Phân tích các chính sách thương mại của chính phủ Thái Lan đối với nguồn cung ứng quốc gia (English version)

Trade Flows and Related Government Policies towards Low-cost Country Sourcing:
A Case of Thailand
Executive Summary
Thailand is known to be not only a LCCs but also a BCCs thanks to both its low-price level
and qualification of products. For a long time, it has proudly stayed in the third position in
global LCC satisfaction amongst Asian countries.
Thailand has a prosperous trade history when it was an economic and financial center of
Asia due to the accurate trade policies such as engaging in trade agreements helped Thailand
gain a tremendous profit. Seaports were established in coastal cities in early 1945s to
facilitate exchange of goods with Eastern countries. However, political instability has led to
uncertainties in the economy such as the devaluation of government in the 1980s, which led
to diminishing national output. Fortunately, the Plaza Agreement in 1985 attracted numerous
FDI inflows (mainly from Japan), impacting foreign trade improvement. Additionally, being a
member of ASEAN in 1967 helped Thailand take tariff advantages, narrowed trade barriers,
and attracted more FDI, leading to an increase in export and import volume. However, the
Covid 19 pandemic and political chaos negatively affected Thai’s trade volume.
Thailand's comparative advantage is industry along with agricultural products such as rice,
flour and fruit. There are three factors that positively affect the successful development of
Thai agriculture: land, labor, and capital. However, Thailand is gradually transforming from
agriculture into industry to compete with developed and developing countries.
In the competitive advantages, Thailand has a large semi-skilled labour force with low
wages. Thailand has a tremendous edge in terms of chance and government role in exporting
left-hand drive cars to Australia, New Zealand, Japan, and ASEAN countries with extremely
cheap tariffs. The automobile industry will be analysed using The Porter Diamond Theory
criteria.
Regarding tariffs, Thailand is recorded to have extremely high tariffs for imported products
from non-ASEAN regions while imposing not more than 5% tariff rate and even duty free for
intra-ASEAN regions as a CEPT scheme. Some obvious pros and cons include domestic
goods consumption encouragement and foreign exporters limitations.

1

For quotas, depending on the trade agreements signed between Thailand and other countries,
the government has made quotas for imported and exported products with different tax rates.
Currently, Thailand has joined ASEAN and FTAs, the government should consider joining
the CPTPP to increase its ability to expand its trade market and overcome the economic
consequences of COVID19, as improvements for tariffs and quotas' disadvantages and
enhancement for their benefits.
For subsidies, the outbreak of Covid 19 and political chaos led to the prolonged agriculture
subsidy, which resulted in a Thai government budget deficit. Therefore, they should consider
shifting the cash subsidies to non-subsidies and attempt to minimize the budget for subsidies
in this industry.
Thailand is one of the most attractive places to be invested by many economic superpower
countries. Offshore investment in Thailand may assist Thai industry produce more
effectively and at a lower cost. The term of offshoring helps Thailand receive technology
transfer and new business approaches.
Thailand is a country that strongly attracts investment from many foreign enterprises. For
decades, FDI inflows have always been on an upward trend, mostly from investments in the
manufacturing industry. Although Thailand is still currently one of the largest FDI attractions
in Southeast Asia, the country is facing competition with neighboring countries in terms of
LCCS.
Some suggestions for the Thai government to develop its competitiveness such as building
and developing facilities, or improving the qualifications of the workforce have been given,
in order to support both domestics and foreign firms, as well as to attract more quality FDI.

2


Abbreviation List
AFTA

ASEAN Free Trade Area

ASEAN

Association of Southeast Asian Nations

BCCs

Best-cost country source

BCCS

Best-Cost Country Sourcing

CEPT

Common Effective Preferential Tariff

CPTPP

Comprehensive and Progressive Agreement for Trans-Pacific Partnership

FDI

Foreign Direct Investment

FTAs

Free Trade Agreements

G&S

Goods and services

ISI

import substitution industrialization

LCCs

Low-cost country source

LCCS

Low-Cost Country Sourcing

LDC

Least Developed Countries

MNF

Most Favored Nations

NESDC

National Economic and Social Development Council

RCEP

Regional Comprehensive Economic Partnership

R&D

Research and Development

SDG

Sustainable Development Goals

TCO

Total Cost of Ownership

WTO

World Trade Organization

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Table of Contents
Executive Summary

1

Abbreviation List

3

1. Introduction

5

2. Purpose Statement - Thailand as LCCS

5

3. Thailand’s Trade History

6

4. Comparative Advantage and Competitive Advantage

8

4.1. Comparative Advantage

8

4.2. Competitive Advantage

8

5. Trade Policy

9

5.1. Tariffs

9

5.2. Quotas

10

Recommendations for Tariffs and Quotas
5.3. Subsidies
Recommendations for Subsidies

