Trade-related investment measures are another policy instrument which has become an important topic discussed in most international trade negotiations in recent years. This is because investment and trade are increasingly interdependent, complementing each other. Most countries, especially developing countries, realise an impact of investment on trade. Investment measures can enhance or reduce comparative advantage of some specific sectors of countries. Therefore, many developing countries maintain various TRIMs as an active part of their trade policy.
TRIMs are used by governments to encourage or force investors to achieve certain performance standards. The most common TRIMs are local content
higher-cost local raw materials. Nonetheless, local content requirements are inferior to tariffs because the government cannot collect any tariff revenue (Hoekman and Kostecki, 1996: 120). At the same time, trade-balancing requirements are equivalent to quantitative restrictions which restrict imports to a certain quantity. Theoretically, both local content and trade-balancing requirements are inefficient and welfare reducing. However, TRIMs have traditionally been seen as a tool for promoting development objectives such as technology transfer, industrialisation, and export expansion (Low and Subramanian, 1996: 385). Since the use of TRIMs has become widespread especially in developing countries, the development of an integrated framework addressing policies affecting both trade and investment is necessary.
The Uruguay Round Agreement on TRIMs laid down multilateral disciplines on the use of TRIMs by member countries. The Agreement applied the GATT principles to investment policies which directly affect trade performance. Thus, under the TRIMs Agreement, local content requirements are not allowed because they violate the GATT's national treatment rule. Trade-balancing requirements are also banned since they are inconsistent with the prohibition of quantitative restrictions under Article XI of the GATT. Nevertheless, the TRIMs Agreement does not prohibit the use o f export performance requirements.
Similar to other developing countries, in Thailand, the use o f TRIMs as trade policy instruments has been extensive. A number of TRIMs have been employed by various government agencies to achieve the goals of import-substitution and export promotion policy. Nonetheless, TRIMs which have been very effective in supporting trade policy in Thailand are implemented through investment promotion measures and Export Processing Zones (EPZs). These measures are administered by the Board of Investment (BOI) and the Industrial Estate Authority of Thailand (IEAT). This section will discuss investment promotion measures and EPZs.
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5.3.1 Investment Promotion Measures
Investment promotion in Thailand began with the establishment of the Board Of Investment (BOI). The Board was to render assistance to entrepreneurs and investors under the provisions of the 1960 Promotion of Industrial Investment Act. The BOI became an administrator of this law which was revised in 1962. The 1962 Investment Promotion Act laid down a set of incentives which was provided for promoted firms. These incentives took different forms of measures such as guarantees, permission, and promotion. This legislation guaranteed against nationalisation; against government's engagement in new industrial activities in competition with promoted firms; and against monopolisation o f the sale of products identical to those produced by promoted businesses. This legislation permitted promoted businesses to bring aliens, skilled workers, and experts into the country to study investment possibilities and to work in their firms; to hold land rights; and to bring in and remit foreign currencies. This law provided promoted firms exemptions from import duties on machinery, parts and components, and equipment; full exemptions from corporate income tax for at least two years but not for more than five years; and exemptions from or reductions of import duties on imported raw materials. To administer these tax privileges, industries were classified into three groups according to their importance to the economy. Group A was capital-intensive industries while group B was industries which depended highly on imported parts and components, and group C was industries which were not classified into the first two groups. To promote import-substituting industries, group A received a full exemption of import duties on raw materials. A reduction of 50 per cent was provided for group B, and 33.3 per cent for group C.
In 1967, it was found that tax privileges granted for group A and B were excessive and encouraged industries with a high import content. Therefore, the BOI began to treat all industries as group C. In 1969, new promoted firms were no longer eligible for all kinds of reduction of import duties on raw materials.
In 1972, the new investment promotion law, i.e. the Coup Announcement No. 227, was enacted. This legislation provided a set of investment promotion measures designed to accelerate export activities. Most non-tax privileges were retained. The most significant revision of the new law was the provision of special privileges for
machinery was provided; a full exemption of corporate income tax was granted for three to eight years. If promoted firms purchased machinery and equipment within the country, producers or suppliers of these goods would be entitled to exemptions from business tax. Under this legislation, the BOI was given discretionary power to implement many kinds of protection for promoted industries. For example, the BOI were empowered to impose surcharges on certain imports; to ban or control imports; and to grant assistance necessary to promoted firms.
Special privileges were additionally provided for export activities. These privileges were full exemptions from import duties and business tax on imported raw materials and on goods imported for re-export purposes; full exemptions from export duties and business tax on exports; and permission to deduct from taxable income 2 per cent of increased income arising from exports over the previous year.
Additional privileges which were granted to promoted firms investing in promoted areas were the reduction of import duties and business tax on imported raw materials of not more than 50 per cent; reduction of business tax on the sale of products produced of not more than 90 per cent; permission to deduct an amount double the costs of transportation, electricity, and water supplies in calculating corporate income tax; permission to deduct from the net profit an amount of not more than 25 per cent of the costs of construction; and reduction of 50 per cent of corporate income tax for five years from the expiry date of the normal three to eight year exemption.
In 1977, the new Investment Promotion Act was promulgated. Some changes were made in this law. Manufacturing firms under promotion are exempted from, or granted 50 per cent reductions in import duties and business tax or VAT on imported machinery and equipment; and reductions of up to 90 per cent of import duties and business tax or VAT on imported raw materials. The change in privileges granted to export activities was that the amount of deduction from taxable income increased from 2 per cent to 5 per cent of additional revenue arising from exports over the previous year. With some minor amendments from time to time, the 1977 Act is still in force.
