Thailand's Clothing and Textile Exports 9789814376853

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Occasional Paper No. 89

Thailand's Clothing and Textile Exports

The Institute of Southeast Asian Studies (ISEAS) was establis hed as an autonomous organi zati on in 1968. It is a regional research centre for sc holars and other speciali sts concerned with modern Southeas t Asia. parti cularl y the many-faceted problems of stability and ec urity. econo mic developm ent. and political and social change. The Institute is governed by a twenty-two-me mber Board of Trustees co mpri sing nominees from th e Sin ga po re G ove rnm e nt. th e Na ti o na l Uni vers ity o f Singa po re , th e va ri o us Ch a mb e rs o f Co mm e rce . a nd profess ion al and ci vic orga ni zati ons . A te n-m a n Exec uti ve C o mmitt ee oversees day-to-day operati ons; it is chaired by the Director, th e In stitute 's chief academic and admini strati ve offi ce r. The ASEAN Economic Research Unit i an integ ral part of the In titute , co ming under the o ve ra ll uperv isio n of th e Direc to r who i a l o th e Chairperson of its Management Committee. The Unit wa formed in 1979 in response to th e need to deepen understa ndin g of eco no mi c change and politi cal deve lopme nts in AS EAN . A Reg io na l Ad vi o ry Co mmitt ee, consisting of a senior economi t fro m eac h of the ASEAN countri es, guides the work of the Unit.

Thailand's Clothing and Textile Exports

Suphat Suphachalasai Thammasat University

ASEAN ECONOMIC RESEARCH UNIT

INSTIT UTE OF SOUTHEAST ASIAN STUDIES

Cataloguing in Publication Data Supha t Suphachalasai. Thai land 's clothin g and texti le export s. 89) (Occa ional paper/ In titute of Southe ast Asia n Studie s: no. I . Tex tile industr y-Th ailand . 2. C lothing trade -Thail and . 3. Arrang ement Regard ing Inte rn ati ona l Trade in Tex til e ( 1973) 4. Textil e indu stry-L aw and leg i lation . 5. C lothing trade -Law and leg is lati o n.

I. Titl e. fl . Series DS50 1 159 no. 89 ISBN 98 1-301 6-63-9 ISS N 0073-9 731

1994

s l 94-4 19_3

Publi shed by Institu te of Southe ast Asia n Studie Heng Mui Keng Terrac e Pa ir Panj ang Singap ore 0511 produ ced. tared 1n All rights reserve d. No part of thi s publi ati o n may be re m an , I ctr nic , ny a by or fom1 a retriev al ysrem, or tran mitred in any the prior pe rmi ut th wi , mecha ni cal, photoc opying , record ing or otherw i e sion of the In titute of So uthea t Asia n Studi e .

© 1994 Institu te of So uthea t Asian Studie public atiun rest.1· The responsibility for fact s and opinions exp res~·ed in this arily rejlt:'Ct necess exclusively with the author and his interp retatio ns do not the views or the policy of the Institute or its supporters. Typese t by Supers kill Graph i cs Pte Ltd . Printed in Singap ore by Stamfo rd Pre s Pte Ltd.

To my parents

List of Tables

2.1 2.2 2.3 2.4 2.5

Average Annual Real Growth of GDP in the Four Leading Countrie Seven Mo t Important Export Product of Thailand, 1960-88 Debt Indicators Import Tariff Protection in Selected Countries Nominal and Effective Rate of Protection of Thailand

