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1996 Country Reports On Economic Policy and Trade Practices

Department of State report submitted to the Senate Committees on Foreign Relations and on Finance and to the House Committees on Foreign Affairs and on Ways and Means, January 1997.

	1994	1995	1996	1/
Income, Production and Employment
Nominal GDP	143.0	167.3	185.9
Real GDP Growth (pct) 2/	8.8	8.6	6.7
GDP by Sector:
Agriculture	15.0	18.2	19.6
Manufacturing	40.8	48.3	55.0
Services	18.1	20.6	22.4
Government	5.0	6.2	6.6
Per Capita GDP	2,381	2,770	3,034
Labor Force (millions)	33.2	33.6	34.0
Unemployment Rate (pct)	2.6	2.6	2.6
Money and Prices (annual percentage growth)
Money Supply Growth (M2)	12.9	17.0	14.5
Consumer Price Inflation	5.0	5.8	6.0
Exchange Rate (baht/US$, annual average)
Official	25.15	24.92	25.30
Balance of Payments and Trade
Total Exports FOB 3/	44.5	55.4	57.3
Exports to U.S. 4/	10.3	11.3	11.4
Total Imports CIF 3/	53.5	70.4	72.4
Imports from U.S. 4/	4.9	6.7	6.9
Trade Balance 3/	-9.0	-15.0	-15.1
Balance with U.S. 4/	5.4	4.6	4.4
External Public Debt	15.2	16.4	16.5
Fiscal Surplus/GDP (pct)	1.8	2.7	2.2
Current Account Deficit /GDP (pct)	-5.6	-8.1	-8.0
Debt Service Payments /GDP (pct)	3.4	2.8	N/A
Gold and Foreign Exchange
Reserves	30.3	37.0	39.5
Aid from U.S. (US$ millions)	34.6	31.2	N/A
Aid from All Other Sources	N/A	N/A	N/A

1/ 1996 figures are all estimates based on available monthly data in October 1996, except as otherwise stated.
2/ Percentage changes calculated in local currency.
3/ Merchandise trade. Sources: Bank of Thailand and Thai Ministry of Commerce, Dept. of Business Economics.
4/ Source: U.S. Department of Commerce and U.S. Census Bureau; exports FAS, imports customs basis; 1996 figures are estimates based on data available through November 1996.

1. General Policy Framework

Thailand's economic development is based upon an export-oriented economy, bolstered by a free market philosophy. Within the last generation Thailand's economy has changed from one primarily based upon agriculture, with some light industries, to one dominated by manufacturing. While 52 percent of the Thai labor force is still engaged in agriculture, the growing service, manufacturing, and wholesale and retail trades now account for two-thirds of Thailand's GDP. After years of strong export growth, Thai export growth slowed sharply in 1996, as in many of its Asian neighbors. After peaking at 26 percent export growth in 1995, Thai exports were flat for 1996. Emerging markets across Asia experienced a downturn in export growth in part due to slow demand in developed economies. In some sectors, particularly labor intensive goods, Thai exports are also under pressure from countries with cheaper labor forces, such as Vietnam and China. A long term factor that will affect Thai export growth rates is the limited availability of an educated management pool and work force capable of shifting into high tech industries as Thailand moves up the technology ladder.

Investor confidence, both domestic and foreign, seems to have weakened during the government of Prime Minister Banharn Silpa-Archa, which lasted a short 15 months. The Thai stock market was down almost 30 percent on the year before Banharn resigned after narrowly winning a parliamentary vote of confidence. While many of the economic problems that arose during the Banharn government were inherited from previous administrations, the failure to deal with these problems decisively, frequent changes in economic leadership, and public sentiment that the Banharn government took corruption to new heights led to the overall drop in investor confidence. To its credit, the Banharn government did give some additional attention to the redress of economic disparities and dislocations caused by rapid development in the central regions of the country. The northeast in particular has not shared in the country's rapid growth.

During 1996, growth in Thailand's gross domestic product has not kept pace with previous years. In 1995 the rate of growth was 8.6 percent. The Bank of Thailand currently predicts GDP growth of no more than 7 percent for 1996, and the general consensus among analysts is that growth will be about 6.7 percent.

Thailand's current account deficit rose during 1995 to $13.5 billion, equivalent to 8.1 percent of GDP. By August 1996, the 1996 figure already stood at $10.7 billion, and will probably exceed eight percent of GDP for the year. The current account deficit has been a much-publicized factor in Thailand's general economic slowdown during late 1995 and 1996 and is one reason, along with the rapid accumulation of short-term, for Moody's adjustment of Thailand's short term debt risk rating during September 1996.

During 1995-1996 Thailand continued to enjoy a budget surplus. In fiscal year 1995 the surplus reached 2.7 percent of GDP and should exceed two percent in fiscal 1996. The Thai government recently announced plans to significantly reduce government expenditures in the upcoming fiscal year to prevent the emergence of a deficit.

