Resumption of the EU-Thailand Free Trade Agreement: A Catalyst for Growth and Collaboration

In an era marked by profound and unprecedented geopolitical tensions, trade disputes, supply chain disruptions, and global economic downturn, the revival of negotiations for the Free Trade Agreement (FTA) between the European Union (EU) and Thailand signifies an opportunity to revitalise the economic relations between the two long-time trading partners. Leveraging the foundation laid by the EU-Thai Partnership and Cooperation Agreement (PCA) signed on 14 December 2022, both parties have affirmed their commitment towards upholding the rules-based international order. The PCA is the reflection of the EU's strategic intent to address the increasing geopolitical risks, economic uncertainties, and the climate crisis by actively cultivating like-minded alliances in the Indo-Pacific region.

In these uncertain times, partnerships are essential and never has the case for cooperation between the EU and its partners in Southeast Asia been so compelling. The Thai-EU strategic partnership is evident in the EU’s ongoing efforts, exemplified by the successful conclusion of PCAs with five other nations in the Association of Southeast Asian Nations (ASEAN) —Indonesia, Vietnam, the Philippines, Singapore, and Malaysia. The inclusion of Thailand is particularly significant, underscoring the EU’s commitment to broadening and diversifying its regional partnerships as a prudent approach to navigating intricate geopolitical dynamics in the Indo-Pacific.

Thailand is the EU’s 26th-largest trading partner worldwide, while the EU is Thailand’s fourth-largest trading partner. The trade volume has underscored that the EU plays a pivotal role in the Thai economy, and the two have maintained a significant trade relationship for decades. Thailand’s main exports to the EU include machinery, electronics, transport equipment, manufactured goods, and food products, while the EU exports machinery, transport equipment, chemicals, and other manufactured goods to Thailand (European Commission, 2023). Against this backdrop, the successful conclusion of the EU-Thailand Free Trade Agreement (FTA) negotiations would serve as a pivotal factor in ensuring the mutual competitiveness of both parties within each other’s markets.

When negotiations were first initiated in 2013, the EU-Thailand FTA was envisioned as a comprehensive pact that would not only create new market opportunities but also encompass various facets beyond traditional trade in goods, so as to include services, investment, and intellectual property rights. However, the negotiation process faced a setback following the 2014 military coup in Thailand, leading to a temporary suspension of the trade talks. 

Negotiations regained momentum after the 2019 election in Thailand when senior officials from both sides met again. In September 2023, the first round of FTA negotiations held in Brussels marked a promising beginning, illustrating shared enthusiasm and high aspirations of both parties. The two sides laid out their positions across the entire spectrum of the future agreement and explored common ground and divergences. For areas where both parties had presented text proposals beforehand, a detailed first reading and discussion took place. In other areas, the initial exchange of views was principle-based, with the remaining text proposals to be introduced in the next phase. Preparatory work for the second round’s text-based negotiations will involve intersessional work by all 20 area-based negotiating groups. The commitment to conclude this agreement within a two-year timeframe by 2025 underscores the sense of urgency and determination to address the economic challenges confronted by both the EU and Thailand.

The FTA as an Economic Recovery Pathway for Thailand 

Thailand, Southeast Asia’s second-largest economy with a population of 71 million people, currently faces its most severe economic downturn in two decades. Experiencing a significant drop in GDP and a spike in unemployment due to declining exports, the country is also confronted with a struggling tourism industry as a result of the lasting impact of the COVID-19 pandemic. On the political front, Thailand experienced months of political deadlock when the pro-reform Move Forward Party won the nationwide election in May 2023 and did not manage to form a majority government. Political instability has led to a declining confidence of foreign investors and a delay in the approval of the 2024 expenditure budget bill, which was supposed to take effect on 1 October 2023, resulting in a significant delay in new government policies and investment projects. 

Since 5 September 2023, Thailand has a new coalition government in place, led by H.E. Prime Minister (PM) Mr. Srettha Thavisin of the Pheu Thai party. Beyond ongoing concerns regarding the legitimacy of the Pheu Thai party-led government, the administration faces major challenges in addressing a number of pressing domestic economic issues, including the household debt crisis, escalating income disparities, and the enduring complexities associated with a declining birthrate and an ageing population Addressing these pertaining problems will require strategic long-term solutions, including increasing trade with International partners and attracting Foreign Direct Investment (FDI).

In his first policy statement to the Council of Ministers in the National Assembly on 11 September 2023, PM Srettha Thavisin pointed out that “Thailand’s post-pandemic economy can be compared to a sick person. In short-term urgent policies, the Government needs to stimulate spending and ease the people’s immediate problems. In medium and long-term policies, it will increase the capability of the people by generating more income, reducing expenses, and creating greater opportunities”. The government’s long-term plan hence includes reinvigorating trade with its international partners, including the EU, after the 8-year pause under the previous government.