in the Mid-1980s 2.6 Tax Incentive Granted by the Board of ln ve. tme nt . 1987 2.7 Net Inflow of Direct Investment to Thailand from Selected Countries ec tor 2.8 Direct Foreign investment Classified by Eco no mi 2.9 Percentage Change of Export Value of Princ ipal Manufacturi ng Export 3.1 Textile Machines 3.2 Alternative Weaving Technologie 3.3 Clothing and Textile Production of Thailand , 1970- 86 3.4 Import Value of intermediate Te tile Produ ct 3.5 Redi scount of Promis ory Notes at the Bank of T hai land Head Office for Indu strial Undertaki n g~ 3.6 Sales Taxes on Clothing and Textiles 3.7 Import Tariff on Clothing and Tex til es 3.8 Average Tariffs on Clothing and Textil e~ in elected Developing Countrie in the early 19 80~ 3.9 Effective Rate of Assi stance to the Tba; lothin g and Textile Indu stry in I 985 3. 10 Effective Rate of As i tance to the Thai C lothing and Textiles in 1985 (assuming th at domesti cal ly produced and imported good are non -~ ub titut abl e) 4.1 Major importing Countries of C lothing and Te tile ~ : Shares in Total Imports in 1986

3 6 9 I0 12

15 16 I 22 23 _4 25 26 27 27 2

30

31 35

4.2

4.3 4.4

4.5

4 .6 4.7 4.8

6.1 6.2

6.3 6.4 6.5 6.6 6.7

7. 1 7._

World Market Share of Clothing and Textile Exports in Selected Countries 35 hronology of Clothing and Textile Trade Re trictions 41 N minal Tariff Rates on Clothing and Textile 42 Real Rates of Growth of Clothing and Textile Import tn Indu, trial MFA Member Countrie from MFA Developing Countrie, 42 Welfare Effect. of the MFA in Selected Indu trialized Countrie 46 Quota Share of Selected Country Member of MFA Exporting to MFA Imp rting Countri · in 1983 47 Export Share of CI thing of Selected Countrie to MFA and Non -MFA Market 49 Export Value of Thai Clothing and Te tile 56 Quota Utilizati n Rate of Thaj Clothing Export to the United State 58 Quota Utilizati n Rate. f Thai Clothing E port to EC 59 E p rt Qu t f ele ted Item of Clothing Allo ated t a Thai Firm in 1 7 61 The ~ lum and VaJue f Thai Clothing E p rt 65 Percemage h re f Maj r CI thing E port f H ng Kong and Thailand lTC 4, Fi e Digit Le el in 1986 66 f Thai I th.ing Exp rts in Selected Item 67 f Th iland nd H ng K ng to the EC, Japan. nd the nited tate m ele ted SITC Fiv Digit Le I Pr u t 68-69 fth MF F E p rtingC untrie 77 t Welfare Effe t n MFA

78 -_ 7

7.

7A

Pr di ti n f hai

1 trung E. p rt

nder Different Sl:enario

0

0

List of Figures

2.1 2.2 5.1 6. 1 7.1

Shares of Agricultural and Manufacturing ec tors in GOP External Balance of Thailand Effects of the MFA on Exporting Countries Thailand 's Export Sbare of Cl othin g and Tex til es to MFA Markets Diagrammatic Representation of the Mode l

5 7 52 56 7~

Acknowledgements

I am grateful to Professor He le n Hughe . . Dr Hal Hill and Dr Will Martin for their guidance and c mmenr throughout the preparation of the manuscript. I am indebted 10 taff o f the National Centre for Development Studie fo r their editing ass i.'> t:m e o n an earlier draft, and the International Economic Data Bank at the u~tralian National Uni er ity for as i ranee on data :-.~ar ·h. I " ould lik ~ 1 ack.now ledge the help of the taff of the Institute of uthea 1 1an Studie · for their editorial work. I w i h to express m. g ratitud e to ffi) friend and c !league in variou s Thai government departm~nt fur their ru. i · tance o n data and field work . I ha e al o benefited fr m d1 ·u s1o ns with . and information from, indu rriali t in the man-made fibre , pinning and wea ing, and lathing indu trie..

