Free Trade Association, Four European Nations: Iceland, Liechtenstein, Norway and Switzerland Facts and Figures (June 2004) at 10. 2/2/2005 HWL (Thailand), Ltd. 8

10 Table 1: Summary of Agreements between EFTA and Other Countries (Excludes the European Union and bilateral agreements) 7 Nation Type of Agreement* Signature Date Entry in Force Date Turkey FTA Dec-91 Apr-92 Israel FTA Sep-92 Jan-93 Romania FTA Dec-92 May-93 Bulgaria FTA Mar-93 Jul-93 Morocco FTA Jun-97 Dec-99 Palestinian Authority** JDC / Other Nov-98 Jul-99 Macedonia FTA Jun-00 May-02 Mexico FTA Nov-00 Jul-01 Jordan FTA Jun-01 Sep-02 Croatia FTA Jun-01 Apr-02 Singapore FTA Jun-02 Jan-03 Chile FTA Jun-03 Jun-04 Lebanon*** FTA Jun *Free Trade Agreement (FTA), Joint Declaration on Cooperation (JDC) **After the JDC was signed in 1996, the parties entered into an Interim Agreement. ***Expected entry in force. Source: Compiled by LECG from Thailand has yet to sign an agreement with EFTA, but competes in international markets with countries that do have an FTA or other preferential arrangement with EFTA. The following countries and products are a few examples of sectors showing outstanding growth rates of partner country exports to EFTA. Some of these products may have gained at Thailand s expense by virtue of FTA s with EFTA, while others may have gained market share for other reasons: 8 - Turkish vehicles and ships/boats - Bulgarian dairy products - Mexican ores - Moroccan footwear 7 In addition to the agreements listed in the table, Joint Declarations of Cooperation (JDCs) have been signed with Egypt (1995), Tunisia (1995), Albania (1992), GCC Cooperation Council for the Arab States of the Gulf (2000), Ukraine (2000), Serbia-Montenegro (2000), Mercosur (2000), and Algeria (2002). EFTA is engaged in Ongoing Free Trade Negotiations with Canada, and the Southern African Customs Union, and is under Ongoing Exploratory Talks with South Korea, the United States, and Thailand. EFTA members have signed bilateral agreements with the European Union (EC at the time); these have been in force since See Part III for more information on EFTA s partner countries. 2/2/2005 HWL (Thailand), Ltd. 9

11 An FTA between Thailand and EFTA would enable Thai exporters to recapture some of the trade diverted to other countries by existing trade preferences. In other words, a Thai-EFTA FTA would at least ensure that Thailand is able to export the products for which it has a comparative advantage compared to other countries that currently have preferential access to EFTA s market. An FTA with EFTA would also insulate existing Thai exports from the possibility of future trade diverting FTAs that EFTA may sign. There is another major difference between a preferential trade agreement with a small number of countries and a global trade agreement. The importing countries are more likely to reduce tariff spikes with individual partners than with the world as a whole. This is evident from the numerous trade preferences embodied in the Generalized System of Preferences (GSP) and in the market opening practices of countries such as the United States. 9 A third difference between preferential liberalization and global liberalization is that in some cases, preferential agreements can lead to net losses in national welfare. This outcome depends on the nature of the trade diversion resulting from the FTA. For instance, if trade diversion occurs in such a way as to exclude imports from much more efficient producers, then the lost tariff revenue from the excluded imports will exceed the efficiency gains resulting from the increase in duty-free imports. While consumers are still better off, net welfare declines due to the falling duties. This adverse outcome is unlikely unless the price gap between an FTA partner and disfavored partners is large and FTA partner is able to supply a large share of imports that would otherwise be supplied by others. In practice, preferences such as FTAs seem likely improve their members terms of trade and welfare and to impose some costs on the outside world For example, the United States has preserved tariff spikes on canned tuna, but has reduced the tariffs on tuna in pouches in preferential trade agreements involving Andean countries. 10 Richard E. Caves, Jeffrey A. Frankel, Ronald A. Jones, World Trade and Payments (Harper Collins, 1993) at /2/2005 HWL (Thailand), Ltd. 10

