The EU GSP Scheme Expiration – A missed opportunity for Thailand?

[1. http://www2.thaiembassy.be/thailands-economy-in-december-2013/.]

I have just recently been talking to Andreas Magnusson, the First Secretary of the Swedish Embassy here in Bangkok. He mentioned that the “Generalised Scheme of Preferences” (GSP) trading partners list of the EU will be updated soon, putting Thai-European trade activities in a tough situation. On January 1, 2015 will Thailand be excluded from the list that granted extensive tariff benefits for the last 15 years. [2. http://eeas.europa.eu/delegations/mongolia/eu_mongolia/trade_relation/general_pref_scheme/index_en.htm.]

Thailand is now defined as an upper middle income country by the Worldbank. According to them, an upper middle income country should earn $4,086 – $12,615 per capita. Thailand reached that mark in 2010 already, however many other official figures still accredit Thailand with a per capita income much below $4000, whereas they these also state that the purchase power parity adjusted GDP per capita is as high as $9000.

As Mr. Magnusson continued, he indicated that the GSP will most likely expire without a follow-up agreement in place. With a trade partner like Europe, after all Thailand’s third largest trading partner [3. http://trade.ec.europa.eu/doclib/docs/2013/may/tradoc_151356.pdf.], what could be the consequences for Thai economy? I concluded during my research how The EU GSP Scheme connects to the Coup in Thailand and how it could possibly contribute to upcoming economic growth stagnation.

The EU reviews the GSP agreement every few years, and as Thailand has moved up the prosperity ladder of nations, the EU introduced a new scheme that focuses on fewer beneficiaries (90 countries). Officially they claim to exclude a country like Thailand because they want to concentrate on the more poorer ones who need such benefits more. Thailand had been the second largest beneficiary of the GSP tariff reductions, just behind India. [4. http://eeas.europa.eu/delegations/thailand/eu_thailand/political_relations/index_en.htm.] However, it makes much more sense that this is an extensively economic and move, Thailand gets excluded not solely because it became more prosperous, but also because there are now more sifgnificant economic interests than tarriff benefits at stake. I will elaborate this later on.

What does this mean for Thailand economically? The European Union is one of the most important investors in Thailand with €14.6 billion Foreign Direct Investment in 2012. The bilateral trade amounted to over €31 billion  in 2012. [5. http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113454.pdf.] Of the €17 billion of Thai exports to the EU, around 70% fall under the GSP, entering the EU with either zero duty or a preferential reduced duty rate. [6. http://www.vieuws.eu/eutradeinsights/eu-thailand-round-three-of-trade-talks-kicks-off/.]

[7. http://ec.europa.eu/trade/policy/countries-and-regions/countries/thailand/.]

Most Thai exports to the EU are industrial products like transport equipment. They account to a volume of € 7.7 billion. These could drop if tariff reductions are revoked, but should not be expected to drop excessively. Another big part of Thai exports, about €3.3 billion, account to agricultural products as well as €1 billion trade of textiles & clothing . These segments represent a very competitive market where demand will suffer if prices increase. Both sides are very aware of this, which is why the EU and Thailand jointly decided to set up an FTA agreement that could step in place of the old GSP. This represents a whole new approach to the bilateral trade relationships between Thailand and the EU. It is, on the one hand, necessary to keep up the level of trade volumes and extend the level of co-operation, yet on the other it could force the Thai government to accept certain regulations that might not be in the best interest of its people.

Things that need to be decided on:

  • trade in goods
  • rules of origin
  • intellectual property rights
  • customs and trade facilitation
  • technical barriers to trade
  • public procurement
  • health standards
  • sustainable development
  • services and investment protection

Does Thailand really need an FTA Agreement with the EU? During the third round of negotiations in December 2013 in Chiang Mai, around 2000 protesters gathered to express their dissatisfaction about the FTA, fearing that it will entail the future monopolization of seeds.

http://www.youtube.com/watch?v=chh39cV1qhs

A further great concern of Civil Society organizations is that Thai citizens will prospectively not be able to cover for their medicine supplies. Thailand itself produces generic versions of some anti-retroviral drugs. These are essential for the approximate 1.2% of population that is HIV-positive and currently enjoy almost free access to the necessary drugs. [8. http://www.bilaterals.org/?the-eu-thailand-fta-what-fate-for&lang=en.] The EU is demanding that drug patents will be extended from 20 to 25-30 years, thus delaying access to generic versions of medicine. [9. http://www.vieuws.eu/eutradeinsights/eu-thailand-round-three-of-trade-talks-kicks-off/.] The unconditional acceptance of European property rights and patents would, of course, have a much larger impact than just extending the live-span of medicine patents; i would make the production of generic medicine more difficult and more expensive.

Can Thailand afford not to  enter the FTA?

If FTAs with other Asean nations are completed, Thailand will be left out. Moreover, Thailand faces the possibility of graduating from the GSP programme in 2015, whereby all tariff privileges would be revoked,

Thai Commerce Ministry, December 2012 [10. http://www.nationmultimedia.com/opinion/A-boost-for-Thai-EU-relations-30200854.html.]

The joint statement of both countries has so far been that they made substantial progress finding a consensus on the majority of the topics that the FTA would comprise of. However, a very sensible issue for both will be to find an acceptable common standpoint regarding IPR protection and access to medicines at the same time. [11. http://trade.ec.europa.eu/doclib/press/index.cfm?id=964.]. The talks to conclude the agreement had officially started in March 2013 and would now be in its fourth round of negotiations. The political situation in Thailand now, however, prohibits the formation of long-term political commitments.

 

EU Statement on Military Takeover in Thailand

We are following developments in Thailand with extreme concern. The military must accept and respect the constitutional authority of the civilian power as a basic principle of democratic governance. International human rights standards, including media freedom, must be upheld. It is of the utmost importance that Thailand returns rapidly to the legitimate democratic process. In this respect, we stress the importance of holding credible and inclusive elections as soon as feasible. We call upon all parties to exercise restraint and work together in the interest of the country.”

The EU-Thailand FTA would have created a whole new situation for the bilateral trade, for investment opportunities and, after all, for the legal rights of European companies in Thailand. I must assume that the expected situation would have been in any case more beneficial for the EU than for Thailand. Looking at the situation now, it cannot be outruled that the military will stay for several years in power. The fact that the qualified personal to conclude the agreement, say the former Thai Minister of Commerce, Mr Boonsong, is now detained by the military makes the dilemma complete.

http://www.youtube.com/watch?v=B6Hz-FRNasw

The EU-Thailand Free Trade agreement was supposed to offset the GSP agreement from the past, but now it seems that nothing will be happening to close the agreement soon. Thai exports to the EU will very likely fall from then on and it will hit the economy with leverage. Thailand has a positive overall trade balance of about €4.5 billion, but if exports to the EU drop, it could become negative. After all, it will also have to face heavily decreasing revenues from the tourism business. Bloomberg furthermore reveals in the above video that not only trade will suffer from the incapability of Thailands current leadership to take care of economic concerns, but also Foreign Direct Investment could be stopped or even withdrawn. If there is no mid-term solution to be found, the long-term outcome could be that Thailand will lose its competitive advantage towards other ASEAN countries, with players like Vietnam, Indonesia and Malaysia taking its place in industrial production export business and as FDI-safeheaven. Economically seen, the perspective failure to close the FTA with the EU before the year 2015 is a dramatic failure. On the contrary seems this delay to turn out as beneficial for the public – they will for now not become subject to extensive property rights regulations.

 

 

 

 

 

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