Dealing with the generals
The Economist
Dealing with the generals
From the Economist Intelligence Unit
Mar 30th 2007
Japan and Thailand ponder a deal on free trade
The troubled military-appointed government in Thailand has said that it will go ahead with the signing of a free-trade deal with Japan on April 3rd. Although welcomed by some local sectors, the move risks further damaging the interim government’s credibility, as concerns have been raised over whether the government has overstepped its authority and also that it has failed to follow up on its promise to hold public hearings on the issue.
JTEPA: Thaksin’s baby
The proposed Japan-Thailand Economic Partnership Agreement (JTEPA), a free-trade deal with additional economic co-operation pacts, was initially agreed in late 2005, and both sides were set to sign the deal in April 2006. However, the dissolution of Thailand’s parliament in February 2006 and the subsequent political turmoil forced the signing to be postponed.
The government of Thaksin Shinawatra, which was ousted in the September 2006 coup, sought to make rapid progress in reaching free-trade agreements (FTAs) with a number of its main trading partners, and this formed a central part of its economic policy platform. The Thaksin government had some success in its pursuit of FTAs, reaching deals with Australia and New Zealand and a more limited FTA with China. It had also made headway in negotiating agreements with Japan and the US, its main two trading partners. However, this policy raised some intense local opposition, with the drafting process lacking any public participation and the final drafts not being debated in parliament.
With the proposed JTEPA deemed more equitable than the FTA with the US, the interim government soon signalled its interest in completing the deal. Under the JTEPA as agreed by the Thaksin administration, Thailand is set to gain tariff reductions on its exports of a number of agricultural commodities, including shrimp, chicken, fresh fruit and vegetables, and canned fruit and juice. Thai garment exporters are also expected to gain from the deal. However, there are some sectors that could suffer. Owing to the proposed reductions on tariffs on steel imports and Japanese cars, the deal has upset the local steel industry and non-Japanese carmakers with operations in Thailand.
Maintaining competitiveness
In recent months, the interim government has faced pressure both from proponents and opponents of the JTEPA. In mid-February the government presented the JTEPA bill to the National Legislative Assembly (NLA, the legislature set up by the military soon after it took control). The NLA members were not asked to vote on the bill, but to express their opinions in order to guide the government’s decision-making. Thai trade associations have pushed the government to sign the deal in order to promote competitiveness, particularly for food processors and garment and footwear manufacturers. However, the deal has been roundly rejected by environmental groups, who claim that tariff reductions on hazardous waste would make Thailand in effect a dumping ground for Japan.
Despite local opposition, on March 27th the cabinet approved the JTEPA, with the interim prime minister, Surayud Chulanont, set to sign it during his visit to Japan in early April. The government spokesman, Yongyuth Maiyalarp, defended the interim government’s right to sign the agreement even though it is not a directly elected body. After announcing that the government had approved the deal, he stated that the JTEPA was beneficial to the national interest.
There is little doubt that Thailand needs to make progress in maintaining its competitiveness in trading with Japan, as six other members of the Association of South-East Asian Nations-Singapore, Indonesia, Malaysia, the Philippines, Vietnam and Brunei-have already finalised or are in the process of negotiating deals with Japan. Under the JTEPA, around 90% of trade between Thailand and Japan would be tariff-free within ten years and Japanese investors would be given greater legal protection. Japan accounted for around 13% of Thailand’s total export revenue in 2006. The net inflow into Thailand of foreign direct investment (FDI) by Japan, including reinvested earnings by Japanese firms operating in the country, averaged US$3bn a year in 2005-06 (40% of the total net FDI inflow into Thailand in 2005 and 33% of the total in 2006).
Attracting more criticism
However, it is unclear why the interim government deemed it necessary to rush through the deal rather than leaving it for the next government, which could be in place by the end of the year. The military leaders, after all, have reiterated their pledge to hold elections by the end of the year and to hand power back to a democratically elected government.
The Surayud administration has struggled to maintain the public’s confidence during its six months in power. It has made a number of misguided moves on the economic policy front, most notably its controversial decision to amend the Foreign Business Act, and its backing of the capital controls imposed by the Bank of Thailand (the central bank) in late 2006 to stem the rapid appreciation of the baht. Such moves have undermined investor sentiment and raised questions about the interim government’s openness to foreign investment and capital. The decision to sign the JTEPA could be an effort to offset such criticism.
However, by failing to stick to its promise to hold public hearings on the deal (a pledge that the Surayud administration probably made to show that it would not follow the negotiating model adopted by the Thaksin government), the interim government has attracted much criticism and opposition from local civic groups. Soon after the cabinet announced that it had approved the JTEPA, local NGOs, including FTA Watch, a network of civic groups that monitor the country’s FTAs, said they would file petitions with the Administrative Court calling for the deal to be blocked.
Assuming Surayud goes ahead and signs the deal in Japan in early April, both sides will spend around three to four months making final revisions before the formal process of ratification. During this period, though, the interim government could be forced into another embarrassing turn-around if the courts rule that the government did not have the legal authority to sign the deal. Even if the courts reject the NGOs’ petitions, it is unclear whether the Surayud government has done itself any favours in handling such a sensitive issue without public consultation, particularly at a time when political opposition to the military’s hold on power is mounting.
