The management of trade policy measures depends on a country's trade orientation. As discussed in the previous chapter, Thailand's trade policy is formulated in the national development plan. The direction of trade policy is roughly indicated in that plan. The first development plan (1961-66) aimed at promoting investment and activities of the private sector. The government provided an adequate basic infrastructure network, including transportation and communication facilities, irrigation systems, and public utilities. The provision of infrastructure was an attempt by the government to improve the investment climate necessary for capital accumulation, with a focus on import- substitution industries. A special emphasis was also placed on industries mainly using
substitution policy continued throughout the years of the second plan (1967-71).
The first major shift in trade policy was seen in the third plan (1972-76). The government began export promotion policy in this plan. It paid attention to the promotion of exports of agro-industries, food processing industries, and light manufacturing industries. The sectoral priority was moved from capital-intensive activities to more labour-intensive ones. The government's provision of infrastructure increasingly expanded to rural areas, in order to decentralise the industrial sector. Trade policy measures were targeted at promoting trade liberalisation. An export development committee was set up to formulate plans and find ways and means to promote exports. This resulted in a number of programmes of various government agencies such as the Ministries of Commerce, and Finance. These programmes were designed to help improve the ability of the country's exporters to compete in the world market. In the late 1980s, the scope of export promotion was expanded to joint venture industries which produce high-technology goods.
This section will discuss how trade policy instruments were implemented to pursue import-substitution policy in the 1960s and export promotion policy in the 1970s and afterwards. Trade policy measures discussed here consist of tariffs, tax drawback schemes, trade restrictions, credit assistance, and safeguard measures.
5.2.1 Tariffs
For the past four decades, tariffs have been a major instrument of trade policy. It was only recently that tariffs have decreased in importance. This is because, under the GATT, member countries are bound to reduce tariffs on imported goods. Therefore, it would be difficult to use tariffs as barriers to international trade. Moreover, various regional integration arrangements require their member countries to abolish or cut tariffs on goods traded among them. These current trends have tended to bring about an increase in the use of Non-Tariff Barriers (NTBs) as another main trade policy measure. However, tariffs are still considered as the most effective instrument of government's protection policy. This may be because tariffs have a direct impact on target industries,
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and thus their outcome is quite clear and easy to quantify. In addition, tariffs generate a large sum of revenue for the government.
In Thailand, the production and domestic trade of manufactured goods are subject to business tax or value-added tax (VAT) and municipal tax. Import and export of manufactured products are subject not only to business tax or VAT and municipal tax but also to import tariffs and export duties. Additionally, for some certain goods such as beverages, tobacco, and matches, excise taxes are imposed on their production and importation. In the pre-1960 era, custom duties were used to generate revenue to the government rather than to protect any specific industry. In the 1950s, the nationalist government raised import and export duties on a number of commodities. Although the purpose of raising custom duties was to balance the government's budget, these custom duties began to demonstrate their indirect protective effects. Industries which were protected by high import duties included consumer goods manufacturing such as sugar, matches, liquor, and soap (Narongchai and Juanjai, 1986: 81-4).
The use of custom duties as a protectionist measure of trade policy became clear in the 1960s when the government pursued import-substitution policy. The Customs Tariff Decree was enacted in 1960 to replace the first systematic tariff schedule of 1935. The classification of the tariff schedule was changed from three digit SITC to four digit BTN. The 1960 Customs Tariff Decree was in use until 1987 when the new Customs Decree was enacted. The new tariff schedule was classified into about 6,500 tariff lines based on the Customs Co-operation Council's Harmonised System. The tariff rates which are specified in the Customs Tariff Decree are the statutory rates. These rates can be changed only by the legislative body, i.e. the parliament. However, the statutory rates are not the rates actually imposed on imported goods. The actual applied rates, which are normally lower than the statutory rates, can be determined and changed by the Minister of Finance upon the approval of the cabinet. With some amendments, the 1987 Customs Tariff Decree is still in use. The Thai tariff rates are specified either as ad valorem rates or in specific rates. Nonetheless, the Ministry of Finance is trying to convert all specific into ad valorem rates.
