The framework agreement to establish the Thailand-India free trade agreement (Tifta) was signed on Oct 9, 2003. Trade negotiations to move closer to full liberalisation are still continuing and are expected to be concluded by 2010. To accelerate the realisation of benefits, both countries agreed to implement an Early Harvest Scheme (EHS) covering trade in goods for 84 products. The Tifta-EHS covered three-year period between Sept 1, 2004 and Aug 31, 2006 and has now ended.
At this stage, it is interesting to evaluate whether imports of any of the 84 items subject to tariff cuts resulted in trade diversion that may have led to a decline in the country's overall economic efficiency and welfare. This study attempts to empirically evaluate the impacts of post-Tifta-EHS tariff cuts on trade diversion using an econometric technique.
The 84 items (Harmonised System [HS] code six-digit level) under the Tifta-EHS included fruits (fresh mangosteens, mangoes, durian, rambutans, longans); fishery products (salmon, sardines, mackerel); electrical appliances (window/wall air-conditioners, colour TVs, ball-bearings); precious metal and jewellery; polycarbonates, and more. Tariffs on these goods were cut by 50% on Sept 1, 2004, 75% on Sept 1, 2005, and eliminated entirely on Sept 1, 2006.
The results of the study can be summarised as follows:
1. Although India is a relatively small trading partner of Thailand (ranked 18th at $3.4 billion or 1.3% of Thailand's total trade in 2006), it holds immense promise based on its population and strategic location.
2. Thailand incurred trade deficits with India from 2002-04 but had a surplus of around 10 billion baht in 2006. Post-Tifta-EHS evaluation found that total trade for all 84 product items increased by 40%, from 13.08 billion baht to 18. 38 billion baht over the Sept 1, 2004 to Aug 31, 2006 period. Thailand's exports in the categories covered increased by much more than its imports.
3. The Post-Tifta-EHS tariff revenue loss for all 84 product items is estimated around 51 million baht per year which is minimal in comparison to the net gains from the overall trade surplus Thailand recorded.
4. Only six out of the 84 items showed positive net imports from India during the period. Nonetheless, except for aluminium oxide other than artificial corundum, import shares of the other five products from India in the Thai market were averaging less than 10%, indicating that India was not a significant player in the products in question. They are: gearboxes (HS code 870840); semi-finished products of iron or non-alloy steel of rectangular (including square) cross-section, width measuring less than twice the thickness (HS code 720711); aluminum not alloyed (HS code 760110); other precious metal, whether or not plated or clad with precious metal (HS code 711319); and other appliances (HS code 848180)
5. Moreover, only the import shares of four items _ gearboxes, precious metal, aluminium oxide, and other appliances _ trended upward for the 2003-06 period, implying the tariff reductions may have had positive impact on raising imports from India and probably at the expense of Thailand's other trading partners. The Philippines is important trading partner of Thailand for gearboxes while Japan, China and Austria export aluminium oxide.
6. Nonetheless, results of the econometric analysis confirmed that only two of the six import items in question raised their import shares and caused trade diversion. They are the gearboxes and other appliance products. Increases in market shares of gearboxes and other appliance products from India in Thailand were found to have occurred at the expense of decreased market shares of other trading partners. For the gearboxes, the Philippines' export sector would be most affected whereas the Japanese export sector would be most affected for other appliance products exported to Thailand.
The study recommended that although India is currently a small exporter of both products to Thailand, a continuation of zero import tariffs from India could definitely provide incentives and induce larger imports in the future, particularly for gearboxes where import elasticity value with respect to tariff was found to be greater than 1 (relatively elastic).
The increased imports from India could occur at the expense of not only reduced government import tariff revenue collection from Thailand's other trading partners through import substitution effects, but also of reduced exports to Thailand of other trading partners, especially the Philippines. To offset an undesirable consequence, Thailand should promote and support domestic production of both products, particularly by foreign direct investment from India, Japan and other countries.
Thailand is certainly benefiting over India with respect to Tifta-EHS as total exports to India have increased much more than total imports from India. Now that the early-harvest scheme has ended, Thailand should support a continuation and extension and propose to merge it into the broader Thailand-India FTA for the benefits of both countries.
Authorities, however, should be very careful in listing the products to be included in the agreement, by examining the trade diversion impacts on the country's economy, efficiency and welfare.
Ake-Aroon Auansakul is director of the research division at the International Institute for Trade and Development. The opinions expressed here are his own. He can be reached at email@example.com
Bangkok Post, August 1, 2007