Facilitating the ASEAN economic community and promoting trade and investment
In late 2015, regional integration finally integrated ASEAN Economic Community. It is the crowning achievement of an international movement that began in 1967 when Indonesia, Malaysia, The Philippines, Singapore and Thailand formed the Association of Southeast Asian Nation (Asean) and proceeded with remarkable prescience to plan a united future.
The reasoned that regional integration was needed to enhance development opportunities; to cope thoroughly with new challenges and threats; to increase bargaining power and reduce dependency on world economies; to enhance the region’s international competitiveness; and to unable member countries to tackle various problems as a group.
Having embraced Brunei, Laos, Cambodia, Vietnam and Myanmar as new members, ASEAN named the “three pillars” that would form the basis for its aspirations, the ASEAN political-Security Community, which would aim to ensure peace and the use of peaceful solutions to tackle problems in the regions and adherence to a rule of cohesive security; the ASEAN Economic Community , Which would drive the economic growth, prosperity and stability in the region; and the ASEAN Socio-Cultural Community, which would uphold the grouping’s commitment to promote a compassionate society, close cooperation and exchanges among members countries.
The ASEAN Economic Community (AEC) has a population of more than 640 million people. Its four main principles are: (1) a single market and production base that supports the free movement of product and services, investment, labor and capital; (2) a competitive economic region through elimination of import tariffs among Asean members and assistance in development of basic infrastructure; (3) equitable economic development aimed at reducing development gaps between old and new member countries as well as supporting the development of small and medium sized enterprises, and (4) integration with the global economy.
The AEC’s impact on Thailand
Various agreement signed in the lead up the implementation of the AEC provide for liberalization in trade, services and investment and the free movement of labor. These will affect Thailand’s border provinces and the country as whole. Liberalized investment will lead to a flow of capital to lower-cost counties that have more readiness in production factors, and enhance market access. Consequently, there will be a greater flow of goods, services and labor across border. If Thailand can offer low production costs, sufficient production factors and market access, the AEC will provide opportunities to generate more investments on the country.
The availability and cost of labor are vital factors in production. The AEC will enable the free movement of labor, give worker wider choices and offer investors a vastly enlarged labor pool from which to source their workers. Hence, proper development policies, in particular area based approached to development, will help to attract workforces that are better matched to the requirements of investors, in terms of quantity, quality and wage levels.
At present, Thailand’s neighboring countries are busily adjusting themselves in order to reap benefits from their shared borders. Implementation of the AEC brings with it the upgrading of transport routes to enhance logistics efficiency; amendments to international trade rules and regulations so that they comply more closely with international standards; the development of potential areas as special economic zones to facilitate investment in border towns; and restructuring of the manufacturing sector to upgrade national development. These changes will help to increase the value of Thailand’s border trade.
In the next stage of development, more production bases will be moved to border areas and to neighboring countries where labor costs are lower. This will aim to cut logistics costs and cope with higher wages in Thailand, as well as chasing entitlement to the Generalized System of Preference (GSP). The GSP is a preferential tariff system providing exemption from rhe more general rules of the World Trade Organization. Thailand no longer qualifies for the GSP, bt export shipments from neighboring countries still enjoy these privileges. In general, these changes will prepare Thailand to take advantage of trade and investment opportunities arising from the AEC.
Development of special economic zones
The border area is a first frontier in the movement of goods and labor. Therefore, border areas are being developed to facilitate this flow of goods and labor in an efficient manner. As well, this border development will enable Thailand to capitalize upon these movement in terms of economic activity; in manufacturing collaboration or partnerships between factories in Thailand and those on neighboring countries; in border and transit trade; and in related services that will support these economic activities.
Border trade already contributes significantly to Thailand’s trade with neighboring countries accounting for about 70 per cent of the total value of trade between Thailand and its neighbors. The country has always enjoyed a surplus in border trade. In the years from 2010 to 2014, the level of trade surplus increased by an average 0,6 per cent per annum, reaching Bt 192 billion in 2014. The borders are also transit points for trade in goods between Thailand and markets such as southern China, Vietnam and Singapore. Transit trade grew by 14,2 per cent annum from 2010 to 2014, soaring to Bt 156 Billion in 2014, an increase of 41,2 per cent over the previous year.
Transit trade, or shipping goods by road through neighboring countries in order to reach countries like Vietnam, India and China, is expected to contribute a major share to future expansion of Thailand’s border trade.
The establishment of Special Economic Zones (SEZs) in border areas is a development strategy designed to take advantage of the country’s geographical location; the preparedness of its trading channels with the neighboring countries; current border-trading pattern; opportunities arising from economic development in neighboring countries; demands for investment in border areas; and in general; opportunities arising from the AEC. The special zones will also help to enhance the county’s competitiveness in border area trade and investment. They will create readiness to meet competition from other AEC counties in an appropriated and efficient way, and continuously attract investment from within Thailand and overseas that will generate economic activities in border areas, including in trade, investment, logistics, tourism, and other service activities. This will help to boost Thailand’s competitiveness in a sustainable manner and create security, well-being and a higher quality of life for people living in border areas.