As per a preliminary study on the EU-Thailand Free Trade Agreement and its potential impact conducted by the Institute of Future Studies for Development in Thailand in 2021, the country stands to gain a significant boost in bilateral trade growth from the FTA, with a projected annual increase of 2.83% in exports to the EU and 2.81% growth in imports from the EU. Notably, the liberalisation of the services sector could further stimulate economic development, prospectively reaching an impressive 5% increase annually. These figures underscore the substantial economic potential and benefits that the EU-Thailand FTA can bring. 

The ambition of Thai policymakers for the FTA ratification is unquestionable. By the year 2030, Thailand has set itself the goal to seek new markets, expand trading opportunities and increase the proportion of Thailand’s international trade value with FTA partners to 80% of Thailand’s global trade. Currently, Thailand has a total of 14 FTAs in place, comprising 18 countries, which account for around 60% of Thailand’s global trade. These included the members of ASEAN, China, Japan, South Korea, Australia, New Zealand, India, Peru, Chile, Hong Kong, and the recently ratified RCEP. Consequently, nearly 40% of Thailand’s trade persists with trading partners where formal agreements have not yet been established.

Between 2022 and 2023, the Thai Ministry of Commerce launched FTA negotiations with several countries and regional groups. These included discussions with European Free Trade Association (EFTA) members Iceland, Liechtenstein, Norway, and Switzerland. Negotiations with EFTA began in June 2022, with the target to conclude in 2024. Simultaneously, initial FTA talks with the United Arab Emirates (UAE) commenced in May 2023, with an accelerated goal of reaching an agreement by the end of 2023 or, at the latest in early 2024. According to the Thai Department of Trade Negotiation, the Thailand-UAE FTA negotiation has progressed by 80%, with the UAE expressing particular interest in Thai goods and services, considering Thailand as a gateway to the ASEAN market. Meanwhile, the UAE has the potential to serve as a central hub for expanding Thai trade into the Middle East. Furthermore, trade negotiations between ASEAN and Canada began in September 2022, aspiring a potential conclusion in 2024. These efforts underscore Thailand’s commitment to expanding trade and investment in line with its strategic goal to leverage external trade relations to fortify its global standing. The question therefore arises as to whether the EU has similar ambitions towards Thailand.

Implications for the EU

While the war between Russia and Ukraine is shaking the rules-based international order, Sino-American rivalry also has been intensifying.  EU trade agreements help EU exports and businesses to diversify and find new markets. The value of EU trade taking place through free trade agreements with global partners has surpassed 2 trillion EUR for the first time in 2022, according to the 3rd Annual Report on the Implementation and Enforcement of EU Trade Policy. The report also shows that tackling trade and non-trade barriers over the last five years helped unlock 7 billion EUR of EU exports in 2022 alone. 

These figures underscore that the FTA is a key driver to boost market access for EU goods and services in Thailand, by addressing trade barriers and tariffs while concurrently safeguarding the rights and investments of EU businesses. This includes strengthening intellectual property rights, harmonising regulations, fostering innovation, and embracing sustainability to ensure that trade benefits both sides. 

The EU-Thailand FTA will contribute to making the EU more resilient to geopolitical tension. Such tension has been causing fragility in international value chains. By paving the way for deeper trade ties with Thailand – the second largest economy in Southeast Asia – and further strengthening the EU’s strategic engagement in ASEAN, a region with nearly 650 million people and robust economic potential, such vulnerabilities can be reduced. In 2019, the EU slipped from being ASEAN’s second-largest trading partner to its third after the US and China (EU ASEAN Business Council Trade and Investment Report, 2019), reducing its influence within the region. Recognising ASEAN and Thailand’s vast opportunities, the EU should further elevate the region’s priority in its trade and investment policy. 

In addition, over the past decades, Thailand’s trade links with the US, the EU, and Japan have weakened relatively to its links with China, particularly under the rule of the previous government. Therefore, timely bilateral free trade agreements between the EU and ASEAN member states could counterbalance the geostrategic and geo-economic weight of other great powers like China and the US in the region. The new Thai government has sent a positive pro-trade signal to the world. Thailand has set its course under the new government’s stance, underpinning its commitment to free and fair trade. Thailand is poised to alleviate existing concerns and to attract more Western investments. 

During PM Srettha Thavisin’s first international presence on the global stage at the UN General Assembly (UNGA) on 18-24 September 2023 in New York City, USA , he sent a clear message to the World that Thailand is committed to advance open and equitable trade, essential for its economic recovery. On the sidelines of the official UNGA meeting, he also met with global companies like Google, Microsoft, Tesla, as well as the US Chamber of Commerce, and the US-ASEAN Business Council. The message of Thailand’s readiness and openness for trade has also been echoed in the recent Asia-Pacific Economic Cooperation (APEC) meeting  on 12-17 November 2023. The PM reiterated that Thailand is ready to implement a number of key policies, in order to build confidence and demonstrate Thailand’s readiness to welcome all investors in terms of infrastructure, ecosystems and business environment.  