10
12
12

5.4. Offshoring

13

5.5. FDI

13

Recommendations for Offshoring and FDI

14

6. Conclusion

14

7. References List

15

8. Appendix

22

4


1. Introduction
The formation and development of globalization have created many opportunities for
countries to be able to exchange and integrate in many aspects such as culture, society, and
especially economy when global trade of products and services become busier than ever.
Regarding developing countries, in the past, trade barriers prevented them from following
rapid improvement of global economy. Nevertheless, globalization stimulated many of them
to begin expanding their markets and liberalizing their economies by promulgating policies to
encourage trade activities. Hence, developed countries are encouraged to invest in developing
countries, which will create more jobs and alleviate poverty in developing nations (Hamdi
2015; Nijman & Shepherd 2010).
This paper aims to present the efforts of Thailand’s government in developing trading
strategies with other regions of the world. First is a discussion of the trading position of
Thailand, through concepts of LCCS and trade history. Next, comparative and competitive
advantages that Thailand uses to position itself in the global marketplace will be outlined.
The authors will examine the policies of Thailand related to tariffs, subsidies, quotas, offshoring, and FDI by showing their effects, both positive and negative, on Thailand's
economy. Last but not least, several suggestions to help Thailand overcome the consequences
and develop its strengths in international trade will also be proposed. The analysis is
supported by accurate academic and non-academic sources which are associated with

international business.
2. Purpose Statement - Thailand as LCCS
When globalization causes tremendous competition in industries, LCCS are always effective
ways of achieving cost-saving goals to increase shareholder value while satisfying internal
customer-demand with low price-level but adequate quality (Jahns & Bänziger 2002;
Koppelmann 2003). According to Monczka and Trent (1991), LCCS is action of globalsourcing (i.e. offshore-sourcing, acquiring, integrating and coordinating G&S) from countries
with lower comparative production-cost than and culturally/geographically substantial
distance from home-country (Kusaba, Moser & Rodrigues 2011).
Not just being LCCs, Thailand is potentially a global BCC source (Vu & More 2017) when
other countries must take both TCO and risk-management, besides purchasing-price, into
consideration when coming to global-sourcing (Siegfried 2013). Specifically, while lower
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TCO is BCCS’s advantages, country risks include long-term factors, namely environmental,
political, socio-demographics, macroeconomics sustainability (Vu & More 2017).
Even global procurement-managers can be biased towards LCCs and/or regions perceptions,
it is obvious that Thailand ranks third in top highest-evaluated-nations (Lorentz 2015).
Thailand also ranked first in quality of products and third in performance-satisfaction (Figure
1) regarding Asian LCCs’s quality and cost-competition (Ruamsook, Russell & Thomchick
2007).

Figure 1. LCC’s Overall Satisfaction (Ruamsook, Russell & Thomchick 2007)
3. Thailand’s Trade History
Thailand was a prosperous Asia trading center in 19th century because tremendous trading
transactions with European and American merchants happened through Treaty-of-Bowringand Treaty-of-Harris (Lord 1966). Until 1945, ports in coastal cities and places with large
estuaries were gradually constructed and facilitated to exchange commodities with Persia,
Arab countries, India, and China, mainly agricultural products and fabric (Unakul 1961).
Throughout 1960s, kingdom's economy flourished due to market-oriented ISI and
establishment of several economic organizations such as NESDC in 1959 (Unger 1998).

However, Thailand suffered from numerous economic issues such as falling US investment,
budget deficits, inflation, and particularly transport network disruption due to two oil crises in
Middle East, declining Thailand's transactions by 36% in 1970-1984 (Robinson et al. 1991;
Jitsuchon 2002). In early 1980s, economic recession happened and led to Thai's government

6


devaluation of national currency, affecting Thailand's trading activities and escalated
domestic prices; national output dropped by 10% accordingly (Senasu 1990; Yu & Xu 2001).
Fortunately, the Plaza Agreement in 1985 made Thailand's exports more competitive and
attract to foreign direct investment inflows (mainly from Japan), and foreign trade improved,
leading to outstanding manufactured exports (Senasu 1990; Robinson et al. 1991). Engaging
in ASEAN in 1967, China FTA in 2002, and FTA ASEAN + Japan in 2008 helped Thailand
benefit tariff, minimize trade barriers, and attract more FDI, leading to increasing average
rate of export manufacturing industry (12%/year in 2007-2010) (Wongpit 2012). Thailand's
export volume, import volume, and term of trade slightly dropped in 2016- 2020 (figure 2;
appendix 1) due to Covid-pandemic and Thai political chaos (OECD 2020). Notably, leading
export turnover is agricultural industry with two main products: rice and rubber (appendix 2).
Thailand's crucial foreign trade partners are Japan, NAFTA, and US during past five years
(appendix 3).

