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4 Aug 2005

Industry

Thai-Japanese FTA and Thai Automotive Industry

The prolonged Free Trade Area (FTA) negotiations between Thailand and Japan finally made a breakthrough in early August. Previously, both parties held differing views on various issues, bringing negotiations to a standstill along the way. This was particularly true for the issue of liberalizing imports of automobiles and auto parts. Initially, Japan wanted to see Thailand fully liberalize this industry immediately, which was unacceptable to the Thai negotiators. As a matter of fact, the automobile industry has recently emerged as Thailand's rising star and much hope has been pinned on it as an export booster.

Significantly, the Thai authorities have set a target of developing the domestic automobile industry into becoming a major automotive production hub, i.e., the so-called "Detroit of Asia". In the early stages of negotiations, Japan called for Thailand to speed up liberalization on auto parts and completely-built-up units (CBUs) with engine capacities of 3,000cc. or higher, as well as those with engine capacities smaller than 3,000cc., over a short period of time. Under the Japanese proposal, Thailand would have had to slash tariff rates imposed on these items immediately, before eliminating them altogether by 2010. Thailand took exception to this proposal and continued to negotiate for amendments.

Finally, both parties have reached an agreement to have Thailand gradually reduce import tariffs on CBUs with engine capacities of 3,000cc. or higher, from the current 80 percent to 75, 70 and 60 percent over the first three years of the FTA, respectively, between 2007-2009. These tariff rates would then be kept unchanged at 60 percent until 2010, when these rates would be reviewed. For CBUs with engine capacities less than 3,000cc., Thailand will not allow a tariff reduction at this time for fear of serious repercussions to the domestic automotive industry.

For auto parts, import tariffs that are higher than 20 percent will be immediately slashed to 20 percent and completely eliminated in 2011. Meanwhile, import tariffs on auto parts that are equal to 20 percent or lower will be kept intact before being made duty-free in 2011.

During the negotiations, Japan's request to liberalize auto parts and CBUs within a short space of time was objected to by many parties, including domestic entrepreneurs; Thai auto part manufacturers, and western automobile manufacturers from Europe and the US, who were worried that if the import tariff on the aforementioned CBUs (which are mostly luxury cars) was reduced right away, and then completely abolished by 2010, the domestic automotive manufacturing industry would be adversely affected, particularly impacting investments from large European and US automobile companies. Liberalizing the imports of Japanese automobiles in the above category would have been tantamount to allowing Japanese luxury cars to penetrate the domestic market and take over this segment, which is now largely occupied by western makes, at present. However, after prolonged negotiations, it was concluded that the Thai authorities would gradually reduce import tariffs on that category in the phases mentioned above until reaching the year 2010, when the negotiations would be opened again.

In the case of auto-part liberalization, during the negotiations, the Association of Thai Auto Part Manufacturers had requested the government to more fully consider the impacts of import tariff reductions on auto-part imports from Japan. The association had stated that such liberalization would severely damage the Thai domestic auto-part industry. However, it was concluded that Thailand would liberate auto parts by prolonging the duty-free status until 2011 so that Thai manufacturers would have time to adjust to the increasing competition.

KRC views that liberalizing auto parts will certainly impact Thai manufacturers, and that they will need to adapt. It is forecast that the state sector will support the development of the domestic auto-part industry to increase its competitiveness in the global arena, whether by giving some attention to the matter of raw materials, and very importantly, in helping to develop domestic human resources to have sufficient quality and quantity to support the growth of the automobile and parts industry of the country.

Industry