2. Exchange Rate Policy

Since 1984 the baht has been pegged to a basket of currencies of Thailand's principal trading partners. The composition of the basket is secret, but the U.S. dollar appears to represent the largest share. The Exchange Equalization Fund, chaired by a deputy governor of the Bank of Thailand, determines the exchange value of the baht each working day. There is no parallel market in Thailand. Appreciation of the Japanese yen has made American exports more competitive.

In May 1990 the Thai government announced a series of measures to liberalize the exchange control regime. Thailand accepted the obligations under IMF Article VIII which cover reduction of restrictions on international transactions. Commercial banks were given permission to process foreign exchange transactions, and substantial increases were allowed in the ceilings above which money transfers require Bank of Thailand preapproval. Since 1992 banks in Thailand have offered foreign currency accounts. The Central Bank has also raised limits on Thai capital transfers abroad and allows free repatriation (net of taxes) of investment funds, profits, loan repayments, and dividends. Companies may transfer foreign exchange among subsidiaries without switching the funds into baht.

3. Structural Policies

In 1992 then Prime Minister Anand launched a series of economic reforms. Thailand's obligations within the WTO and ASEAN have also prompted reforms in tariff rates, trade regulations, regulation of financial institutions, and currency policies.

The Thai taxation code has undergone revision since 1992, when a 7 percent value added tax (VAT) system was introduced. The previous tax regime was clumsy and complicated, with a multi-tiered structure for assessing business taxes. The VAT system exempts businesses that realize turnovers of less than $24,000 per year. For companies with annual turnover between $24,000 and $48,000 there is a 1 percent turnover tax. Exporters are "zero rated" but must file VAT returns and apply for a rebate.

The corporate tax rate is currently 30 percent of net profits for all firms. The November 1996 general election and change of government has put discussion of options for lowering the corporate tax rate into abeyance.

A new tax treaty between the United States and Thailand was signed in November 1996. The treaty will enter into force after exchange of instruments of ratification. Smaller American firms, in particular, were disadvantaged by the lack of a reciprocal tax agreement between the two countries. The new treaty will provide for the elimination of double taxation and give American firms tax treatment equivalent to that enjoyed by Thailand's other tax treaty partners.

4. Debt Management Policies

The rapid accumulation of short-term debt -- attracted by high short-term interest rates -- led Moody's to downgrade Thailand's short-term sovereign debt rating from prime one to prime two in 1996.

The prime rate has ranged between 10.5 and 14 percent for over five years. It stood at 13.25 percent in November 1996.

5. Significant Barriers to U.S. Exports

Thailand ratified the Uruguay Round agreements in December 1994. The government is moving to meet its WTO and ASEAN tariff reduction commitments, with reductions to be completed on 4,000 items by the beginning of 1997. Thailand instituted tariff reductions beginning in January 1995. The latest round of reductions is due to take effect in January 1997.

By the beginning of 1997 the total number of tariff rate categories will be reduced from 39 to 6, with the following spread: 0 percent on such goods as medical equipment and fertilizer, 1 percent for raw materials, electronics components, and vehicles for international transport, 5 percent for primary and capital goods, 10 percent for intermediate goods; 20 percent for finished products, and 30 percent for goods needing "special protection." This last category includes agricultural products, autos and auto parts, alcoholic beverages, and a few other "sensitive" items.

Thailand is beginning the process of changing its import license procedures to be in accord with WTO obligations. Progress has not been as fast as was hoped, as import licenses are still required for 42 categories of items, with only new motorcycles being removed from the list during 1995-1996. Licenses are required for many raw materials, petroleum, industrial, textile, and agricultural items. All items of food for human consumption require licenses. Import licenses can sometimes be used to protect unproductive local industries and to encourage greater domestic production. Ten categories of items which do not require licenses must nevertheless comply with the regulations of concerned agencies, offer extra fees, or provide certificates of origin.

The Thai Food and Drug Administration issues licenses for food and pharmaceutical imports. This process can be a barrier due to cost, length of the process, and occasional demands for proprietary information. Licenses for food imports cost about $600 and must be renewed every three years. Pharmaceutical import licenses cost about $480 and must be renewed every year. Required laboratory analysis increases this expense considerably. Costs of $40 to $120 per item are usual for sample food products imported in bulk, while sealed, packaged foods can cost about $200 per item. Pharmaceuticals must be registered for a fee of $80, and pharmaceuticals must be inspected and analyzed for another fee of $40 per item. The process can take more than three months to complete.