Figure 2. Thailand’s Import, Export Volume, and Terms of Trade from 2016 to 2020
Source: Bank of Thailand (2021)

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4. Comparative Advantage and Competitive Advantage
4.1. Comparative Advantage

Comparative advantage refers to economy's ability to produce goods with lower opportunity
cost than its trading partners (Ricardo 1917). Thailand is known as agricultural nation with
the top third position in exporting rice worldwide in 2021 (Statista 2021). There are 3 factors
influencing agricultural development: land, labor, and capital. Firstly, total area of Thailand is
510,890km2, which includes 221,100km2 of agricultural land (World Bank 2018). This means
that based on the land area, percentage of agricultural land accounted for 43.277%, almost
half of Thailand's total land. Secondly, total population of Thailand in 2020 is also quite high,
approximately 69,799,978 people (World Bank 2020). Lastly, government approved
supportive policies to develop country's economy, such as increasing agricultural
productivity, distributing equal land use, and educating skill-labor. Currently, Thailand is
gradually transforming from pure agriculture to heavy industries like car industry.
4.2. Competitive Advantage
Competitive advantage refers to characteristics that enable firms or industries to function
goods or services more effectively in order to compete with competing industries from other
nations (Porter, 1990). The Porter Diamond Theory attributes competitive advantages to a
number of factors (Liga et al, 2014). One of Thailand's most efficient industries is automotive
manufacturing industry; therefore, automobile industry will be analysed using The Porter
Diamond Theory criteria. In terms of factors, Thailand has a large semi-skilled labour force
with low wages. These labours might be a valuable resource in assisting Thailand's car
industry to become more cost-effective and production efficient (Peter & Archanun, 2017).
Thailand has a tremendous edge in terms of chance and government role in exporting lefthand drive cars to Australia, New Zealand, Japan, and ASEAN countries with extremely
cheap tariffs (austrade.gov.au, n.d). Hence, Thailand has a significant edge over other nations
and right-hand automobile production countries.

8


5. Trade Policy
5.1. Tariffs
Simply understood, tariffs are taxes imposed on imported and/or exported goods, being the

oldest and longest form of trade policies and generating value for a country (Ferrara et al.
n.d.; Seppo, Arja & Alan 2016).
In 2019, Thailand’s average MFN tariff-rate was 10% ad-valorem, 29% for agricultural and
7% for non-agricultural commodities. Joining WTO, Thailand has bound 75% of its tariff
lines, while WTO has bound only 28% (ITA 2021). Despite being LCCs, Thailand’s high
tariffs in several industries still obstruct US commodities’s entry into Thai-market. Imports
competing with local-produced commodities levy highest ad-valorem tariff-rate, namely
motor-vehicles (80%), motorcycles and clothing (60%), distilled spirits (54%-60%), plastics
and restaurant-products (30%). Even MFN tariffs on imported food goods record 30%-50%.
These genuinely restrict US and foreign-exporters’ ability to compete in Thai-market,
shielding domestic goods (export.gov 2019).
Being part of AFTA - a “tool” to promote ASEAN area’s competitive-advantage in production
upon global market (ASEAN 2012) by not imposing common external tariffs on imported
commodities, ASEAN members only have tariffs on goods imposed from outside ASEAN.
Besides, LDC are granted with preferential trade-agreement by Thailand (Santander 2021).
For 99% products within ASEAN, its members only apply 0-5% tariff rate, as known as
CEPT scheme (Chaipan, Nguyen & Ezaki 2006).
Thanks to that, nation’s benefits from being AFTA member include trade liberalization by
eliminating tariff barriers, GDP and economic improvement in region, long-term competition
with aforementioned factors, diversified and qualified commodities, and encouragement to
domestic consumption.
However, limitations appearing are AFTA’s commitments to outtra-ASEAN regions since it
only focused on intra-ASEAN generally and Thailand specifically, with extremely low
ASEAN share in global trade of 1.3% (WTO 2019). Clearly, with hefty taxation on imported
commodities from non-ASEAN regions, such regions might face much less incentives while
their products become much more costly in Thai-market, eventually affecting and reducing
trade liberalization and customer demand in Thailand (Chaipan, Nguyen & Ezaki 2006;
Andrew 1996).
9