12 ii) EFTA s FTA strategy. Background From the time of EFTA s inception, the European Economic Community ( EC ) and its successor, the European Union ( EU ), have loomed large in EFTA s calculations. 11 The EFTA Convention established EFTA in 1960 as an economic counterbalance to the EEC. EFTA s focus was on establishing free trade in industrial products. EFTA s inaugural member states were Austria, Denmark, Norway, Portugal, Sweden, Switzerland, and the United Kingdom. Finland joined the EFTA in 1961 and Iceland joined the group nine years later. 12 Although EFTA was founded in 1960, the free trade area did not come into operation until The relationship between the EEC and EFTA experienced important changes during the 1970s and 1980s. Denmark and the UK joined the EEC in 1973, leaving EFTA behind. In 1977, EFTA and the EEC concluded agreements eliminating tariffs on industrial goods. During the 1980s, talks began regarding the establishment of a relationship that would integrate EFTA and the EC more tightly through more structured arrangements in trade and common institutions. Portugal left EFTA and joined the EC in During the 1990s, the vision of greater integration between EFTA and the EU was achieved through the European Economic Area ( EEA ), which came into force in January The EEA is a broader form of cooperation than an FTA, as the agreement allows for the free movement of labor and capital, was well as the harmonization of regulations affecting businesses, consumer protection research and development, competition policy, state aid, and government procurement. Among EFTA countries, only Switzerland voted against joining the EEA. 14 The 1990s also saw significant 11 Most of this section is drawn from The EFTA Secretariat, Highlights in EFTA s History at 12 There was a geopolitical aspect to EFTA as well. Austria, Finland, Sweden, and Switzerland were reluctant to join the EEC for fear of antagonizing the Soviet Union. Victoria Curzon Price, The European Free Trade Association, in Ali M. El-Agraa, ed., Economic Integration Worldwide (St. Martin s Press, 1997) at Tamim Bayoumi and Barry J. Eichengreen, "Is Regionalism Simply a Diversion? Evidence From the Evolution of the EC and EFTA" (October 1995). NBER Working Paper No. W5283 at A.S. Bhalla and P. Bhalla, Regional Blocs: Building Blocs or Stumbling Blocs (St. Martin s Press, 1997) at /2/2005 HWL (Thailand), Ltd. 11

13 changes in EFTA membership. EFTA gained a member in the form of Liechtenstein, but Austria, Finland, and Sweden left EFTA to join the EU in In recent years, EFTA membership has been stable. However, due to EU enlargement, EFTA members are increasing the number of countries with which they have preferential trading arrangements. EFTA countries are considered to be highly successful by many metrics. EFTA countries are ranked high in IMD s World Competitiveness Yearbook. 15 In the 2004 version, Iceland ranks fifth, Switzerland fourteenth, and Norway seventeenth. Norway has the second highest dollar-based GDP per capita among OECD countries, while Switzerland ranks third. The unemployment rate in EFTA countries is also relatively low compared to other European-based OECD countries. 16 Economic analyses of EFTA There have been several studies of the impact of EFTA and other FTAs on trade flows. The EFTA is believed by many to have increased trade among its members after its initial creation. 17 According to one study, the EFTA increased trade among members by 2.3 percent annually from 1965 to There is also evidence of an announcement effect; trade increased after EFTA was announced, but before any trade barriers were actually removed. 19 Some economists found that EFTA resulted in trade diversion as well, but that the level of trade diversion changed over time. 20 For example, one study found that EFTA trade with the EU and the rest of the world declined somewhat 15 IMD, IMD World Competitiveness Yearbook 2004 (May 2004) at OECD in Figures, 2004 Edition at Bayoumi and Eichengreen at 15; Norman D. Aitken, The Effect of the EEC and EFTA on European Trade: A Temporal Cross-Section Analysis, The American Economic Review (December 1973) at 885-6; Price at 179, citing EFTA Secretariat, EFTA-Past and Future (1980). 18 Bayoumi and Eichengreen at 15. Bayoumi and Eichengreen also find that trade between EU members and EFTA members was reduced following the formation of the EEC. 19 Aitken at Jeffrey A. Frankel and Shang-Jin Wei, Regionalization of World Trade and Currencies, in Frankel, ed., The Regionalization of the World Economy (University of Chicago Press, 1998) at 195. Frankel and Wei also found that EFTA countries traded less with each other than predicted by their gravity equation approach. Mordechak Kreinin found limited amounts of trade creation and trade diversion in EFTA. Mredechai E. Kreinin, Trade Creation and Diversion by the EEC and EFTA, Economia Internazionale, Vo l. 22 (2) (May 1969) at 279. Also, see Price at /2/2005 HWL (Thailand), Ltd. 12