The Thai government is easing barriers to imports of agricultural and food products in accordance with WTO requirements and, in some cases, is taking steps beyond its WTO commitments. Sanitary and phytosanitary standards currently limit the entry of some U.S. products, primarily citrus. California and Florida citrus were able to enter Thailand in late 1995, and it is anticipated that the market will be open to Texas and Arizona citrus following a technical visit early in 1997. Thailand's tariff-rate quota for a selected number of agricultural products was adjusted in 1996. The quota for soybeans and soybean meal was eliminated while the tariff rate for soybean meal was reduced, steps not required by Thailand's WTO commitments. This should prove helpful to American agricultural exporters. Likewise, the quota and import duty for corn were eliminated. However, the Thai government continues to require that imports arrive between February and June, and to subject the liberalized tariff-rate quota to domestic wholesale corn prices, which limits the effect of this measure.

Import duties on most high-value fresh and processed foods remain the main constraint to U.S. exports of these products. With the exception of wine and spirits, there will no longer be specific duties for most agricultural and food products and ad valorem rates are slated to decline between 35 and 50 percent under WTO rules. Nevertheless, import duties are currently high and will continue to be so following the implementation period. A notable exception was made in 1996 for raw shelled or unshelled tree nuts, when the import duty was reduced to 10 percent.

Arbitrary customs valuation procedures sometimes constitute a serious barrier to U.S. goods. The Department of Customs, which enjoys unusual autonomy, uses the highest previously declared invoice value as a benchmark for assessing subsequent shipments from the same country. Customs may disregard the invoice value of a shipment in favor of the benchmark amount. This has a particularly damaging effect upon trade in agricultural products, which often have seasonally fluctuating values.

Foreign air couriers in Thailand must conform to restrictive regulations that require an on-board courier, but prohibit the use of on-board couriers on all-cargo aircraft. This significantly raises the cost of delivering any single shipment. In November 1996 the Thai Customs Department undertook to examine this situation, but has indicated that the requirement will remain in effect for the near future.

Duties are sometimes arbitrary in other ways. For example, import duties on unfinished materials are higher than those upon finished goods in some categories, which is a burden to American firms that manufacture or assemble in Thailand.

In the past Thailand restricted the activities of foreign banks. Total foreign banking assets in Thailand only recently exceeded 7.5 percent of the national total. Although there have been moves toward liberalization, foreign banks are still disadvantaged in a number of ways. They may not open branches and, while they may operate an on-site ATM and take part in a local ATM network, they may not participate in the nationwide ATM network without the approval of the domestic Thai banks. Foreign banks must maintain minimum capital funds of $5 million invested in low yield government securities or directly deposited in the Bank of Thailand. The number of expatriate management personnel is limited to six in branches and two in Bangkok international banking facilities (BIBFs). Foreigners are limited to an aggregate maximum of 25 percent share holding in any Thai bank.

In order to be consistent with WTO requirements, Thailand is undertaking a liberalization of banking regulations. The Thai government's Financial Liberalization Plan provided for seven new BIBF licenses, which were issued in October 1996. Seven additional BIBF licenses were announced in late December 1996, although none were for U.S. banks.

Thai law and regulations formerly limited foreign equity in new local insurance firms to 25 percent or less. In June of 1996 the cabinet approved raising this limit to 49 percent. This has yet to be written into law, and awaits the approval of the Council of State and the new Parliament.

Under a 1979 Thai law aliens are forbidden to engage in the brokerage business. Foreign ownership of Thai finance and credit firms is limited to 25 percent for companies formed after the law was passed, and 40 percent for those formed before.

Telecommunications services are a government monopoly in Thailand. Plans are under discussion for a liberalization of this market. The United States is urging a more acceptable Thai offer in WTO negotiations on basic telecom services in advance of the February 1997 deadline for concluding an agreement.

6. Export Subsidies

Thailand maintains several programs which benefit manufactured products or processed agricultural products and which may constitute export subsidies. These include subsidized credit on some government-to-government sales of Thai rice (agreed on a case-by-case basis), preferential financing for exporters in the form of packing credits, tax certificates for rebates of packing credits, and rebates of taxes and import duties for products intended for re-export. In September 1993 Thailand established an Export-Import Bank which has taken over administration of some of these programs, particularly those involving packing credits. The Thai Ex-Im Bank offers a 10 percent rate, about four points below other banks.

7. Protection of U.S. Intellectual Property

Improving protection for U.S. copyright, patent, trademark and other intellectual property in Thailand has been an important bilateral trade issue for several years. After Thai passage of a revised copyright law in 1994, the United States moved Thailand from the Special 301 "priority watch list" to "watch list" status. The Thai government also agreed to provide "pipeline protection" through administrative means for certain pharmaceutical products not entitled to full patent protection under the 1992 patent law. In recognition of this progress the U.S. restored a number of GSP benefits that had been denied to Thailand under Special 301. Several other bills designed to bring Thailand into compliance with its TRIPs requirements, including an amendment to the Patent Act that would abolish the pharmaceutical patent review board, are currently being drafted.

