Potential of the Proposed Pakistan – Thailand Free Trade Agreement

Negotiations for a Pakistan – Thailand Free Trade Agreement (PATHFTA) have been in progress since early 2013. Media reports suggest that an agreement has been reached on most clauses of the FTA and that it is expected to be signed in the coming months.

This report titled “Potential of the Proposed Pakistan – Thailand Free Trade Agreement” is the fourth in the PBC’s Pakistan – Thailand FTA series and is part of the PBC’s Market Access Series. This report has been prepared based on the latest trade and economic data available and aims to see if there is any change in the competitiveness of Pakistan’s economy which may have given policy makers renewed optimism that Pakistan’s manufacturing and other value-added sectors will be able to compete with the sophisticated products manufactured by Thai industry.

The Pakistan Business Council (PBC) would like to restate its position that an FTA with Thailand, or for that matter with any country, should only be signed if it leads to incremental jobs, exports and additional revenues for the government. The findings of this Study have led to the conclusion that Pakistan is NOT READY to sign an FTA with Thailand and that Pakistan would be better off signing a limited Preferential Trade Agreement (PTA) seeking parity access for Pakistan’s fisheries and textile products.

Figure: Pakistan – Thailand Bilateral Trade

Pakistan – Thailand Bilateral Trade

Source: ITC, Trade Map

Since 2010, Pakistan has had a trade deficit in its bilateral trade with Thailand. While Thai exports to Pakistan have mostly been of sophisticated manufactured products, Pakistan’s exports to Thailand are for the most part dominated by textiles, apparel, cotton and cereals i.e. mostly commodities.

Recognizing Pakistan as a significant exporter of aquatic animals, there seems to be an interest among ASEAN countries in building new trade relations with Pakistan. For this purpose, this study has used Revealed Comparative Advantage (RCA), Export Product Dynamic (EPD), and X-Model methods. This procedure is adapted from (Luhur et al., 2019). The EPD estimation results show that Pakistani ‘Crustaceans’ (HS-0306) and ‘Aquatic Invertebrates’ (HS-0308) in Thailand, Malaysia, and Indonesia were falling in the ‘Rising Star’ position, which showed that Pakistan was able to meet the growing demand in these countries. Moreover, Pakistani ‘Frozen Fish’ (HS-0303), ‘Fillets and Fish Meat’ (HS-0304), and ‘Molluscs’ (HS-0307) have acquired a ‘Rising Star’ position in the Thai market. To determine Pakistan’s market development potential in Thailand and each ASEAN market under consideration, this study further used the X-Model of Potential Export Product method. The X-model estimates show that Thailand, Malaysia, and Indonesia indicate a positive and potential market development status, which means all three markets have a significant potential to develop the Pakistani fishery product market.

For textiles, Pakistan is the 23rd largest source country for Thailand but with a share of just 0.5 percent, along with a negative CAGR of 6.2 percent. As of 2019, Thailand imported $5.40 billion worth of textile products from the world. Since textiles represents 25.0 percent of Pakistan’s total exports to Thailand, signing a trade agreement could likely open up Thai textile market for Pakistani textile manufacturers.

Items classified under ‘Cotton’ (HS-52) enjoyed a significant share of 16.5 percent in total textile imports of Thailand from Pakistan. A list of textile articles has been developed that PBC recommends being pushed for inclusion in the concession list in any possible future negotiations for a trade agreement with Thailand.

This study does a brief historical analysis of Thailand’s manufacturing sector to show how a set of appropriate policies followed by the Thai government and its close collaboration with the private sector has resulted in the inflow of large amounts of FDI. From Thailand’s export point-of-view, an analysis of two manufacturing industries, namely; the automobile industry and the auto parts industry has been conducted. This report compares Thailand’s major export industries with Pakistan’s and the differences especially in the auto and the auto parts industries are highlighted. The auto and auto parts industry are relevant as comparators since the Thai authorities have asked for preferential access to these industries.

The current tariff structure reveals that there is room for tariff cuts, for goods traded between the two countries. Pakistan could ask for 100 percent concession or the most concessionary tariffs for its top potential textile and seafood exports to Thailand. Since Pakistan is not among the primary source of textile articles for Thailand, but has a high potential to supply these products, provision of concessionary duties will make Pakistani products more competitive in the Thai market against zerorated products of India, China, Japan, Australia and New Zealand.

While Thailand stands to benefit immediately from a reduction in tariffs for its major exports to Pakistan, Pakistan will need time to build capacity, mostly in the automotive sector to gain from an FTA. Pakistani officials need to be extremely cautious in signing a free trade agreement with Thailand. Pakistani industries, may not be able to compete in a market exposed to low-cost imports from an industrial economy such as Thailand. The FTA would not only burden the Pakistani economy with deficits but could lead to the manufacturing industry being forced out of business and more job losses than our economy can sustain.

The PBC is a private sector not-for-profit advocacy platform set-up in 2005 by 14 (now 83) of Pakistan’s largest businesses. PBC’s research-based advocacy supports measures which improve Pakistani industry’s regional and global competitiveness. More information about the PBC, its members, objectives and activities can be found on its website: www.pbc.org.pk