Table 5.1 shows the average tariff rate which is government tariff revenue from each industry group divided by the value of imports in that industry group. It can be
promotion policy since the early 1970s, a major change in the tariff rates in July 1970 still induced an upward trend (Pairote, 1975: 6). The average tariff rate for total imports increased from 18.3 per cent in 1965 to 20 per cent in 1970. This was because the government needed to reduce unnecessary imports of luxury consumer goods to check the balance of payments deficit. Therefore, the promotion of export industries was mostly in the form of investment promotion privileges. Though the tariff rate for all imports in 1970 was still high, the rate for intermediate goods, e.g. mineral fuel and lubricants, began to fall and was lower than that for manufactured goods. Consequently, the costs of export industries decreased. Moreover, since the latter half of the 1970s, the tariff rate for mineral fuel and lubricants dropped very rapidly from 22 per cent in 1970 to 1.5 per cent in 1990. However, the average tariff rate for chemicals was hardly reduced until the 1990s, i.e. 18.4 per cent in 1960 and 14.6 per cent in 1992 (Table 5.1).
The average tariff rate for machinery was high until the early 1990s. This picture does not really conform with the attempt of the government to promote exports by providing many tax concessions on imported machinery. Nevertheless, it can be seen that, in the 1960s and 1970s, the average tariff rate for machinery was lower than the applied rates for both electrical machinery and non-electrical machinery. For example, in 1964/65, the average tariff rate for machinery was 16.6 per cent (Table 5.1) whereas the applied tariff rates for electrical machinery and non-electrical machinery were 21.6 per cent and 18 per cent, respectively (Table 5.2). This is because the average tariff rate represented the real amount of duties that the government collected which already excluded the amount of tax refunds. With the exception o f the period around 1970, changes in the average tariff rate for manufactured goods are consistent with the trade policy pattern of the country. In the 1960s, when an import-substitution policy was pursued, the tariff rate for manufactured goods was high, about 20 per cent (Table 5.1), to protect domestic production. Since the latter half of the 1970s, when the government launched an export promotion policy, the rate has been reduced continuously to encourage trade liberalisation. The tariff rate for manufactured goods has been less than 10 per cent since 1990 (Table 5.1).
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Considering the statutory and applied tariff rates, tobacco and beverages always have the highest rates. The rates were particularly high in 1964 and 1974, 54.7 per cent and 68.1 per cent, respectively, for tobacco; and 241.2 per cent and 177.7 per cent, respectively, for beverages (Table 5.2). In 1964, with the exception of tobacco and beverages, processed foods were the most protected industry. The applied tariff rates for processed foods ranged from 7 per cent for dairy products to 95.7 per cent for products of vegetable origin. The tariff rates for consumer goods were generally lower than the rates for processed foods. They scattered around 28 per cent. At the same time, the tariff rates for intermediate products varied between 18.9 per cent for ores and metals and 43.4 per cent for petroleum products (Table 5.2).
In 1974, the applied tariff rates for necessary processed foods were reduced very significantly. The tariff rates for dairy products and oil seed products were 3.4 per cent and 7.4 per cent, respectively. For machinery, both electrical and non-electrical, the tariff rates slightly decreased to 19.7 per cent and 15 per cent, respectively. On the contrary, the tariff rate for transport equipment increased from 40 per cent in 1964 to 53.6 per cent in 1974 (Table 5.2). For intermediate products, the picture is unclear. The tariff rates for some products increased, e.g. rubber, whereas the rates for the others decreased, e.g. pulp and paper.
