Information about Asia and the Pacific Asia y el Pacífico
Chapter

V. Trade Policies

Author(s):
David Robinson, Ranjit Teja, Yangho Byeon, and Wanda Tseng
Published Date:
September 1991
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Information about Asia and the Pacific Asia y el Pacífico
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From the beginning of its modem economic history, Thailand has traditionally maintained an open trade and exchange system, which has contributed to its economic success. From the late 1950s, although Thailand embarked on industrial development through an import-substituting strategy, tariff rates ranging from 15 percent to 30 percent remained low in comparison with most other developing countries. However, during the 1970s, even as the emphasis of industrial policy swung increasingly toward export promotion, tariff rates were increased substantially, doubling the average rate of effective protection in the course of the decade.25 The increases in tariff rates partly reflected the policy response to increasing balance of payments difficulties; they were accompanied by a proliferation of exemptions on specific products and by surcharges and nontariff barriers.

From the early 1980s, a reversal of this buildup of trade barriers became an important policy goal. Considerable progress was made in reducing nontariff barriers, including the proportion of goods subject to import restrictions, and the use of specific import surcharges by the Board of Investment to protect domestic industries also declined sharply. But, partly owing to fiscal constraints, less progress was made in reducing the level of tariffs, although their dispersion fell somewhat over the period: while many minor tariff reductions were implemented, the structure of tariffs remained broadly unchanged.26 Since early 1990, however, as part of a wide-ranging program of economic liberalization, policy initiatives in trade reform have been renewed, as described in more detail below.

Structure of Nominal Tariffs and Effective Protection in the 1980s

Between 1981 and 1985, the overall tariff level, as measured by the unweighted average tariff rate, remained broadly unchanged, although the dispersion of the tariff declined (Tables 9 and 10), owing largely to the reduction of almost all tariff rates to 60 percent or less in 1982. Actual import duties collected as a percentage of imports, particularly for capital goods, were lower than the weighted average tariff, mainly reflecting the various tax exemptions available from the Board of Investment (see Section II), as well as the duty drawback schemes available for exporters (see below). A feature of Thailand’s tariff structure, shared with many other developing countries, was “tariff escalation,” whereby the average level of the tariff increased with the degree of processing of the product: raw materials were typically subject to very low, and finished products to relatively high, rates of duty. Thus, effective protection was considerably higher than that implied by the nominal tariff rates.

Since calculations of effective rates of protection are based on a variety of theoretical and empirical assumptions,27 the results can vary considerably according to the methodology used. But while individual results must be interpreted with care, they can provide useful information about the impact of the tariff system on producers’ decisions and thus on the structure of domestic production.

Estimates of the effective rate of protection during the period suggest that the average rate of protection in Thailand is quite high, owing primarily to the tariff escalation during the 1970s and the tariff increases of 1985 (Tables 9 and 11).28 At the same time, the wide dispersion of nominal tariff rates has also led to a wide dispersion of effective protection rates across industries, although reduced slightly by the tariff reforms during the 1980s. Frequent changes in tariff rates on individual products during the 1980s also resulted in substantial variations in effective protection rates for individual industries over time (for instance, the effective rate of protection on flour varied from 89 percent to 164 percent between 1981 and 1985).

Table 9.Tariff Rates and Effective Protection
September 1981March 1983October 1984November 1984April 1985January 1988
Nominal tariffs
Unweighted31.032.632.829.933.8
Standard deviation(30.1)(28.6)(28.7)(26.3)(27.3)
Weighted114.316.216.615.318.5
Effective protection
Unweighted66.766.465.359.065.964.6
Standard deviation(140.2)(140.4)(136.7)(131.3)(132.0)(131.4)
Weighted227.927.928.525.530.029.7
Source: World Bank staff estimates.

By 1985 import values.

By 1980 value added at world prices.

Source: World Bank staff estimates.

By 1985 import values.

By 1980 value added at world prices.