14 following the formation of EFTA. 21 Another study found that trade diversion declined for some EFTA members but not for others. 22 In general, these studies covered a period of time when EFTA membership was larger. EFTA today is much smaller relative to the rest of the world than was the case during the 1960s. 23 The vast majority of EFTA s trade today is with the outside world and its importance as an engine of trade expansion among its members has declined. Intra-EFTA trade is now less than one percent of total EFTA trade. 24 At least two studies have found that the countries within EFTA no longer trade more with each other than predicted by gravity-type equations. 25 EFTA countries are extremely sensitive about their agricultural sectors. Traditionally, EFTA has excluded trade in the most sensitive agricultural products from complete liberalization. 26 However, there has been some agricultural liberalization in recent FTAs with partners who have relatively small agricultural sectors. The agreement between EFTA and the Central European Free Trade Area had a ten-year transition period for eliminating tariffs and quotas on processed agricultural products. 27 EFTA s agreement with Turkey was supposed to liberalize trade by 2002 for processed agricultural products and fish products. 28 Research on the gains of deregulating and integrating financial services sectors by means of a regional trade agreement is limited. One study of the potential gains from 21 Bayoumi and Eichengreen at 16. Bayoumi and Eichengreen find that much of the decline can be attributed to shifts in trade that occurred after the Stockholm Convention but before the FTA actually went into effect. 22 Daniel Yuichi Kono, Are Free Trade Areas Good for Multilateralism? Evidence from the European Free Trade Association, International Studies Quarterly, Vol. 46 (4) (December 2002) at However, EFTA remains a major trader with non-member countries. 24 Price at Bayoumi and Eichengreen at 24; Isidro Soloaga and L. Alan Winters, Regionalism in the Nineties: What Effect on Trade? (1999) at Bayoumi and Eichengreen claim that by the time Spain and Portugal joined the EU in 1986, there are signs of the unraveling of the EFTA bloc. Soloaga and Winters find that intra-bloc trade is below expected levels but rising. 26 Sheffield at 90. Trade negotiators often try to exclude from FTAs (not just EFTA) the very sectors which would benefit most from trade creation. Frankel and Wei at Sheffield at Sheffield at 95. 2/2/2005 HWL (Thailand), Ltd. 13

15 integrating the financial services sectors of EFTA and the European Union indicated that the gains to EFTA would be significant. 29 Insight from Embassy personnel In order to better understand the way that EFTA works, we are meeting with diplomats from EFTA members on an informal basis to discuss EFTA and countryspecific issues. Switzerland A Swiss diplomat in the economics section of the Swiss embassy in Washington, DC confirmed the EU s paramount role in Swiss and EFTA calculations. From the Swiss perspective, the hierarchy of importance in trade is EU first; WTO second; and the United States, Japan, and other large economies third. For other countries, the Swiss seem to prefer conducting relations through EFTA. The Swiss relationship with the EU is complicated by the fact that the country is still not a member of the EEA. The Swiss have retained their sovereignty, but at the same time their businesses face trade disadvantages if the EU signs FTAs with third countries. Though Switzerland has the ability to negotiate FTA s on its own, it prefers to operate through EFTA. While the overarching accord is between EFTA and the FTA partner country, each EFTA country can establish special arrangements for sensitive products on a case-by-case basis. An FTA with EFTA is thus akin to a sum of bilateral agreements. According to the official we spoke to, FTAs with normal-sized economies are not expected to produce large economic gains or losses in the near term. Indeed, this official stressed that the impact of other factors, such as significant exchange rate fluctuations, the business cycle, and the decisions of large firms, easily overwhelm the impact of an FTA in the short term. 30 Thus, FTAs with typical economies are not valued for their ability to produce immediate economic gains. They are valued as facilitators of longterm integration, as political instruments, and as a defensive mechanism to prevent a disadvantage to EFTA members due to an EU FTA with the same partner country. He 29 Edward P. M. Gardener and Jonathan L. Teppett, A Select Replication of the Cecchini Microeconomic Methodology on the EFTA Financial Services Sectors: A Note and Critique, The Service Industries Journal, Vol. 15 (1) (January 1995) at This observation seems especially relevant given the already low tariffs on manufactures in EFTA countries. 2/2/2005 HWL (Thailand), Ltd. 14