In 1989, the tariff structure was made more consistent with the government policy of trade liberalisation. Tariffs became a policy measure to promote exports. The applied tariff rates for most products were lower than their rates in 1974. A big reduction was in intermediate products. For instance, the applied tariff rate for wood and cork decreased from 23.3 per cent in 1974 to 2.3 per cent in 1989. Moreover, the tariff rates for leather and petroleum products were reduced from 40 per cent and 48 per cent respectively to less than 2 per cent. The tariff rates for processed foods were generally higher than the rates for intermediate products but lower than the rates for tobacco and beverages, and transport equipment. For consumer goods, the tariff rates were lower but still rather high compared with the rates for intermediate products. The tariff rates for machinery, both electrical and non-electrical, were 8.2 per cent and 11.3 per cent, respectively, which are lower than the rates in 1974 (Table 5.2). However, these rates were still considered very high and imposed a cost burden on exporters.
lowered. Therefore, the government through the Ministry of Finance launched a programme to restructure the tariff system in 1990. Although overall changes in the Thai tariff system did not occur until 1994, there have been a number o f revisions since then.
In September 1990, the government decreased the statutory tariff rate for machinery from 30 per cent to 5 per cent. This decrease alleviated the tax burden of exporters, especially those not entitled to any tax drawback scheme. The details o f the drawback scheme will be discussed later. The second revision of tariffs was implemented in the transport equipment sector. In July 1991, the Anand administration decreased tariffs for completely built cars. The statutory rate for these with engines over 2,300 CC was reduced from 300 per cent to 100 per cent while the rate for the cars with engines smaller than 2,300 CC decreased from 180 per cent to 60 per cent. At the same time, the government revised the tariff structure on computers and computer components. The tariff rate on computers decreased from 20 per cent to 5 per cent whereas the rate on computer components decreased from 10 per cent to 1 per cent. In addition, there were other tariff revisions. For example, the government decreased the tariff rates for chemicals, metal and metal products, non-ferrous metal, and research and medical equipment.
Following the launching of the tariff revision programme in 1990, on 27 December 1994, the cabinet approved an overall restructuring of the tariff system. This meant that tariffs on all imported non-agricultural goods, which had not been revised earlier, were to be restructured on 1 January 1995. This restructuring programme would be completed in 1997. Under the revision programme, the standard structure o f tariffs would be classified into six rates, i.e. 0, 1,5, 10, 20, and 30 per cent. This was a very considerable change in the Thai tariff system. On the one hand, the highest tariff rate would change from 100 per cent to 30 per cent in 1997. On the other hand, the number of the ad valorem tariff rates would be reduced from 39 rates in 1994 to 6 rates in 1997.
This new standard structure of tariffs was designed on "value-added escalation". The tariff rates would be specified as follows. The zero tariff rate would be applied to
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medical equipment and man-made organs. The 1 per cent tariff rate would be applied to raw materials and electronic parts. The rates for capital goods, machinery, research equipment, and computers would be 5 per cent. The rates for finished products and intermediate products which cannot be produced in Thailand would be 10 per cent. The 20 per cent tariff rate would be imposed on finished products which can be produced domestically. The 30 per cent tariff rate would be applied to products which are deemed to need special protection.1 However, there is an exception in the case o f motor vehicles and parts which are excluded from the new structure. For raw materials and products which cannot be produced domestically, the tariff rates would be adjusted to the target rates immediately in 1995. For products which can be produced domestically but still need short-term protection, the tariff rates would be gradually adjusted in 1995 and would be reduced to the target rates in 1997. Once the standard structure is fully utilised, Thailand's average statutory tariff rate would reduce to 17 per cent. However, the import tariff rates for almost all products would still be higher than the rates imposed on imports from ASEAN member countries under the ASEAN Free Trade Area (AFTA) programme.
In the past, there were widespread criticisms that the tariff structure in Thailand is highly favourable to import-competing and against export activities (see, for example, Somsak and Yamazawa, 1983: 46). This resulted from the fact that although the government decreased tariffs for capital and intermediate goods to reduce the cost facing export producers, the tariff rates for consumer goods were still high enough to protect the domestic market. Thus, it was more profitable for manufacturers to sell their products in the domestic market than to export. It seems that the government provided positive incentives for export industries without abolishing corresponding negative incentives. Details on positive incentives will be discussed in the next section.