Table 10.Tariff Structure
Weighted

Nominal
Average Rate of Import Duty1
Tariff19851990
Consumer goods24.825.418.0
Intermediate products14.1
12.18.5
Raw materials5.1
Capital goods22.312.79.9
Automotive products63.044.842.5
Total18.514.011.8
Sources: World Bank staff estimates; and data provided by the Thai authorities.

Calculated as import duties in percent of import value.

Sources: World Bank staff estimates; and data provided by the Thai authorities.

Calculated as import duties in percent of import value.

Table 11.Structure of Effective Protection1
April 1981January 1988
Agriculture10.913.1
Other primary products5.711.3
Agroprocessing24.732.9
Other manufacturing53.651.2
Textiles(110.4)(59.9)
Chemicals(49.3)(9.5)
Machinery(18.9)(35.2)
Consumer goods(51.5)(68.7)
Overall average27.929.7
Source: World Bank staff estimates.

Effective protection rates weighted by share in 1980 value added at world prices.

Source: World Bank staff estimates.

Effective protection rates weighted by share in 1980 value added at world prices.

The protective system has strongly favored the manufacturing sector relative to both agriculture and the production of other primary products (Table 11). Within the manufacturing industry, effective protection rates vary widely, being highest for finished consumer goods and lowest for intermediate and capital goods. The tax exemptions available from the Board of investment for imports of intermediate and capital goods, which are not taken into account in the calculations, are likely to exacerbate this divergence.

The anti-export bias inherent in any tariff system has been reduced in Thailand by various export promotion schemes. Since 1958, the Bank of Thailand has operated an export rediscount facility, providing short-term loans to exporters at subsidized interest rates; and since the early 1970s, export orientation has been increasingly important in determining the distribution of investment incentives. In addition, the operation of the various duty drawback schemes, which refund tariffs and business taxes on imports used to produce exports, has been significantly improved since the early 1980s: and institutional support to exports (such as export marketing and trade fairs) has been strengthened.29

Table 12.Manufacturing Industry Classified by Sales Orientation and Effective Protection Rate (ERP), 1985
Negative ProtectionPositive ProtectionTotal
Number of sectorsMean ERPNumber of sectorsMean ERPNumber of sectorsMean ERP
Exporting sectors7–15241223191
Import-competing sectors2–1343614558
Noncompeting sectors3–410391329
Nontrading sectors132132
Total12–1278119065
Source: IMF staff estimates.
Source: IMF staff estimates.

A recent study by Bhattacharya and Lin (1988) compared Thailand’s nominal tariff structure with those of a group of its East Asian neighbors.30 While it found that Thailand’s average nominal tariff was the highest among the countries in the sample, Thailand also had a relatively low level of nontariff barriers, including quantitative restrictions. Overall, the study concluded that Thailand’s protective system was broadly comparable to those in Indonesia and the Philippines; Korea and Malaysia, however, appeared to have somewhat less restrictive regimes. The study also observed that the level and dispersion of nominal protection in all five countries was much lower than in most developing countries in Latin America and South Asia.

Trade Liberalization in 1990 and Beyond

Given Thailand’s small domestic market, its prosperity and growth must rest primarily on its ability to export, and since the early 1970s export promotion has assumed a greater role in its industrial strategy. As Thailand prepares for accelerated industrial development in the 1990s, the distortions created by the tariff structure could have an increasingly damaging effect. Tariff reform, therefore, has become more important in the authorities’ program of market liberalization.

As a first step, in October 1990 tariffs on capital goods used in manufacturing were reduced from 20 percent to 5 percent, and the tariff exemptions or reductions on these goods that could previously be granted by the Board of Investment were abolished.31 This should not only simplify both the tariff and the investment incentive system, but should also particularly benefit small exporting firms that profit less from Board of Investment incentives. The authorities have recently stated their intention to enact a second package of tariff reforms during 1991, which is expected to include reductions in tariffs on raw materials, intermediate products and certain capital goods, and some finished products, aimed particularly at benefiting exporters and exporters’ suppliers who have been unable to gain from Board of Investment exemptions or to participate in the various duty drawback schemes. This potentially represents a further important step toward lowering the level and the dispersion of effective protection, and thereby increasing efficiency.

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