DESPITE FTA, LITTLE GOOD NEWS IN THAI-JAPAN ECON RELATIONS

UNCLAS SECTION 01 OF 03 CHIANG MAI 000034

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EINV PREL PGOV JA TH
SUBJECT: DESPITE FTA, LITTLE GOOD NEWS IN THAI-JAPAN ECON RELATIONS

REF: A. 08 CHIANG MAI 160 (LAMPHUN: POTENTIAL AND INVESTMENT)

B. 08 CHIANG MAI 123 (INDUSTRIAL ZONE IN LAMPHUN)

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Summary and Comment
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1. (SBU) Summary: With the Thai-Japanese free trade agreement
in place since 2007, and with 2009 designated as the
Japan-Mekong Exchange Year, hopes have been high in northern
Thailand for a strengthening of the Thai-Japanese bilateral
economic relationship. However, a variety of factors including
only modest momentum from the FTA, investment fears surrounding
Thailand's political climate, and anemic RTG stimulus efforts
caused Thai-Japanese economic relations to flounder. In
northern Thailand specifically, Japanese and Thai officials have
made local efforts to improve conditions, but the net impact has
been weak at best.


2. (SBU) Comment: While the global economic recession casts a
pall over all economic activity, the seizure of Suvanabhumi
Airport in Bangkok last November by the People's Alliance for
Democracy continues to have a significant impact on the Japanese
business community's psyche vis-`-vis Thailand. Thailand will
have to implement effective policies -- both nationally and
locally, addressing political stability and economic stimulus --
to remedy how the GOJ and private Japanese investors view the
country and the northern region as destinations for their
investments. If Thailand falls short of this objective, the
Thai-Japanese economic relationship may suffer more over the
long term. End Summary and Comment.

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High Expectations, Harsh Reality
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3. (SBU) Last year was an optimistic one for Thai-Japanese
economic relations. 2008 started with the Japan-Thailand
Economic Partnership Agreement (JTEPA),effectively a free-trade
agreement between the two countries that was already in force
since October 2007. Japan was also preparing for its
Japan-Mekong Exchange Year in 2009, during which it planned to
invest more time, effort, and money into expanding its policy
interests in the Greater Mekong Subregion (GMS) through such
initiatives as promoting more trade and investment in the
region, within which Thailand is a key economy. However, the
optimism at the outset of last year has dissipated. After
encouraging increases in 2007 in Thai exports to Japan (11%) and
Japanese exports to Thailand (18%),those figures dropped
sharply in 2008 (down 19% and 29%, respectively).

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JTEPA: An FTA Without Much Punch
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4. (SBU) Implemented in October 2007 with little opposition and
high hopes, JTEPA has had positive but modest effects on
bilateral trade. Chiang Mai Province's Commercial Office
Director gave credit to JTEPA, stating that it has boosted
northern Thai exports, particularly in goods such as mangos, spa
products, and handicrafts. The Commercial Officer of the
Japanese Consulate General in Chiang Mai pointed to the
flexibility of the agreement (namely, its stipulation for talks
every 10 years to review and update JTEPA) and its provisions on
trade in services, such as more relaxed work experience
requirements for Thai cooks going to work in Japan, as JTEPA's
high points.


5. (SBU) Private sector perspectives on JTEPA were not so
positive, however. Two northern Thai companies that are
exporters to Japan noted that the agreement has done nothing for
them. Thai-Nichi Industries, a Lamphun-based producer of rice
biscuits and snacks, stated that its products were already
designated as duty-free for export to Japan, so JTEPA added no
value for the firm. Speaking with her Thai rice suppliers'
interests in mind, Thai-Nichi's Managing Director said that
where progress should be made in JTEPA is on greater access for
Thai rice producers to export to Japan. The GOJ did not make
concessions on rice trade in the current manifestation of the
JTEPA, but said that in the next round of talks in 2017, it
might be open for discussion.


6. (SBU) Chiang Mai Frozen Foods, which exports frozen
vegetables and fruits to Japan, also noted that its goods
already were entering Japan duty-free before JTEPA went into
effect. A company source said that although JTEPA has not had a
positive impact on exports to Japan, Japanese fears about
Chinese food contamination have. The source said that Japanese
importers are buying more from Thailand as fears of Chinese
safety standards persist. Chiang Mai Frozen Foods experienced
10% growth in profits last year.


7. (SBU) Others fear that what few positive aspects exist in

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JTEPA may be at risk anyway. A Chiang Mai Chamber of Commerce
source said that the current global economic crisis could have
negative impacts on how the Japanese view the agreement.
Specifically, she worries that Japan may retreat from its
progressive provisions on trade in services by closing access to
Thai migrant labor as Japanese unemployment rises. She also
commented that while the agreement offers some preferential
trade access for northern Thai handicraft producers, Japanese
rules of origin requirements are complicated and burdensome for
Thai exporters.