The Thai government has also made some effort to improve enforcement, making about 6800 arrests and seizing 2.7 million pirated items under its intellectual property laws since 1993. A specialized Intellectual Property Department in the Ministry of Commerce has cooperated with U.S. industry associations to coordinate both legal reforms and enforcement efforts, including raids. Firms representing U.S. video, audio, and software industries report sharply higher sales. In 1996 the Parliament passed legislation establishing a separate intellectual property court that should result in a more efficient judicial system and tougher sentencing.

Piracy remains a serious problem, however. The U.S. pharmaceutical, film, and software industries estimate lost sales at over $200 million annually. Despite new and improved laws, judicial proceedings remain slow and fines actually imposed are light. To date, no one has served time in jail for copyright infringement. Police have not always been cooperative, let alone proactive, in combating piracy. Partly as a result, arrests and seizures of illicit goods have fallen sharply since 1994.

8. Worker Rights

a. The Right of Association: The Labor Relations Act of 1975 gives workers in the private sector most internationally recognized labor rights, including the freedom to associate. They may form and join unions and make policy without hindrance from the government and without reprisal or discrimination for union activity. Unions in Thailand may have relationships with unions in other countries, and with international labor organizations. In 1991 the Thai Parliament enacted the State Enterprise Labor Relations Act (SELRA), denying state enterprise workers the rights other workers enjoyed under the 1975 law. The Thai government has promised to amend the SELRA, and to restore those rights. Although new legislation was approved by the cabinet, it was still under consideration in Parliament when the government was dissolved during October 1996. Passage of the SELRA reform legislation will await parliamentary elections and the formation of a new government during November 1996.

b. The Right to Organize and Bargain Collectively: The 1995 act grants Thai workers the right to bargain collectively over wages, working conditions, and benefits. About 900 private sector unions are registered in Thailand. State enterprise employees and civil servants still may not form unions, but this will be addressed in the pending SELRA legislation. State enterprise employees, essential workers (transportation, education, and health care personnel), and civil servants may not strike but may be members of employee associations. Collective bargaining is unusual in Thailand. Industry-wide collective bargaining is all but unknown. However, representatives of public sector associations and private sector unions sit on various government committees dealing with labor matters, and are influential in setting national labor policies, such as the minimum wage.

c. Prohibition of Forced or Compulsory Labor: The Thai constitution prohibits forced or compulsory labor except in cases of national emergency, war, or martial law. However, Thailand remains the target of ILO actions under Convention 29 (forced labor) because child prostitution persists despite government cooperation with ILO programs and recent moves to step up enforcement of laws prohibiting such activity.

d. Minimum Age for Employment of Children: The minimum age for employment in Thailand is thirteen. Children between the ages of 13 and 15 are restricted to light work in nonhazardous jobs, and must have Department of Labor permission to work. Night-time employment of children is prohibited. The government has announced its intention to raise the period of compulsory education from six to nine years, which will make it feasible to also raise the minimum age of employment. Recently the government has doubled the size of the corps of labor inspectors, but enforcement is not rigorous.

e. Acceptable Conditions of Work: Working conditions vary widely in Thailand. Large factories generally meet international health and safety standards, though there have been serious lapses involving loss of life. The government has increased the number of inspectors and raised fines for violators. The usual work day in industry is eight hours. Wages in profitable export industries often exceed the legal minimum. However, in the large informal industrial sector, standards for pay, health, and safety are low and regulations are often ignored. Most industries have a legally mandated 48 hour maximum work week. The major exceptions are commercial establishments, where the maximum is 54 hours. Transportation workers are restricted to 48 hours per week.

f. Rights in Sectors with U.S. Investment: U.S. capital investment is substantial in several sectors of the Thai economy, including petroleum (exploration, production, refining and marketing), electronic components assembly and consumer products. Workers in these sectors, especially those working for U.S. and other western and Japanese firms, usually enjoy labor conditions superior to those of the average Thai worker: the degree of unionization is greater, wages and benefits are higher, and health and safety conditions are better. Child labor is rare or nonexistent among large multinational firms. However, compliance with worker rights standards is weak among some subcontractors which supply larger, more reputable firms.

Category		Amount
Petroleum		1,375
Total Manufacturing		1,768
Food & Kindred Products	58
Chemicals & Allied Products	338
Metals, Primary & Fabricated	(1)
Machinery, except Electrical	(1)
Electric & Electronic Equipment	431
Transportation Equipment	1
Other Manufacturing	146
Wholesale Trade		369
Banking		476
Finance/Insurance/Real Estate		70
Services		43
Other Industries		495
TOTAL ALL INDUSTRIES		4,596

(1) Suppressed to avoid disclosing data of individual companies.

Source: U.S. Department of Commerce, Bureau of Economic Analysis

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