In light of these regional developments, it becomes ever more crucial for the EU to prioritise the strengthening of trade partnerships with Southeast Asia’s larger economies, including Thailand, being its second largest. Given the global challenges posed by (potential) supply chain disruptions, Thailand can be a subsidiary destination for European businesses proactively redirecting and diversifying their operations towards South East Asia to mitigate the impacts of geopolitical tensions and being overly reliant on a too limited number of suppliers. This strategic move is a response to the growing recognition of the region’s potential, its economic growth and its extending role as a diversification hub. This approach, emphasising collaboration and mutually beneficial agreements, stands as a more pragmatic alternative to the notion of decoupling. By fostering stronger trade ties, the EU can secure broader access to vital markets and contribute to the resilience of global supply chains. Broadening the EU’s engagement with the ASEAN members through bilateral FTA negotiations can unlock great benefits in trade and investment between the two parties, which could ultimately still lead to the envisioned region-to-region FTA in the future. 

Putting trade at the forefront, there are many common areas for mutual growth. Thailand and other countries in ASEAN are at the forefront of digitalisation showcasing significant growth in internet access, the e-Economy and e-Trade, as well as financial inclusion. Cross-border digital payments within the ASEAN framework have fostered significant progress in the digital-based economies of the ASEAN members. To move Thailand toward a digital-based economy, the new Thai government introduced a national program of “digital wallet”. As part of this initiative, the government aims to provide 10,000 baht (280 USD) to 50 million eligible Thai citizens. To qualify, individuals must have a monthly income not exceeding 70,000 baht or a total deposit in a savings account below 500,000 baht. Its aim is to stimulate the economy by boosting short-term spending, lay the foundation for the country’s digital economy and prepare Thailand for the new era, opening the doors for international (thus also European) trade partners and investors with stronger digital infrastructure, to accommodate the rise of Thai digital trade. The EU-Singapore Digital Partnership offers an example to the region for future joint efforts with the EU in emerging areas such as 5G/6G, Artificial Intelligence, and digital identities. With its increasingly well-established digital infrastructure Thailand holds great potential to forge a similar emerging digital partnership with the EU. 

Challenges Ahead

The EU’s ‘new generation’ of Free Trade Agreement transcends traditional trade domains and goes beyond tariff reduction, exuding a high-standard approach towards sustainable development, including labour standards, human rights, and environmental concerns. 

In June 2022, the Commission concluded its Trade and Sustainable Development (TSD) review, which brought strengthened implementation and enforcement of TSD provisions. The TSD review identifies policy priorities and key actions to further align domestic legislation in partner countries with international norms. This can provide Thailand with opportunities to elevate its trade practices while ensuring that social and environmental considerations are taken into account. The ratification of the EU-Vietnam FTA can serve as an example, as it has triggered an ongoing broader reform of its Labour Code to allow for independent trade unions to be set up. 

While the reinforced Trade and Sustainable Development framework may enhance sustainable practices in Thailand, it also presents challenges for local businesses, characterised by heightened competition and potential escalations in production costs to meet new requirements. Navigating these complexities demands policy-makers and negotiators to balance the benefits of setting higher standards with the challenges posed by such challenges.

In line with previous FTA negotiations in the region, other potential challenges for Thailand in the negotiations include opening up public procurement, setting up dispute resolution mechanisms between private investors and states, intellectual property rights, and Geographical Indications (GI). Given the ambitious timeline aiming for completion by 2025, it is likely that various aspects of the negotiations, including the challenges mentioned earlier, may necessitate more extensive technical and text-based discussions. The forthcoming FTA negotiation round scheduled in 22-26 January 2024 in Bangkok and is expected to bring about a lot more substance-based consultation, followed by another round scheduled in June 2024 in Brussels and at the consecutive one inclusive October 2024 round in Bangkok aimed to be a conclusive one. This signified pivotal milestones within an ambitious timeline set forth by the imminent inauguration of the forthcoming EU Commission. In the next negotiation round, the Thai department of Trade Negotiation will be led by the new Director General, Ms. Chotima Iemsawasdikul, who was an Inspector-General at the Ministry of Commerce and previously served as the Deputy Director General to the Department of Trade Negotiation.  

Achieving the 2025 Pivotal Milestone

In the midst of global uncertainties, the EU-Thailand FTA emerges as a potential catalyst for growth and extended cooperation for both parties. The profound implications of an ambitious agreement will resonate with the EU’s commitment to a rules-based, multilateral trading system, in alignment with its broader Indo-Pacific Strategy. If the EU-Thailand FTA can set high ambitions, it can stand as a transformative catalyst for sustainable growth and cooperation in the vibrant ASEAN region. The EU and its member states must remain consistent in emphasising the pivotal role of ASEAN, keep it high on their agenda, dedicating special focus on the ongoing EU-Thailand FTA negotiations to evidence that ambition. 

Beyond the trade discussions, the negotiations also symbolise a collaborative spirit, fostering enhanced resilience and a promising future for both the EU and Thailand. They underscore that free and fair trade, grounded in a rules-based world order, remains the most viable path forward to navigate the economic challenges that lie ahead.

Author: Pimwan Pongsuwan, EIAS Junior Researcher

Photo Credits:EIAS