16 noted that the Swiss Chamber of Commerce is in favor of improving market access through FTAs. We asked this official to discuss the sectors of the Swiss economy that are particularly strong. He mentioned that Switzerland tends to have one or two large firms in many major industries. Swiss firms are moving towards becoming producers of high technology and highly specialized equipment. He mentioned that overall machinery output is not as strong as it once was, but that firms are focusing on more advanced equipment. This focus is underscored by Switzerland s very high per capita investment in information technology. The manufacturing sectors he specified were orthopedics and medical equipment, pharmaceuticals, chemicals and specialty chemicals, and jewelry watches in particular. He said that the agricultural sector is slow and that the level of protection in this sector remains high. As for services, he noted that tourism in the country is largely high-end, and that Switzerland is strong in private banking. However, he noted that banking has experienced net job losses in recent years due to the bursting of the economic bubble and is considered a shrinking sector. Liechtenstein Our contact with the Embassy of the Principality of Liechtenstein in Washington, DC provided insight into Liechtenstein and its relationship with EFTA. Liechtenstein has formed a Customs Union with Switzerland and is a member of the European Economic Area and the WTO. Goods manufactured in Liechtenstein and exported outside the European Economic Area are considered of Swiss origin. Bilateral trade agreements signed between Switzerland outside of EFTA with third-party countries are also applicable in Liechtenstein. Unless otherwise noted, trade data reported as Switzerland includes transactions directed to and/or from Liechtenstein as well. Liechtenstein authorities believe several considerations are driving the principality towards the expansion of trade through FTAs, including: (1) a stronger competitive position of the EFTA states, especially vis-à-vis the EU, (2) a high dependence on exports by Liechtenstein, (3) an opportunity for integration with other countries, and (4) political considerations such as assisting transition economies to benefit from the political stability and economic success enjoyed by Western countries. 2/2/2005 HWL (Thailand), Ltd. 15

17 From a practical perspective, Liechtenstein imports goods and services through either a direct or indirect purchasing method. Direct imports are those that flow directly into Liechtenstein, addressed to a defined purchaser in the Principality. Indirect imports are the most common, and flow through Swiss wholesalers that redistributes to retailers in Liechtenstein. 31 Some of the key industries with operations in Liechtenstein include machine and equipment manufacturing, chemicals and pharmaceuticals, textiles, jewelry, banking and other services. iii) Patterns of sector-specific protection It appears that EFTA countries maintain significant tariff spikes in a number of food-related product categories. The extent of this protection is illustrated by average import tariffs by commodity and region in the GTAP 5 database. 32 There is no single measure of protection for all EFTA countries in the GTAP 5 database, but there are tariffs for Switzerland and the rest of EFTA combined. 33 In order to facilitate comparison between the GTAP codes and tariff codes, a concordance between GTAP codes and HS codes has been provided in Appendix G. 31 For this reason, Direct Import figures are not an accurate measure of the real volume or value of purchases by Liechtenstein. 32 The GTAP database includes merchandise tariffs from the World Integrated Trade Solutions system of the World Bank and the United Nations Conference on Trade and Development. Tariffs on food and agriculture are from the Agricultural Trade Policy Database of the U.S. Department of Agriculture s Economic Research Service. Other tariff information is from regional input-output tables. Data are for See GTAP-II at These tariffs were calculated at the tariff line level and aggregated to match the GTAP sectoral concordance. Trade between free trade areas has been excluded in calculating these average tariff levels. See GTAP II at /2/2005 HWL (Thailand), Ltd. 16

18 Table 2: EFTA Member Average Import Tariffs in Excess of Fifty Percent Product code Description Thailand Switzerland Norway/Iceland omt Meat products nec 46% 296% 368% cmt Bovine meat products 53% 198% 351% wht Wheat 0% 120% 334% ctl Bovine cattle, sheep and goats, horses 13% 162% 319% mil Dairy products 29% 224% 317% c_b Sugar cane, sugar beet 40% 153% 205% gro Cereal grains nec 0% 99% 195% ofd Food products nec 40% 111% 157% pdr Paddy rice 0% 36% 155% osd Oil seeds 39% 97% 130% v_f Vegetables, fruit, nuts 58% 101% 109% pcr Processed rice 0% 33% 107% oap Animal products nec 17% 150% 103% vol Vegetable oils and fats 26% 115% 94% ocr Crops nec 39% 36% 74% sgr Sugar 45% 131% 53% b_t Beverages and tobacco products 51% 130% 50% p_c Petroleum, coal products 7% 53% 9% Source: Center for Global Trade Analysis, Purdue University Region The tariff information in the table above indicates that EFTA countries have heavily protected agriculture and food processing sectors. In rest of EFTA, tariff spikes in excess of 300 percent are present in husbandry, bovine and other meat products, dairy products, and wheat. Other highly protected products in EFTA include sugar cane and sugar beet, cereal grains, not elsewhere classified ( nec ); food products, nec; paddy rice; oil seeds; vegetables, fruit, and nuts; processed rice; animal products nec; vegetable oil and fats; crops nec; sugar; and beverage and tobacco products. 34 Switzerland also maintains significant tariffs on these products ranging from 33 percent to 296 percent. Petroleum and coal products are highly protected in Switzerland, but not in rest of EFTA, as Norway is a major exporter of petroleum. The table above indicates that Thai tariffs on some of the highly protected EFTA products are also significant, though in most cases much lower that tariffs in EFTA. Vegetables, fruits and nuts; bovine meat products; and beverage and tobacco products are the only highly protected product categories in Thailand. Average tariffs in these sectors are 58 percent, 52.8 percent, and 51 percent, respectively. On the other hand, paddy rice, 34 Highly protected products are defined as GTAP categories with tariffs in excess of 50 percent. 2/2/2005 HWL (Thailand), Ltd. 17