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Investor Worries Persist After Airport Closure
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8. (SBU) While JTEPA offers modest improvement in the
Thai-Japanese economic relationship, the current state of
Japanese investor confidence in Thailand is a gloomy picture.
Although Thailand would like the world to leave the November
2008 Suvanabhumi Airport closure in Bangkok as a distant memory,
the political incident is still fresh in the minds of Japanese
investors. According to the Japanese Investors Club President
for Chiang Mai and Lamphun, Japanese investors are still worried
about the political situation in Thailand and "the airport
closure remains a shock to them." He noted that while Japanese
business people living in Thailand are more knowledgeable and
sanguine about internal Thai politics and the current state of
affairs, Japan-based executives still have unclear and
pessimistic perspectives on the situation. Our Japanese
Consulate contact said that without any arrest or legal action
taken against the protestors who seized the airport, foreigners
will continue to fear another airport closure. He said that
Japanese investors remain very concerned about Thai political
instability.


9. (SBU) Following the airport closure, Japanese and other
foreign investors called for a meeting with RTG officials to
discuss what measures would be taken to prevent a future
closure, according to the Japanese Investors Club. The Club
President said since that meeting, there has been no action by
Thai officials. The Japanese Consul General in Chiang Mai has
called for airlines to explore starting non-stop service between
Chiang Mai and Japan in an effort to provide more air transport
links independent of Suvanabhumi Airport; however, because of
poor economic conditions, no airlines have expressed interest in
doing so. (Note: Chiang Mai International Airport is one of
Thailand's largest after Suvanabhumi, providing non-stop service
to Laos, Malaysia, Singapore, South Korea, and Taiwan.)


10. (SBU) In January, the Airport Authority of Thailand in
Chiang Mai conducted a seminar on air travel and transportation
issues; however, the authority did not disclose any measures to
address possible future airport closures, fueling the fears of
many Japanese investors. The Thai Board of Investment's
Northern Regional Office Director said that she was disappointed
after the seminar that no specific measures were underway in the
airports to build foreign investor confidence. The only change
cited was that the RTG gave authority to airport officials to
arrest invaders and hand them over to the police.

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Stimulus Aid Offers Businesses Little, Demands A lot
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11. (SBU) Japanese investors have another headache in trying to
juggle the strains of the global economic crisis with slow
implementation of the Thai economic stimulus package. Sources
at MuRata, a Japanese auto parts producer located in the
Northern Regional Industrial Estate (NRIE) in Lamphun, said that
exporting firms there are addressing the need to reduce their
workforces. He said that firms are reluctant to make layoffs,
so they have been offering voluntary resignation packages to
employees - acceptance of which has ranged from 10-80%,
depending on the firm and how the crisis has affected its
production. Our source estimates that, on average, one in five
employees at the NRIE has resigned.


12. (SBU) While voluntary resignations have lessened payroll
burdens, MuRata sources said that firms will nonetheless have to
face the reality of layoffs. The RTG's recent economic stimulus
policy is trying to address this reality while avoiding an
increase in unemployment. In particular, the RTG is requesting
that firms considering layoffs instead send at-risk employees to
temporary, government-funded training programs in order to keep
the employees in the labor force while also lessening the firm's
financial burden.


13. (SBU) The problem from Japanese and other foreign firms'
perspectives, however, is that the RTG is vague about the
policy's implementation. When MuRata asked the Federation of
Thai Industries (FTI) -- the organization that is liaising
between individual firms and the RTG -- when, where, on what

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subjects, and for how long the training would be, the FTI could
not answer and said nothing had been decided. Yet if a firm
wishes to participate in the program it must agree to no layoffs
for the next year. MuRata said that it would not participate in
the program without first getting more answers.


14. (SBU) The company complained further that the RTG and local
government in Lamphun were ignoring its and other foreign firms'
ideas for alternative ways to ease the pain of the economic
crisis. Specifically, MuRata noted that two of its biggest
costs are the land and building taxes at the NRIE. If either or
both could be reduced temporarily, it would be welcome relief
for foreign firms there. However, when some Japanese firms
raised this with the Thai Board of Investment, the Board
referred them to the local sub-district government in Lamphun
that sets the tax rates. Yet when approached on the matter, the
sub-district director said the issue was above his authority and
should be taken up with the central government. When the firms
then approached the RTG directly, they were again advised that
it was a local government issue; so they gave up.

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Long-Term Prospects
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15. (SBU) Thai analysts are trying to see the bright side of
Japanese investors' impressions on Thailand, however. One
economics professor from Chulalongkorn University in Bangkok
told us he believes firmly that Japanese investors still look at
Thailand as a "sound site for investment" in Southeast Asia,
despite last year's political turbulence. He said that the
Japanese private sector in Thailand will continue to push the
Thai private and public sectors to improve the environment for
expanded Japanese investment. He also believes that Thailand is
still Japan's best bet in Southeast Asia, compared to Vietnam
with its inflation-related risks and Malaysia and Indonesia with
their focus on Islamic trading networks.


16. (U) This cable was coordinated with Embassies Bangkok and
Tokyo.
MORROW