5.2. Quotas
A quota is a maximum limit on the volume or value of goods allowed to be imported or
exported during a period (Gandolfo 2013).
There are quotas applied in Thailand for some imported commodities with specific quantities
and associated taxes. Thailand will impose different taxes on a specific product for different
countries, depending on trade agreements between both. For example, because Thailand and
Myanmar signed AFTA, Myanmar received zero tariff and unlimited import corn into
Thailand from 1st February to 31st August 2019. Meanwhile, due to no FTAs, US pays 20%
in-quota tariff and 73% out-of-quotas with corn quota of 54,700 metric tons (Prasertsri 2019).
From that, government can control the number of goods imported and exported into Thaimarket and protect domestic products as well as domestic companies from high competition
with foreign goods and large foreign companies. Both are advantages of quotas for Thaieconomy.
Regarding barriers, government also requires import licenses and complicated entry forms
including packing lists, commercial invoices, and airway bills (Thailand-Import
Requirements-and-Documentation 2019). As a result, because there are not many products,
Thais will have fewer shopping options, which can be detrimental to their quality of life.
Recommendations for Tariffs and Quotas
Although Thailand signed FTAs, AFTA, and RCEP, government should consider joining
more world trade organizations. A good recommendation is the CPTPP which is FTA as a
new generation with 11 members.
There are two main reasons: trade expansion, post-Covid-19 recovery. Firstly, top 5 export
and import partners of Thailand include Japanese market, and Japan is a member of CPTPP
(figure 3). Therefore, Thailand will have beneficial trade policies and preferential tax rates
with Japan via the CPTPP to boost export quotas. Importantly, due to COVID19 spread,
figure 4 shows Thailand's economy suffered a serious loss, exports of G&S (%-of-GDP)
significantly reduced, from 64.856% in 2018 to 51.43% in 2020 (World-Bank-2020).
Therefore, commerce vice-minister Sansern Samalapa said if Thailand denies participating in
this agreement, they may lose economic opportunities and trade competitiveness (WTO2021). Meanwhile, government may have to adjust legal system to comply with new

10

standards of the Agreement, for example, intellectual property provisions under Protectionof-New-Varieties-of-Plants-Convention (Chongkittavorn-2021).

Figure 3. Top 5 Export and Import Partners in Thailand.
Source: World Integrated Trade Solution (2019)

Figure 4. Export of Goods and Services in Thailand from 2015 to 2020.
Source: World Bank (2020)

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5.3. Subsidies
Utilizing advantages of land and abundant labor resources, Thailand has become one of the
world's leading rice and rubber exporters. However, in last century, Thai politicians took
advantage of rice subsidies to pursue political support by intervening in rice market (Ricks
2018). Moreover, prolonged political turmoil affected the subsidy, production, and price of
rice in Thailand. Besides, volatility of world business cycle and commodity prices currently
led to instability for exports, Thai-government has to intervene in rice production industry to
ensure standard of living for farmers (Nidhiprabha 2019). Thai-government has ignored the
opportunity costs, inefficiencies of market intervention, and risk of budget deficits;
agricultural subsidies were lifelines for farmers and ensured production for domestic demand.
Notably, over 10 billion baht subsidies for rubber (Benbourenane 2021) and 100 million baths
for rice (Chantanusornsiri 2021) were supported to reduce the suffering from Covid-19pandemic. However, these subsidized agricultural products have become political
commodities, and chronic agricultural subsidies create a trap for Thai-economy (Nidhiprabha
2019). The subsidy was claimed to cost over 50% compared to actual market price and
accounting for over 300 billion baht; therefore, to avoid budget deficit, Thai-government
should switch to non-subsidy or minimizing subsidy for agriculture industry (Polpun 2013;
Phakdeewanich 2017).

Recommendations for Subsidies
The chronic and prolonged subsidies for agricultural sectors led to government budget
deficits; therefore, Thailand should rearrange agricultural subsidies to farmers related to the
expansion of agricultural products. In particular, Thai-government might consider converting
cash subsidies for agricultural production to subsidies related to improving skills of farmers
and transforming into modern industry, and this helps to increase export output while meeting
domestic demand and people's living (Azzimonti, de Francisco & Krusell 2008). Besides,
cooperation with non-profit and agricultural organizations will have the optimal solutions to
reform Thai agriculture performance in FTA's context. Additionally, improving quality of
agricultural raw and processed products and substitute commodities development might help
government minimize subsidies (Horlick & Clarke 2017). However, Thailand's unstable
political regime combined with the raging epidemic situation still happened, Thaigovernment should consider more effective actions in preventing taking advantage of
subsidies and interfering in agricultural price commodities.
12