19 processed rice, wheat, and other grains can enter Thailand duty free, while tariffs on animals and animal products are relatively low. The high tariff levels in EFTA countries suggest that a comprehensive FTA between Thailand and EFTA could remove significant tariff barriers affecting Thai exports. The extent to which Thai exports rise depend in part on Thailand s competitiveness vis-à-vis other suppliers who currently enjoy preferential access to the EFTA market. An FTA with EFTA would also result in increased Thai imports of products for which EFTA countries are competitive and Thai tariffs are relatively high. The following table illustrates Thai product categories for which tariffs exceed 20 percent along with the EFTA tariffs for those same categories. Most of the protected Thai product categories are also protected in EFTA. The exceptions are fishing, textiles, wearing apparel, metal products, and motor vehicles and parts. From Thailand s perspective, these product categories could be vulnerable to import pressure from an FTA if EFTA countries are competitive exporters of these products. Table 3: Thailand Average Import Tariffs in Excess of 20 percent Product code Description Thailand Switzerland Norway/Iceland v_f Vegetables, fruit, nuts 58% 101% 109% cmt Bovine meat products 53% 198% 351% b_t Beverages and tobacco products 51% 130% 50% mvh Motor vehicles and parts 48% 0% 0% omt Meat products nec 46% 296% 368% fsh Fishing 45% 0% 0% sgr Sugar 45% 131% 53% wap Wearing apparel 41% 4% 18% ofd Food products nec 40% 111% 157% c_b Sugar cane, sugar beet 40% 153% 205% ocr Crops nec 39% 36% 74% osd Oil seeds 39% 97% 130% mil Dairy products 29% 224% 317% vol Vegetable oils and fats 26% 115% 94% tex Textiles 25% 1% 14% fmp Metal products 22% 1% 5% Source: Center for Global Trade Analysis, Purdue University Region 2/2/2005 HWL (Thailand), Ltd. 18

20 PART II: QUANTITATIVE ANALYSIS OF COSTS AND BENEFITS TO THAILAND iv) Methodology This section will quantify the costs and benefits of the FTA with EFTA. The first step will be to describe the status quo in bilateral trade relations between Thailand and EFTA. This analysis will include determining the value and volume of trade between Thailand and EFTA, assessing that trade relative to EFTA s and Thailand s overall trade, and putting the EFTA imports and exports in perspective relative to other economies with which Thailand trades. Certain aspects of this analysis will be performed from the perspective of both Thailand and EFTA. Unfortunately, the bilateral trade data differ substantially depending on which country s data are used. Second, EFTA is assessed as a single economy in terms of its economic footprint. This analysis will calculate an EFTA GDP and look at EFTA s overall economic performance during the past 5 years. Third, a competitive assessment is performed using revealed comparative advantage measures. Fourth, an overall macroeconomic assessment of the proposed FTA is made using the GTAP model. v) Status quo in trade Thailand s current trade (2003) with EFTA from the perspective of Thailand As shown in Table 4 below, Thailand s total exports in 2003 were $80.5 billion. Thailand exports to EFTA totaled $972 million according to the International Monetary Fund, approximately 1.2 percent of Thai exports in For the past decade, the EFTA share of Thailand s exports has been in the range of 0.9 percent to 1.2 percent. There has been a slight upward trend during the past decade, but the word stable is the best way to describe the EFTA share of Thailand s exports over the past ten years. On the other hand, EFTA s share of Thailand s imports has been declining. In 2003, Thailand s f.o.b. imports were $75.8 billion, shown in Table 5. Thailand s imports from EFTA countries were $822 million, or 1.1 percent of Thailand s total imports, by far the lowest import share during the past ten years. This compares unfavorably with EFTA s share of 1.67 percent in 1994, which was the highest import share during the past 2/2/2005 HWL (Thailand), Ltd. 19

21 decade. This declining share probably says more about the rise of the Chinese economy as a trade powerhouse during the past 10 years than it does about EFTA competitiveness. Table 4: Thailand s Total Exports ($ Million) World Iceland Norway Switzerland ETFTA Non-EFTA , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,549 Source: Haver Analytics from Direction of Trade Statistics, IMF 2/2/2005 HWL (Thailand), Ltd. 20

