Thailand and the European Union (EU) have agreed to resume negotiations on a free trade agreement (FTA), seven years after talks collapsed in 2014, following the military coup in Thailand.
If the two sides complete a deal, it would mark the EU’s third FTA with an ASEAN member state, following agreements with Singapore and Vietnam.
An FTA would boost the EU’s access to trade and investment in Southeast Asia’s second-largest economy, while Thai exporters would benefit from lower tariffs. Nevertheless, while momentum on an FTA has been revitalized, the EU and Thai governments need to resolve several outstanding issues to finalize an agreement.
Many EU companies base their Southeast Asia production in Thailand due to its location in the region and status as ASEAN’s second-largest economy after Indonesia. Establishing an FTA would loosen trade and investment barriers for EU companies, making Thailand an even more attractive regional base.
Why did FTA talks fall apart?
The EU and Thailand began FTA talks in 2013. The EU sought to bolster ties with ASEAN’s second-largest economy, while the Thai government was motivated to mitigate the impacts of losing access to trade aid under the EU’s Generalized System of Preferences (GSP) scheme.
The GSP scheme is an EU development program that offers low or zero tariffs to developing countries. Thailand grew too wealthy to qualify for the GSP scheme, losing eligibility at the start of 2015.
In 2014, the Thai military took control of the government via a coup and suspended the constitution, leading to a breakdown in ties with the EU, which canceled trade talks.
In December 2017, however, the EU’s Foreign Affairs Council decided to pursue gradual re-engagement with Thailand. This decision stated that the EU could explore the possibility of resuming FTA talks on the condition of Thailand having a democratically elected civilian government under the new constitution.
The military directly ran the Thai government until March 2019, when a pro-military coalition of parties formed government after an election. The EU considered this development sufficient to resume trade talks, leading to an agreement in June 2021 to resume negotiations.
Trade talks are poised to take place in 2022 using a joint understanding document as the framework, which covers issues such as trade in goods, services, and investment, as well as intellectual property, e-commerce, and government procurement.
What issues need to be resolved?
There are a number of issues that need to be resolved for the EU and Thailand to come to an agreement.
Sticking points in negotiations on the EU’s side include Thailand’s relatively high taxation of alcohol, opaque government procurement procedures, and industry-specific market access concerns. The EU is also reluctant to increase market access for Thai agricultural and fishing products.
For Thailand, concerns with an FTA largely relate to the need to meet the EU’s higher regulatory standards and to remove non-tariff barriers. Issues that need to be resolved include labor and environmental standards, and intellectual property, among others. EU stakeholders, for example, have criticized labor abuses in Thailand, including the treatment of migrant workers.
The Thai government also has concerns about opening the country’s financial sector, as well as the potential impacts that a more stringent intellectual property enforcement could have on the country’s booming medical industry.
Who benefits from an EU-Thailand FTA?
The EU is Thailand’s fifth-largest trade partner, after ASEAN, China, Japan, and the US, representing about 7.5 percent of the country’s total trade. On the other side, Thailand is the EU’s 26th largest trade partner, and the 17th biggest for imports.
In 2020, total bilateral trade was worth €29.1 billion (US$34.5 billion), with the EU importing €17.7 billion (US$21 billion) worth of products from Thailand and exporting €11.4 billion (US$13.5 billion) worth. That represented drops of 10 percent for imports and 15.8 percent for exports, respectively, as the COVID-19 pandemic disrupted the global economy.
The EU’s biggest category of imports from Thailand is, by far, machinery and appliances, which represented 52.3 percent of total imports in 2020.
Under an FTA, machinery and appliances, electronics, and vehicle manufacturing stand to be winners. Further, exporters who flourished under access to the GSP would benefit, such as those in food and beverage, pearls and rare stones, and apparel.
Additionally, the EU’s FTA with Vietnam went into effect in 2020, increasing the Thai government’s urgency to come to an agreement. Like Thailand, Vietnam is strong in export-driven manufacturing, but its low EU tariffs give it a competitive advantage in the region.
Among all European countries in 2019, including those not in the EU, Switzerland had the largest share of imports from Thailand (16.9 percent), followed by Germany (15.6 percent), the Netherlands (13.2 percent), the UK (11.4 percent), and France (7.5 percent).
Mirroring the EU’s imports from Thailand, machinery, and appliances is the bloc’s largest export category to the country, making up 36 percent of the total in 2020. Products of the chemical or allied industries were the EU’s second-largest category, at 18.2 percent of total exports.
The EU is the largest foreign investor in Thailand after Japan and the largest foreign investor in ASEAN as a whole. In 2020, the EU had €19.8 billion (US$23.5 billion) worth of outward stocks in Thailand.
An FTA would also benefit EU-based exporters in industries, such as machines and appliances, apparel, and food and beverage.
In 2019, Germany was the top European exporter to Thailand, as it was responsible for 26 percent of the region’s exports. Next was Switzerland (10.5 percent), France (9.1 percent), the UK (8.8 percent), and Italy (8.7 percent).
In addition to Thailand, the EU has pursued trade talks with Indonesia, the Philippines, and Malaysia in recent years, to mixed results. Nevertheless, the negotiations, on the heels of a successful deal with Vietnam, reflect a concerted EU effort to strengthen economic ties with Southeast Asia.