5.4. Offshoring
Many businesses in the world are operating in Thailand, including Australia, Japanese and
Singaporean companies (Santander 2021). The firms that have invested in Thailand are the
largest in their respective industries. For example, in automobile sector, there are Toyota,
Honda, and Mazda; in electronics, there are Samsung, HP, and IBM; and in energy, there are
Chevron and ExxonMobil (Kitiphong & Satawasin 2021). Offshoring activities in Thailand
brings a lot of benefits to both parties, so many great companies and countries invest in
Thailand, and Thailand also actively calls for investment from foreign investors. Offshoring
creates opportunities for Thailand to receive technology transfer and certain new approaches,
such as expanding human resource creation, worldwide market integration, greater
competitiveness, enterprise development and restructuring from the other investment country.
For instance, Thailand can obtain more manufacturing technologies from economic
powerhouse, which may assist Thai industry produce more efficiently. Offshore investment in
Thailand may also support Thai employees to develop their skills and be educated to obtain

higher education so that they can fully utilize their potential (Timothias 2017).
5.5. FDI
FDI appears when an individual or an operation in one country directly invests in other
businesses in other countries to produce and/or market products/services in those foreign
markets (CFI n.d.).
As an area with busy off-shoring activities, Thailand became one of the major FDI
destinations in the ASEAN (Thailand-Board-of-Investment n.d.). In 2019, Japan is the
biggest investor of Thailand, and 42.9% of total investment is for manufacturing sector
(appendix 13). Also, Thailand's FDI net inflows have always been on an upward trend for
about 50 years, peaking in 2013 with nearly 16 billion baht (WorldBank n.d.). This has
resulted from implementation of Investment-Promotion-Act, and Eastern-Economic-Corridor
Act, which encouraged free trade, and increased financial incentives to invest in new
technology, creative activities, and R&D (Thailand-Board-of-Investment 2002; EEC 2018;
Kinda 2010). Consequently, FDI helps Thailand achieve its SDG through contributing to
different elements of sustainable development, for instance, paying higher salaries, or
recruiting more skilled people and women in most industries (OECD n.d.).

13


On the other hand, Thailand is losing competitiveness to neighbouring Laos, Cambodia, and
Vietnam, which are becoming potential FDI destinations thanks to low-cost and low-skilled
labor. Additionally, as a developing country, in COVID19 era, Thailand’s FDI inflows
strongly decreased, as a result of suspension of many MNEs (OECD 2020).
Recommendations for Offshoring and FDI
Thailand is facing many problems related to infrastructure, mostly because of improper
financial distribution (Thapanont, Santi & Pruethipong 2018). Therefore, Thailand should
continue to apply the above policies to make profits, thereby, using profits more reasonably to
develop facilities, such as a well-organized transportation network (seaport, railway, airport,
etc.), or a sufficient energy supply system. A good example is China, which has built a dense

logistics system, both domestic and foreign, to promote fast and efficient goods
transportation, and made it to be the busiest global trade country in Asia (Jiang et al. 2017). In
addition, Thailand should also focus on developing its competitiveness in manufacturing
sector, by developing quality of workforce (OECD n.d.). It is necessary to strengthen linkages
between business units and educational institutions, and Thai-government should invest in
providing the future workforce with education and training opportunities at any level. These
strategies have been applied by many EU countries, reflected in remarkable industrial
development in those regions (Miro 2021).
6. Conclusion
The ability to identify its competitiveness to attract investors and policies related to trade
flows help Thailand become one of the biggest economies in ASEAN. These plans created
significant benefits in the development of science and technology of the country, promoting
the development of the economy. Thailand should continue to implement those efficient
policies, as well as join some international councils, to strengthen its connections to more
countries, and enhance its position in the world trade arena.

14


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8. Appendix

Appendix 1. Trade Indices and Terms of Trade (In terms of Baht) in 2015 to 2020

22


Appendix 2. Total Value and Quantity of Exports Classified by Product Group (Millions of

Baht) 2016-2020

Appendix 3. Total Value and Quantity of Exports Classified by Country (Millions of Baht)
2016-2020

23


Appendix 4. Thai citizens against the government to join the CPTPP at the beginning.
(Source: Bangkok Post 2020)

Appendix 5. Skim milk powder tariff rates and quotas in Thailand.

Appendix 6. The impact of Covid-19 on Thailand. (Source: The World Bank 2020)

24


Appendix 7. Thailand ranks 3rd in rice exports in 2020/2021.
(Source: Statista 2021, Unit: thousand metric tons)

25