22 Table 5: Thailand s Total Imports ($ Million) World Iceland Norway Switzerland ETFTA Non-EFTA , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,987 Source: Haver Analytics from Direction of Trade Statistics, IMF As a result of these trends, Thailand ran a trade surplus of $150 million with EFTA in However, 2003 may have been an aberration, as Thailand has only run two trade surpluses with EFTA during the past ten years. In prior years, Thailand tended to run a deficit with EFTA. In contrast, Thailand s trade with the rest of the world moved into surplus beginning in 1998 due to the currency depreciation that followed the Asian financial crisis in During the past decade, Thailand s merchandise trade balance ranged from 38 percent to +8 percent as a percent of total trade, but since 1998 the range was 13 percent to +8 percent. Among EFTA countries, Switzerland is by far the largest in terms of trade with Thailand. In 2003, according to IMF data, Switzerland absorbed 93 percent of Thailand s exports to EFTA and was the source of 87 percent of Thailand s imports from EFTA in Thailand had a $190 million trade surplus with Switzerland, but has run trade deficits with Switzerland for 8 of the past ten years. Switzerland s share of EFTA trade with Thailand grew during the past decade. 2/2/2005 HWL (Thailand), Ltd. 21

23 Norway is the second largest source of EFTA trade for Thailand, accounting for less than 7 percent of Thailand exports to EFTA and more than 12 percent of Thailand s imports from EFTA in Thailand ran a trade deficit with Norway in 2003 amounting to $36 million and has recorded trade deficits with Norway during each of the past ten years. Iceland accounted for almost 0.5 percent of Thailand s exports to EFTA and approximately one percent of Thailand s imports from EFTA in Thailand ran a trade deficit of almost $5 million with Iceland in 2003 continuing the small negative trend that persisted during the past ten years. As a group, EFTA is about as large a market for Thai exports as France. According to United Nations data, Thailand s $979.5 million in exports to EFTA were larger than exports to Italy and slightly less than exports to France, as shown in Table 7. Table 6: Thailand Top Export Commodities (2-digit HS Codes) Code Description Trade Value 85 Electrical, electronic equipment 17,143,038, Nuclear reactors, boilers, machinery, etc 12,885,420, Rubber and articles thereof 4,458,943, Vehicles other than railway, tramway 4,145,063, Plastics and articles thereof 3,421,919,232 Other commodities 38,276,530,176 Source: 2/2/2005 HWL (Thailand), Ltd. 22

24 Table 7: Thailand 2003 Top Export Destinations (ranked in 2003 $) Country Share '00-'03 % Ch. United States 14,872 13,200 13,510 13, % -8.6% Japan 10,283 9,994 9,949 11, % 10.5% Singapore 6,064 5,262 5,555 5, % -3.6% China 2,837 2,873 3,555 5, % 100.6% HongKong 3,519 3,307 3,689 4, % 22.6% Malaysia 2,849 2,734 2,834 3, % 35.9% Taiwan 2,444 1,925 1,969 2, % 5.6% United Kingdom 2,384 2,337 2,388 2, % 8.2% Netherlands 2,270 2,037 1,891 2, % 4.2% Indonesia 1,354 1,370 1,681 2, % 67.4% Australia 1,638 1,362 1,642 2, % 31.9% Germany 1,658 1,574 1,537 1, % 8.1% Philippines 1,095 1,158 1,275 1, % 47.7% Republic of Korea 1,278 1,234 1,398 1, % 23.9% Vietnam , % 48.5% Belgium 1,143 1,422 1,358 1, % -1.4% Italy % 12.0% France % 4.9% Source: Bank of Thailand data at Download/Tab46-1.xls EFTA s current trade with Thailand In 2003 EFTA exports totaled $171.1 billion. About one billion dollars of this trade was with EFTA member countries. Thailand is currently not a large market for EFTA. In 2003, EFTA s exports to Thailand were $667.5 million, approximately 0.4 percent of EFTA s total extra-regional exports. The share of the Thai market in EFTA s extra-regional exports was in the range of 0.6 percent to 0.71 percent during the mid- 1990s. However, this share dropped significantly in 1998, likely due to the Asian financial crisis, which began in EFTA s total imports in 2003 were $139.2 million and its imports from non-efta countries were $138.2 million. EFTA s imports from Thailand were $621.6 million, 0.45 percent of EFTA s non-efta imports. In contrast to the situation with exports, Thailand s share of EFTA imports did not change substantially due to the Asian financial crisis. From EFTA s perspective, it ran a trade surplus of $46 2/2/2005 HWL (Thailand), Ltd. 23