I

Introduction

The manufacturing sector has become increasingly important to the Thai economy since the 1980s : in 1987 it comprised about 22 per cent of GOP and brought in 50 per cent of foreign exchange earnings. Manufactured exports largely consist of labour intensive industries, such as clothing and textiles, integrated circuit assembly and jewellery, which together accounted for around 54 per cent of manufacturing exports and 27 per cent of the country's total export earnings in 1987. The clothing and textile industry has become particularly important to the Thai economy in recent years. Clothing and textile exports grew so rapidly that in 1985 they became the highest foreign exchange earning commodity. In 1986 the clothing and textile industries contributed about 26 per cent to GOP from manufacturing and had the highest employment share in the manufacturing sector with around 500,000 workers. In 1988 exports of textiles and clothing increased to $2.4 billion compared with $0.8 billion in 1984. (All dollar values are in U.S. dollars .) Since 1986 clothing exports have become the highest export commodity; the export value was $1.9 billion in 1988. The clothing and textile industry is likely to become the largest manufacturing industry if Thailand follows the industrial development path of Japan, Hong Kong, the Republic of Korea and Taiwan. Nominal protection has been high for clothing and textiles, and production capacity has been controlled to limit domestic competition. The tariffs on spinning , weaving, clothi ng and man-made fibres have been high . This could have been expected to restrict export growth. High protection on intermediate products such as fabric could have been expected to reduce the competitive edge of downstream industries, notably clothing. High tariffs on clothing suggested that there was no incentive to export. From 1978 to 1986, moreover, the production capacity of spinning and weaving was controlled. Neither expansion nor new establishments were permitted. In addition there were external barriers to clothing and textile exports in the form of the Multi-Fibre Arrangement (MFA). However, the MFA at first 1

2

THA ILAND ·. CLOTH I 1G

ND T EXTILE EXPORTS

had a pos iti ve effec l on Th a i expo rt s beca use ex port from such maj or ex porti ng co un tries a. lhe As ian NIC we re limited, all ow in g Thail and to ex port to th e MFA marke ls. As ex ports grew. markets beca me limited . Thail and beca me subj ec t to quotas and had consistentl y fill ed its qu otas since the mid- 1980 . . Thi s co ul d be ex pected to slow dow n ex port growth because, un like the As ian IC , Thai land has a mall share of global ex port qu otas. Thi s study has two main objec ti ves . It see ks to ex pl ain why the indu stry has grown . o fast de. pite domesti c protec ti on. thu s to analyse th e effec ts of the MFA on the Th ai clothin g . ec tor and to estim ate the net we lfare effects of th e MFA on the Thai economy. Th e emph as is is on clothing rather than t xtil es. The tex til e sec tor is di sc ussed in th e earli er chapters to present a com plete picture of the industry, but in the later part the focus is on clothing. In trying to expl ain th e rapid grow th of Th ai clothing and textile ex ports, both domesti c and ex tern al factors are examined. The domestic side of the story i first examin ed by foc usin g on th e suppl y side, mainl y covering gove rnment interventi on in the industry in the fo rm of protection and re lated poli cie . Effecti ve rate of ass istance (ERA) are es timated. Related policies, uch a the poli cy of controlling the capac ity of the tex til e industry, are also included. The role of the MFA and it · global welfare effects are analysed by using a parti al equilibrium model. The effects of the MFA on the future growth of Thai clothin g ex ports are fo recast and the welfa re effects of the MFA on Thailand are evalu ated by usin g a general equilibrium world clothing trade model. Product differenti ation i incorporated to co ver the heteroge neous product nature of clothing. Outline of the Study

Chapter 2 g i ve~ a general view of the evo luli on of th e T hai rn anufacluring sec tor. Chapter 3 desc ribe. the stru cture and deve lopment of the clothin g and tex til e in du!>lry and governmenl interve nti on. analys in g protec li on po li c ies a:-- we ll a~ the effec1i ve rates of u ~s i s t a n ce (E RA) in th e indu stry. Chapters 4 and 5 dea l with MFA iss ues. In Chapter 4 th e in sliluli nnal aspec ts of the MFA and the effec ts of the MFA on in dustrial co unlri t:s are rev iewed. Chapter 5 empl oys a partial equili brium model to e~ lim a l c 1he we lfare effects of the MFA on deve loping co untri es. Chapter 6 exa mines the ex port s of lh e T hai clolhin g ~ec t n r. co mparin g Thai clothing ex porl s to those of Hong Kong. hapter 7 p re~e nt ~ a worl d clothin g trade mode l to eva lu ate the we lfare e ffect~ uf th e MFA on T hailand and to predict the future of Th ai ex ports under different ~ce n a ri os . Chapl er !:) summ arizes the conclusions. In the tex t, all figures have been rounded off, and thu s percen tage s in tabl es do nol always sum to one hundred.