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For some activities to be eligible for promotion, there is a condition that all or parts of their products must be exported. For instance, at least 80 per cent of total sales of rubber products, leather products, and polished gem stones must be exported. At least 50 per cent of total sales of canned foods, umbrellas, toys, and sporting equipment must be exported. Moreover, for some industries, local content requirements are a necessary condition to qualify for the BOI's promotion. These requirements exist for the production o f tea leaf and dust, silk and silk yam, pasteurised skim milk, automobiles, and motorcycles.
Since tax drawback schemes are also available for non-promoted businesses, exemptions from or reductions of import duties and business tax or VAT on imported inputs do not create differential incentives for promoted firms. Investment promotion measures that seem to provide advantages to promoted firms are exemptions from import duties and business tax or VAT on imported machinery and equipment, and corporate income tax holiday.
It can be seen that TRIMs, export performance requirements and local content requirements, are widely used in Thailand as an essential condition for obtaining privileges from the BOI under the investment promotion law. Because the Uruguay Round Agreement on TRIMs does not prohibit the use o f export performance requirements, the requirements can still be applied to promote the export sector. Nonetheless, in order to comply with the obligations under the Uruguay Round Agreement on Subsidies and Countervailing Measures, the BOI will have to eliminate all export-related incentives by the end of 2002. In contrast, the use of local content requirements is not permitted by the TRIMs Agreement. The local content requirements which are presently applied to dairy products, motor vehicle engines, diesel engines for agriculture, multi-purpose benzene engines and motorcycle assembly,9 are to be eliminated by the end of 1999 (The WTO b, 1995: 25). Thus, the BOI has to change the rule about these requirements. Moreover, the role of the BOI needs to be generally revised. It is expected that when the TRIMs Agreement is reviewed, in five-year time from the launch of the WTO, export performance requirements are likely to be prohibited. Therefore, the BOI will have to adjust itself and focus on providing services, investment information, and technical assistance. Its
The adjustment of the BOI in responding to prohibition on the use o f both requirements needs to consider the different nature of the local industries. Praipol (1992) studies the impacts of the removal of both requirements on Thailand's trade policy and on the industries affected. He found that, in a number of industries, the removal of export performance requirements would have little impact. These industries consist of, for example, jewellery, canned seafood, garments, toys, plastic products, and ceramic products. The industries are so competitive that they can compete with the firms initially subject to export performance requirements. Furthermore, these firms are not very much interested in selling domestically. However, the removal of export performance requirements could produce severe impacts on the home electronic industries, such as, television sets, radios, refrigerators. This is because, in these industries, firms producing initially for export usually have large world-scale production capacity and are foreign-owned. Hence, they tend to sell more products in the Thai market.
The removal of local content requirements would cause strong and negative impacts on the local producers of some raw materials, such as, fresh milk, raw silk, and some vehicle components. The costs of production of these domestic firms are high because of low efficiency, and the lack of economies of scale and skilled labour. Nevertheless, some electrical component industries, for instance, colour television tubes, and air-conditioning compressors, are not likely to be much affected by the removal of local content requirements. Their products would continue to be used although local content requirements are not in force.
Praipol made recommendations that in the case where the impacts o f the removal of both requirements are severe, these requirements should be maintained and gradually removed during a transitional period. In addition, some policy measures could be employed to ease these adverse impacts. For example, to lessen the impacts of the removal of export performance requirements, the government may impose a special tax on the increased domestic sales by promoted firms. Moreover, direct assistance on technical improvement should be provided for local firms.
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5.3.2 Export Processing Zones (EPZs)
Export processing zones can be regarded as TRIMs because their operation is based on export performance requirements.10 In effect, all or most of products produced in EPZs must be exported. In Thailand, EPZs are under the supervision of the Industrial Estate Authority of Thailand (IEAT) which was founded in 1973. The main function of the IEAT is to undertake the setting up of industrial estates. Industrial estates normally comprise two zones: a general industrial zone and an EPZ. In its first decade, there were only a few industrial estates completed. None of them was EPZs. The first EPZ was Lard Krabang Industrial Estate, Bangkok, which was completed in 1985. Until 1992, there were three EPZs operating in Thailand, i.e. Lard Krabang, Lam Chabang (Eastern Seaboard), and Northern Industrial Estate.
Industrial enterprises operating in EPZs would obtain exemptions from import duties and business tax or VAT on machinery, equipment, and raw materials used in their export production; and on materials used for factory construction. Import duties and business tax or VAT on imports for re-exports, export duties and business tax or VAT on exports, and import surcharges are also exempted. Investors are granted the rights to own land in the industrial estate compound. They are also given the rights to bring into the country foreign experts and skilled workers. Foreign investors are permitted to remit foreign exchange from the country. Moreover, firms in EPZs are entitled to a 10 per cent discount on electricity for five years.
To date, industries which operate in Thai EPZs are garments, leather products, footwear, electronics, and furniture. The existence of EPZs is equivalent to the use of export performance requirements as a prerequisite for government's investment promotion measures, but EPZs can provide a more comprehensive benefit package to investors. Thus, they could have helped promote export growth. However, compared with other East Asian countries' experiences, Thailand's EPZs have not played any significant role in the promotion of the country's export sector. The limited role of EPZs as a measure of export promotion policy can partly be explained by the fact that the incentives provided for firms in the zones are not so different from those given to exporters in general. For instance, exporters can have refunds or rebates of any tax paid
estate, they will be entitled to exemptions from import duties and business tax or VAT on imported machinery and equipment. Consequently, EPZs' incentives seem not to create differential privileges to firms. Furthermore, the growing Thai domestic market resulting from the rapid expansion of the economy proved to be more attractive to investors than EPZs' privileges. The most notable aspect of EPZs is that they provide exporters with advantages and conveniences in customs and other government administrative procedures.