INTERNATIONAL TRADE

Caught up in FTA mania

Impatient with WTO delays, Thailand is moving to seal bilateral deals with several trading partners large and small. But such deals can be a double-edged sword if they result in inequities that are incompatible with the WTO process

By WORANUJ MANEERUNGSEE

Thai Commerce Minister Watana Muangsook (left) discusses a planned FTA agreement with US Trade Representative Robert Zoellick. Some experts are worried that the country could end up a loser in its talks with Washington.

Among the Thaksin Shinawatra administration's economic policies to drive growth to between 6% and 8% a year is the entry into several free trade area (FTA) agreements, so much so that it has become FTA mania in the eyes of some observers.

Since the Thaksin-led government took office in 2001, Thailand has entered bilateral FTA talks with eight countries, compared with none under previous governments. Among the counterparts are the world's largest and second largest economies, the United States and Japan, as well as booming economies like China and India.

Thailand is in various stages of bilateral free trade talks with Australia, Bahrain, China, India, New Zealand, Peru, Japan and the United States. Many of these countries are its major trade partners, accounting for more than 50% of total international trade value.

Besides, the government favours regional FTAs. As an Asean member, Thailand is among the active proponents of the China-Asean FTA, with an aim to establish a huge market with 1.7 billion people.

Given the number of bilateral FTA talks, the country has inevitably been criticised as a supporter of bilateralism instead of multilateral trade as encouraged by the World Trade Organisation. Proponents of multilateralism say the proliferation of bilateral FTAs could undermine the pursuit of multilateral trade, which is widely believed to benefit both rich and poor nations fairly and equally.

In addition to increasing the number of the country's trade partners, the government also rushes to conclude the negotiations and timeframes of FTA implementation. Together with Singapore's Premier Goh Chok Tong, Mr Thaksin pledged to push for faster realisation of a proposed Asean Economic Community (AEC), five years ahead of the target year of 2020. Asean leaders agreed in November 2002 to explore the possibility of transforming the trade bloc into the AEC, a move that would involve deeper economic integration within the 10-member grouping.

With more FTAs, the government will be able to open up more export markets for Thai goods, one of the key engines that have driven the economy for more than three decades.

But in the earlier days of the government, Mr Thaksin announced an unconventional policy that raised many eyebrows. He said then that Thailand had to look inward and could no longer rely on exports, which were usually influenced by external factors. Instead, he said, local consumption should be the most important engine driving the economy. Three years later, the idea of "looking inward" was integrated into the so-called "dual-track" policy, which seeks to strengthen the economy simultaneously through both local consumption and exports.

What Mr Thaksin said three years ago was not wrong at the time. The country's export sector was growing at a slow pace then due to the US economic downturn and Japan's stagnant economy. He even sought to drop the East Asia Economic Model (EAEM), which focused on attracting foreign direct investment from multinational corporations interested in mass production of manufactured goods. However, imbalances created over time by the implementation of the EAEM have undermined its effectiveness in generating high and sustained rates of growth.

So he might have forgotten his earlier words, or he has just realised that Thailand could not throw away tremendous foreign income from selling goods abroad. Exports rose 16.6% to US$80 billion in the previous year and were projected to grow by 15% this year.

With his CEO working style, Mr Thaksin regards FTAs as a shortcut to create added value for the country. In his view, Thailand is like a small enterprise that needs to seek a fast way to upgrade itself rather than let things evolve gradually toward that end. For a country to achieve this, it needs to form FTAs, many of them.

"You see today there is a global business trend toward mergers and acquisitions among international firms. M&As enable them to achieve not only the economy of scale but also the economy of speed. Similarly, a state needs to forge closer economic ties with one another," he told businessmen at one point.

The Thai Commerce Ministry has sugested to Washington that any FTA should span tariff and non-tariff barriers against Thai agricultural products and address US anti-dumping actions against Thai shrimp and plastic bags.

Actually, both external and internal factors have forced the Thaksin government to move hastily toward FTAs.

Thailand's leader feels he could not afford to wait for the conclusion of the Doha Round of multilateral trade negotiations under the World Trade Organisation. A happy ending of the talks will bring not only low import tariffs on goods, but also lower export subsidies and domestic support on farm products among member countries. Unfortunately, the talks have moved at a snail's pace and even broke down at the latest meeting in Cancu'n, Mexico, in September 2003.

As a result, many countries, led by the US and Singapore, have jumped into bilateral trade talks instead. The Thai government does not want to see the country miss the train. Neither does it want the FDI to go straight toward booming China.

The fast-thinking prime minister wants the FTAs for two main purposes: to raise the country's competitiveness in trade and investment, and force the private and public sectors to improve themselves ahead of their counterparts in other developing countries.

"All my life, I have hated to take a defensive position when an offensive stance can dominate the game," he said. Although free trade is not a bad idea, careful consideration must be taken when negotiating the terms. Unlike trade-dependent Singapore, Thailand has real business sectors to take care of.

Rangsun Thanapornpan, an economics lecturer at Thammasat University, spoke for many critics when he accused the Thaksin government of rushing into FTAs and taking too many prospective partners at the same time.

The Thaksin government's strategy, he said, is to "catch the train first and die later" because it does not want to pay the "cost of non-participation" in a drive led by the US.

He also criticised the government for a lack of clear criteria in the choice of FTA partners and advanced research into their social and economic impacts, and for sketchy details on the priority points under negotiation.

It was not until early this year that the cabinet appointed a committee to follow up on the impacts from the FTAs and mapping out adjustment plans for affected business sectors. At the same time, it set up a committee to co-ordinate strategies and negotiations.

The setting of deadlines, Mr Rungsan pointed out, further undermines the bargaining power of Thai negotiators, who have already been at a losing edge in terms of knowledge, information and experience. Besides, FTAs add regulatory complexity and confusion to trade policy, especially in the administration of overlapping, contradictory and mind-bogglingly complicated rules of origin requirements. This is what Jagdish Bhagwati, a highly regarded authority on international trade who has advised the United Nations on globalisation, calls the "spaghetti-bowl effect" _ firms and governments become tied up in knots of messy, discriminatory red tape _ which makes little sense in a world of integrated cross-border production.

It is sad but true that poor nations can make themselves heard only at the WTO, where they have more bargaining power to negotiate with rich nations.

But under bilateral negotiations, a developing country can hardly hope to force Washington to cut its huge farm subsidies that are distorting farm prices in the world market. That is why academics and non-government organisations are so worried that Thailand could end up a loser in its FTA talks with Washington.

The Bush administration proposes a comprehensive package of liberalisation, covering trade, investment, services, information technology, intellectual property, fair trade competition, etc. Unfortunately, Thailand is keen on only certain areas.

Thaksinomics in the area of international trade policy has yet to bear fruit, as most of the bilateral FTA pacts will take effect after his four-year term expires by the end of this year.

The Thaksin-led Thai Rak Thai Party stands a good chance to be re-elected in the next general election and forming the government. If this is the case, the new government will have plenty of time to negotiate with the US and Japan carefully to balance the benefits for both parties.

As well, in his next term, Mr Thaksin should pay more attention to adjusting plans to salvage sectors to be hit by the FTAs.

It would be ideal if the Thaksin government also adopted the dual-track approach in international trade policy _ proactive in both the FTA engagement and multilateral trade negotiations under the WTO to balance freer and fairer trade among rich and poor nations.