II

An Overview of the Thai Economy and its Manufacturing Sector

Growth and Structural Change The Tha i economy ha achie ved a high rate of grow th ince the beginnjng of th e 1960s. The average rate of growth of real GOP wa 8.2 per cent in the 1960s, 7 .2 pe r cent in the 1970s and 5.1 pe r ce nt in the ear ly 198 0 . Moreover the real GOP growth has increa ed dramati a ll y in rece nt year : in 1986 it was 4. 3 pe r cent, it inc rea ed to 7 per cent in 1987 a nd to I 0 .6 per cent in 1988. Thailand ha bee n am ong the fas te t growin g countrie in the world , immediate ly fo ll owin g the newly indu , tri ali zin g countrie of Ea t Asia (Tab le 2. 1). TABLE :!.I: AVE RAGE ANNUAL REAL GROWTH OF GOP IN THE FOUR LEADING COUNTRIES ( ln percentages) Singapore

Thailand

Hong Kong

Rep. of Korea

2.4

17A 19..8 5.4

1.1 5.1 1.9

1.8 9.9 3.0

8.6

8.8 8.5 6.5 1.9 8.6 11.0

8.4 7.2 5.1 4.3 7.0 10.6

Inn ation rates

1960- 70 1970- 80 1980- 86

8.2

6.9

Grow th rates

1960-70 1970-80 1980-85 1986 1987 1988

10.0 9.3 5.9 9.0 13.6 7.5

9. -

7. 1_.5 12.11.0

SOUR ES : World Bank, World Developmenr Report (various i sues); International Economic Data Bank, ANU .

3

4

THA ILA D' CLOTH LNG A D T XTILE EXPO RTS

Thailand, unlike its neighbours. has neve r been co lonized. It wa a buffer state between the Fre nch coloni es in Ind oc hina and the British colonies of Burma Malay ia and Indi a (Ingram 1971 ). In I 855, however, T hail a nd was forced by the Briti h und er the Browring Treaty to ope n to outs ide markets. The treaty had two important compone nts. F irst. Thai la nd (t he n Siam) could not impo e import and export tariffs of more than 3 per cent. Second, British me rchants were allowed to buy a nd ell goods directly, w ith out any of the interference that had taken place when trade had been co ntro ll ed by the King. Fourteen other countrie . mostly European countries, the Uni ted States and Japan, were included in the Browring Treaty. As a result , Thaila nd pursued broadly free trade policies a nd concentrated on export in g ri ce, teak and agric ultural products, in which it apparently had a comparative advantage a nd was highly competitive, and imported manufactured products. Although the Browring Treaty was abolished in 1926, pri vate investme nt in manufacturing continued to be low. Government began to e ncourage publi c inve tment , mainly in infrastructure but also in manufacturing (I arangkun 1969). Thi was partly the result of nationalistic policies, but it aJ o reflected di scrimination against the Chinese business co mmunity a nd fear of foreign investment. Akrasanee and Ajanant (1986) have ugge ted that high remittance to China were responsib le for these po li cies. Chinese bu sinesses di verted their in vestments into high liquidity bu sinesses suc h as retai ling and mining (M uscat 1966). Import tariffs an d export taxes (especially on rice exports) were raised, not to protect indu s try but for govern ment revenues (Ingram 1971). T hail and tra nsformed its ag ra rian eco nomy to a ~emi-industr i a l o ne be twee n 1960 and 1980. that is, ove r one ge ne rati o n (F ig ure 2. 1 ). Alth o ug h the dg ric ultural sec tor was res ponsibl e fo r the co untry\ hi gh G OP grow th in the l