Apart from tariffs, other policy measures also created protective effects on manufactured products. These measures, which will be examined later, consist of, for instance, import quotas and import surcharges. Therefore, various studies were undertaken aimed at measuring protection for each industry group. These studies on effective protection revealed common results that the Effective Rates of Protection (ERPs) in Thailand are quite high and there is a bias against export industries. Thailand's high ERP reflects the widespread implementation of protectionist policy
The first study on ERP of Thailand was made by Trairong in 1970. This study found that, in general, the structure of protection was in favour of the production of consumption goods and intermediate goods but discouraged the production of capital goods (Narongchai and Juanjai, 1986: 93).
Narongchai (1973) calculated the ERP by using the input-output coefficients from the 1969 industrial survey, covered 58 industries. The results showed that, in 1969, the ERP for export industries were negative whereas most import competing industries received higher protection. When industries are classified according to the stages o f fabrication, the ERPs were strongly in favour o f consumer, both durable and non-durable, goods. The rates were particularly high for processed food, beverages, tobacco, and transport equipment, but biased against machinery. The structure of protection provided incentives to the sale in the domestic market, either non-import competing goods or import competing goods.
Pairote (1975) calculated the ERP for 1964, 1971, and 1974. He also found that the ERPs for export industries were shown to have large negative values. The ERPs in the 1970s were generally higher than those in the 1960s, especially for consumer goods. In 1971, the structure o f protection provided highest incentives for transport equipment, lowest incentives for processed food and construction materials. In 1974, the ERPs were lower, and for a number of industries, the rates became negative. The structure of protection was still biased in favour of consumer goods. In terms of trade orientation, there was a strong incentive for domestic sales.
Narongchai made more calculations of ERPs for 1980, covered 93 sectors (quoted in Narongchai and Juanjai, 1986: 94-7). He found that, on average, the ERPs were close to zero or negative for export industries but a positive rate for overall the manufacturing sector. This means the high rates for import competing and other industries. Consumer goods still received the highest protection. Bakery products, furniture, and motor vehicles were among the sectors with the highest ERPs. On the contrary, the ERPs for textile bleaching, rubber sheet, and canned fruit were all
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negative. These trends continued as shown in Supote's study of ERP in 1984 (Thamavit, 1994: 211-7).
Mingsam (1998: 9) calculated the ERPs for 1997 for Thailand's Industrial Master Plan. She found that the average ERP for the manufacturing sector was about 30 per cent, compared to 65 per cent from Narongchai’s study (1980). The ERP for import competing industries was about 53 per cent, decreased from about 71 per cent in the 1980 study o f Narongchai, while the rate for labour-intensive export industries was negative. The ERPs for the relatively high technology industries remained quite large. The automobile industry received the ERP of nearly 500 per cent.
The negative ERP for Thai export industries suggests that the government not only provided no incentives for exporting but also protected intermediate goods industries. This places burdens on export industries which use these intermediate goods as their inputs.
It should be noted that all the studies of Thailand’s ERP discussed here did not include the effects of some policy measures, e.g. tax drawback and credit assistance, on export industries. If these effects are taken into account, it is possible that the ERP for export industries could be different, either higher or lower. This depends on the extent of the effects of these policy measures. If these effects are quite strong, the ERP for export industries are likely to be higher. Nonetheless, further study on this issue is needed.
It can be argued that, on the whole, the ERPs and Thailand's import tariffs moved in the same direction throughout the past three decades. In the 1960s, both the ERPs and tariffs were very high, especially for tobacco, beverages, and transport equipment. Into the 1970s, in general, both moved in an upward direction. The structure o f tariffs and protection still provided incentives for the production of consumer goods. In the 1980s, the ERPs and tariffs started to show a downward trend. The protection for intermediate goods decreased very significantly. In the 1990s, tariffs decreased continuously due to the tariff restructuring programme of the government and the implementation of Uruguay Round commitments. This could be an explanation for the decrease in the ERPs over time.
schemes were offered to exporters. It is expected that the schemes would correct negative incentives for exporting.
5.2.2 Tax Drawback Schemes
The tax drawback schemes have been one of the most effective non-tariff measures of Thai trade policy. The schemes were designed to reduce the cost o f production generated by taxes. The tax burden is accumulated at every level of production and