Australia-Thailand trade: An analysis of competitiveness and effects of the bilateral FTA

This paper undertakes an analysis of bilateral trade linkages between Australia and Thailand over 1990 to 2011, analysing changes in trade competitiveness, and possible role played by the Thailand-Australia Free Trade Agreement (TAFTA) that came into force in 2005. Trade competitiveness changes are measured by the revealed comparative advantage index (RCAI) at an aggregate and value-added level, as well as a constant market share analysis (CMS) analysis. An export-demand model utilizing interaction effects in presence of the TAFTA is then estimated, hitherto not attempted earlier in the empirical literature on Australia-Thailand trade. The findings of the paper suggest that the Thailand-Australian trade relationship has undergone further adjustment since the establishment of the TAFTA. However, the changes in trade patterns are not necessarily due to TAFTA but more of a long term trend. CMS analysis suggest that Thailand’s export competitiveness significantly contributed to the remarkable growth of exports to Australia experienced over the period, and the strongest trade link between the two countries has been the export of automotive vehicles from Thailand to Australia. However, value-added RCAI reveals that Thailand’s domestic industry have been contributing to its exports to a much lesser extent than as actually observed in its gross exports, and this reflects the increasing role of foreign firms and imported inputs in Thailand’s machinery and transport equipment sector. The export demand model therefore finds a significant positive impact of the TAFTA only on Australian exports to Thailand, but not vice-versa. The observed statistically insignificant impact of the TAFTA on Thai exports to Australia could be due to the limited impact of the TAFTA on trade barriers in Australia, as Thai exporters already enjoyed low tariffs prior to implementation of the TAFTA. The insignificant income effect observed in presence of TAFTA confirms that the TAFTA agreement had no impact on Thailand’s demand for Australian exports even while the Australian economy was growing. The results imply that Australia and Thailand’s membership with the same country in three different FTAs (bilateral, regional and cross-regional) could throw up additional challenges of utilization of these agreements for actual business purposes in the near future.