Thailand began to seriously pursue the SEZs policy in 2014, with the primary objectives of attracting investment from both local and foreign investors, distributing, wealth to the provinces, reducing inequity, improving quality of life, and solving security problem in the border areas, including illegal immigration and farms products and narcotics entering Thailand from neighboring countries. A national Committee on the Development of special Economic Zones is the principle mechanism driving execution of the SEZs plan. The Prime Minister is the committee’s chairman and its members include representatives of involved governments agencies and the private sector. The Office of the National Economic and Social Development Board is the committee’s secretariat, and there are six subcommittees considering areas to be designated as SEZs, as well as projects and measures to support their development.
The government plans to designate areas for the establishment of SEZs in two phases. There are Five areas in the first phase, comprising of Tak, Sa Kaew, Trat, Mukdahan, and Songkhla, and another five in the second phase, namely, Nong Khai, Narathiwt, Chiang Rai, Nakhon Phanom and Kanchanaburi. The total value of border trade in the areas designated for SEZs in both phases is about Bt 969 billion, accounting fot about 98 per cent of all of Thailand’s border trade transaction.
They have high potential to become new investment bases around the county’s border areas, as well as being bases for wide-ranging relationships with neighboring countries.
To promote development of the SEZs, the government has provided support in five key areas:
1) Incentives to promote investment
Investors in the SEZs who have received approval from the Board of Investment (BOI) will qualify for the BOI’s maximum investment incentives. For example, if a Project falls into one of the 13 targeted activities specifies by the SEZs Committee, it will be exempted from corporate taxation for the eight years and its corporate tax will be reduced by 5à per cent for a further five years. It will also be able to use foreign labor in tis SEZ-based operation. The minimum investment sum for a project to be developed in a SEZ by a small and medium sized enterprise has been reduced to bt 500,000, from the earlier minimum of bt 1 miliion.
Furthermore, for projects that are not entitled to BOI incentives, the Ministry of Finance halves their corporate taxation payments, which are normally 20 per cent, for 10 accounting periods. To facilitate investments, the government has set up “One stop service” centers in the first five SEZs, and there are linked with the BOI’s One Start One Stop Investment Center at the Chamchuri Square, Pathumwan, Bangkok.
2) Labor and one-stop service centers on labor
The government has introduced a cross border management system to enable workers from neighboring countries to word in Thailand and return to their countries on a daily basis. The management system will enable them to work legally, while they will be systematically monitored and cared for. The government also provide a training and welfare system, and has set a one-stop labor service centers in Sa Kaew and Trat that are offering registration services for daily migrant workers in the SEZs. The Ministry of Foreign affairs is negotiating cross border agreements with the governments of Laos and Myanmar, and once completed, the agreements will allow one stop labor service centers in Tak and Mukdahan to provide registration for daily migrant workers in the SEZs.
3) Development of basic infrastructure and customs houses
The government has developed a 9-year plan (2014-2022) for the development of the infrastructure ass customs houses to support establishments of SEZs in six areas with seven cross-border checkpoints. They are TAk, Sa Kaew, Trat, Mukdahan, Songkhla and a border area in Nong Khai. Budgets totaling bt 1.663 billion have already been allocated for these priority projets. Another bt 5.749 million has been allocated for basic infrastructure and construction of customs houses in fiscal year 2016. The development will bring this basic infrastructure up to a high standard; solve problems relating to principal border checkpoints and develop their potential; prepare electricity and tap-water supplies to SEZs; develop industrial estates and infrastructure for the farm sector; and prepare public health services in border areas.
4) Land procurement and administration
The government has secured land for development of SEZs in Tak, Mukdhan, Trat, Sa kaew and Nong Khai and has allocated plots within the SEZs for the use of states agencies, for renting to private sector organization and for the Industrial Authority of Thailand, with 50 years contracts that can be renewed in accordance with treasury department procedures.
5) Management of imports and exports of farm products
The Ministry of agriculture and Cooperatives, in conjunction with the ministry of Commerce, administers the import and export of farms goods through the SEZs. It also promotes imports of agricultural raw materials from neighboring countries I order that they can be processed will value added in the SEZs. Then the processed products will be shipped to both domestic and export markets. Agricultural cooperatives in the SEZ areas have been assigned to coordinated with neighboring countries on this matter.
All of this support from the public sector will help to promote many aspects of private sector business, such as helping private ventures to reduce production costs with investments incentives and improved access to various aspects of production, such as labor and raw materials. Basic infrastructure is also being provided both within the SEZs to facilitate manufacturing activities, and outside the SEZs to help distribute goods to markets. One stop services are being established to support investment and labor movements; land has been procured to help solve the problem of rising land princes; and cross borders activities are being developed to cope with the free flow of goods, labor and services between Thailand and its neighbors, in accordance with the provision of the AEC. Furthermore, these activities will help to solve borer security issues such a illegal labor and smuggling.
The AEC represents both opportunity and a Threat to Thailand, depending on the county’s readiness and preparation. The development of SEZs in border areas is a tool that is designed to grasp benefits from the AEC by using Thailand’s Geographical advantage, the readiness of trade channels with neighboring countries, the ascendant nature of border trade, opportunities arising from economic development of neighboring counties, and demands for investment in border areas.
Nevertheless, development conditions are constantly changing. Therefore, investors in the SEZs should also monitor changing circumstances closely in order to get benefit from doing business efficiently.
To get further information, you can check this article: Thailand in 2017: a Changing Investment Landscape