25 million with Thailand in Thus, when EFTA and Thailand look at their respective official trade statistics, each sees a trade surplus in Table 8 below shows Thailand s top-fifteen exports to EFTA by SITC-Rev. 3 division. These exports accounted for 93 percent of Thai exports to EFTA. Most of Thailand s top exports are manufactured goods, including photographic apparatus and clocks (SITC 88); other transport equipment (SITC 79), electrical machinery, apparatus, appliances, and parts (SITC 77); and non-metallic mineral manufactures (SITC 66). Among exports not considered to be manufactured goods, exports of non-monetary gold (SITC 97); special transactions and commodities not classified by kind (SITC 93); fish, crustaceans and mollusks (SITC 03); vegetables and fruit (SITC 05); and cereals and cereal preparations (SITC 04) are the top Thai exports to EFTA. 36 Table 8: Thai Exports to EFTA (2000, 2001, and 2003) 37 SITC Rev. 3 Code and Description $ Thousand 97 GOLD,NONMONTRY EXCL ORES 10,272 10, , PHOTO.APPARAT.NES;CLOCKS 112, , , OTHR.TRANSPORT EQUIPMENT , SPEC.TRANSACT.NOT CLASSD 191, ,030 86, MISC MANUFCTRD GOODS NES 58,183 62,237 76, ELEC MCH APPAR,PARTS,NES 44,821 24,590 33, FISH,CRUSTACEANS,MOLLUSC 23,001 20,191 29, NON-METAL.MINERAL MANFCT 32,607 41,900 22, CLOTHING AND ACCESSORIES 24,056 21,666 21, TELECOMM.SOUND EQUIP ETC 11,467 5,726 19, TEXTILE YARN,FABRIC,ETC. 9,645 12,484 18, TRAVEL GOODS,HANDBGS ETC 15,566 14,321 15, VEGETABLES AND FRUIT 8,859 11,227 11, CEREALS,CEREAL PREPRTNS. 9,953 12,014 11, ROAD VEHICLES 15,803 8,467 9,893 Subtotal 568, , ,544 OTHER 61,521 46,470 69,004 Total 629, , ,547 Source: 35 Bilateral trade statistics always differ from partner to partner for a variety of reasons. In the case of Thailand and EFTA countries, the differences are quite substantial. 36 Appendix E contains more complete descriptions of the SITC codes and also contains the HS codes in each SITC division. 37 The data source for this table did not have any Thai trade data for /2/2005 HWL (Thailand), Ltd. 24

26 Thailand s top-fifteen imports from EFTA are shown in Table The top manufactured goods include photographic apparatus and clocks (SITC 88); machinery specialized for particular industries (SITC 72); electrical machinery, apparatus, appliances, and parts (SITC 77); and certain fertilizers (SITC 56). The top nonmanufactured imports are of non-monetary gold (SITC 97); and fish, crustaceans and mollusks (SITC 03). It is clear from Tables 8 and 9 that there is substantial intra-industry trade among Thailand and EFTA countries. The existence of intra-industry trade prior to a trade liberalizing agreement suggest that the adjustment costs of such an agreement are likely to be low. 39 Table 9: Thai Imports from EFTA (2000, 2001, 2003) 40 SITC Rev. 3 Code and Description $ Thousand 88 PHOTO.APPARAT.NES;CLOCKS 110, , , GOLD,NONMONTRY EXCL ORES 208, ,958 96, SPECIAL.INDUST.MACHINERY 59,876 73,170 68, ELEC MCH APPAR,PARTS,NES 63,302 74,444 63, FERTILIZER,EXCEPT GRP272 29,996 48,575 50, MEDICINAL,PHARM.PRODUCTS 51,567 50,954 47, GENERAL INDUSTL.MACH.NES 17,177 39,600 32, NON-METAL.MINERAL MANFCT 31,823 29,052 30, FISH,CRUSTACEANS,MOLLUSC 33,013 28,410 26, DYES,COLOURING MATERIALS 19,823 22,843 25, METALS MANUFACTURES,NES 19,397 22,276 25, METALWORKING MACHINERY 17,582 14,057 19, CHEMICAL MATERIALS NES 12,616 14,228 19, SCIENTIFIC EQUIPMENT NES 10,219 13,117 18, MISC MANUFCTRD GOODS NES 20,000 12,711 14,410 Subtotal 705, , ,553 OTHER 81, , ,159 Total 787, , ,712 Source: 38 Appendix F contains more complete descriptions of the SITC codes and also contains the HS codes in each SITC division. 39 Marius Brülhart, Marginal Intra-Industry Trade: Towards a measure of Non-Disruptive Trade Expansion, in P.J. Lloyd and Hyun-Hoon Lee, eds. Frontiers of Research on Intra-Industry Trade (Palgrave-Macmillan, 2002) at 1. The expansion of intra-industry trade is generally believed to entail lower adjustment costs than the expansion of inter-industry trade. 40 The data source for this table did not have any Thai trade data for /2/2005 HWL (Thailand), Ltd. 25

27 Table 10 below summarizes Thai-EFTA trade by one-digit SITC sections in 2000, 2001, and The majority of Thai imports and exports with EFTA were manufactured goods. Despite the high tariffs on primary products in EFTA, Thailand maintained a trade surplus in food and live animals throughout the period of review. In 2003, Thailand also ran trade surpluses in beverages and tobacco, fuels and lubricants, animal and vegetable oils and waxes, and the other categories. Thailand s trade in manufactured goods was in deficit by $165 million in 2003, and there was a much smaller trade deficit in crude materials. The trade deficit in manufactures shrank markedly in 2003 from 2001 levels due to a significant rise in Thai exports. Table 10: Structure of Thai-EFTA Trade by SITC Section (2003) Exports $ Thousand Share FOOD AND LIVE ANIMALS 57,824 48,368 62, % BEVERAGES AND TOBACCO 1,126 1,387 1, % CRUDE MATERIALS, INEDIBLE, EXCEPT FUELS 3,584 2,879 2, % FUELS, LUBRICANTS, ETC. 12 4,834 2, % ANIMAL,VEG.OILS,FATS,WAX % MANUFACTURED GOODS 365, , , % OTHER 201, , , % Imports FOOD AND LIVE ANIMALS 41,654 38,124 40, % BEVERAGES AND TOBACCO , % CRUDE MATERIALS, INEDIBLE, EXCEPT FUELS 13,911 6,931 9, % FUELS, LUBRICANTS, ETC. 1,371 1, % ANIMAL,VEG.OILS,FATS,WAX % MANUFACTURED GOODS 519, , , % OTHER 209, , , % Source: EFTA country trends in merchandise trade EFTA country exports and import dollar values have been rising in recent years due to a combination of growing external demand, a recovery of internal demand, and dollar depreciation. The trade of individual countries in EFTA is dominated by the European Union, which should be expected given their geography geographical 41 Manufactured goods are defined as SITC Groups 5 through 8, less division 68. Division 68 is then added crude materials, inedible, except fuels. 2/2/2005 HWL (Thailand), Ltd. 26

28 proximity to EU countries. The following tables show, for each EFTA country, total exports and imports, the value of EU and non EU trade, the value of trade with the top trading partner in the EU, and the value of trade with the top three non-eu trading partners ranked according to 2003 trade flows. Switzerland s exports and imports are displayed in Table 11 and 12. It runs a trade deficit with the EU but runs a trade surplus with the rest of the world. Switzerland s largest export destination in the EU is Germany. Its largest export destinations outside the EU are the United States, Japan, and Honk Kong. Its largest source of imports is Germany. Beyond the EU, the United States, Japan, and China are the top sources of imports. However, imports from the United States and Japan have stagnated while imports from Germany and China continue to rise. Imports from the United States are $1.1 billion less than in Imports from Japan peaked in 1990 and are currently $1 billion less than during the peak year of Table 11: Switzerland s Export Trends ($ Million) World EU Non-EU Germany USA Japan H. K ,447 16,515 10,932 5,401 2, ,456 23,372 14,084 7,916 3,596 1, ,500 28,766 16,735 9,678 4,027 1, ,621 32,039 18,583 10,592 4,329 2,171 1, ,547 32,800 18,747 10,499 4,587 2,141 1, ,790 41,477 22,313 14,134 5,111 3,048 1, ,380 40,327 21,054 14,580 5,088 2,627 1, ,542 43,126 22,416 15,398 5,598 2,458 1, ,733 40,040 22,693 14,382 5,639 2,192 1, ,474 45,020 25,454 16,498 6,450 2,732 2, ,353 52,099 29,254 19,045 7,074 3,244 2, ,391 49,850 29,541 17,952 7,433 3,308 2, ,949 47,060 28,889 16,970 8,010 3,058 2, ,837 51,120 27,717 18,215 8,692 2,993 1, ,249 51,200 29,049 18,154 9,934 3,228 1, ,526 49,409 31,117 17,275 10,550 3,415 2, ,049 51,478 30,571 17,785 9,547 3,190 2, ,555 54,079 33,476 17,885 10,478 3,323 2, ,526 62,677 37,849 20,954 11,359 4,014 Source: Haver Analytics from Direction of Trade Statistics, IMF 2,972 2/2/2005 HWL (Thailand), Ltd. 27