The Economic Consequences of Globalization on Thailand

Juthathip Jongwanich

• Publisher: Routledge
• Year: 2022
• eBook ISBN: 9781000538977
• Edition: 1
• Topic: Business
• Subtopic: Economic Theory
• Index: Business

This book explores the impact of globalization, especially in the context of trade and investment policies, on the key economic outcomes, including innovation, productivity, employment, and wages, using Thai manufacturing as a case study. The book looks at the impacts of the shift of manufacturing share from industrialized to emerging countries and emergence of 'global value chains' (GVCs) as well as liberalization through the proliferation of free-trade agreements (FTAs) on key economic outcomes.

The book highlights that globalization, through trade (including the parts and components trade) and investment, continues in Thailand amid the anti-globalization sentiment since the onset of the new millennium, especially the US–China trade war and the COVID-19 pandemic. Thailand has gained considerable benefit from trade and investment liberalization in various forms, including innovation, firm productivity improvements, and workers' skills enhancement. Although the country has prospered in these areas, several further enhancements are needed in order to effectively harness the benefits available from globalization, including continued trade and investment policy reforms. Key policy inferences are provided in the last chapter.

The book will appeal to those with an interest in international economics, especially issues relating to the economic consequences of globalization. It will also appeal to policymakers and practitioners responsible for international trade and investment regulations.

1 Introduction

DOI: 10.4324/9781003144076-1

Since the onset of the new millennium, anti-globalization sentiment has grown stronger, especially in the realm of trade and investment liberalization. Applied tariff rates have been raised in many countries and non-tariff measures instigated. The trade war between the United States (US) and China stands as an obvious case where the tension has simmered since February 2018 when the US implemented ‘global safeguard tariffs’ wherein a 30 percent tariff was placed on solar panel imports and a tariff of 20 percent on washing machines.¹ Although the US–China trade unrest seems to have de-escalated recently, especially since the two sides signed the Phase One Deal in January 2020, anti-globalization convictions persist in the slow progress of tariff rollbacks. The prevailing trend of escalating tariffs and non-tariff measures is also evident in developing countries, such as Indonesia, Malaysia and Vietnam.² COVID-19 has the potential to kindle anti-globalization positions even further.³ Japan, for example, has announced as part of their coronavirus countermeasures package an initiative to encourage firms to re-shore manufacturing operations back to Japan. In addition to tariff and non-tariff measures, other restrictions, including direct investment constraints, are also evident. For example, in March 2020, the acquisition of StayNTouch, a mobile hotel property management system operation, by the Chinese firm Beijing Shiji Information Technology Co., Ltd. and her partners, subsidiaries or affiliates was prohibited. According to Global Trade Alert, the number of cross-border restrictions increased noticeably, from around 1,800 cases in 2017 to about 2,400 cases in 2018.⁴ Many countries, especially developed nations, encountered considerable disappointment resulting from pursuing conventional economic policies under the Washington Consensus, including trade and investment liberalization and, in particular, increasing employment polarization, growing income inequality, and widening current account deficits (Autor et al., 2015; Goos et al., 2014; Dustmann et al., 2009).

Ongoing debates regarding the benefits of globalization, especially in the medium to long term, are contentious and in fact have long been so, dating back to the early 1970s. Many scholars (including Baldwin, 1969; Krueger, 1978 and Bhagwati, 1978) in the early 1970s believed that government failure was worse than market failure, and that trade and investment liberalization, together with macroeconomic stability, represented basic requirements for productivity improvements, skills upgrading, growth, and industrialization. Two influential works, Krueger (1978) and Bhagwati (1978), showed that export growth supported by well-publicized and stable government commitment comprised the most favorable conditions for economic growth and productivity. In particular, Bhagwati (1978) pointed out that pursuing an export-promoting strategy seems to be more neutral among industries and the incentives provided tend to be less chaotic. This is likely to promote economic growth more effectively than an import-substitution regime. Papageorgion et al. (1990) argued that trade liberalization promotes economic growth, even in the short term, and does not increase unemployment in either the manufacturing or agriculture sectors. Dollar (1992), Sachs and Warner (1995), Edwards (1998), Esser et al. (1996), Taylor (1998), and Altenburg (2011) acknowledged that liberalization is conducive to economic growth. Hobday (1995), Pietrobelli (1998), Kraay (1999), and Hahn (2004), who all applied firm-level data, supported learning by exporting hypotheses and demonstrating potential causality travelling from exports to productivity improvements.

However, since the late 1990s, many governments have been reassessing these policies in the wake of significant setbacks resulting from pursuing conventional economic policies under the Washington Consensus. Consequently, policymakers in these countries started searching for alternative development strategies. The crises that hit many countries, from the Mexican and Asian financial crises to the global financial meltdown, have tended to accelerate the revival of industrial policy initiatives. Rodriguez and Rodrik (2001) and Harrison and Hanson (1999) criticized previous empirical works, mostly on the grounds of model misspecification, inappropriate data sets and unsuitable econometric techniques. Such critics argue that there is no credible evidence to support trade liberalization having positive consequences for economic growth. Bernard and Jensen (1999), Isgut (2001), Arnold and Hussinger (2005) and Alvarez and López (2005), who all support a self-selection hypothesis,⁵ challenge the traditional view of the benefits of trade openness for productivity and economic growth and posit that exporting does not necessarily improve productivity, and that the positive correlation which occurs between exports (trade) and productivity (growth) arises because firms who participate in export markets are already productive operations. Pack and Saggi (2006) and Chang and Andreoni (2016) argue that industrial policy could play an important and successful role in supporting latecomer industrialization, mainly because of pervasive market failures. Such market breakdowns include coordination failure, in which firms will not invest until others undertake necessary related spending; dynamic scale economies and knowledge spillovers, whereby industrial policy helps to determine future production possibilities under learning-by-doing economies; and information externality, within which governments are able to encourage the discovery of future business opportunities. Hausmann, Hwang and Rodrik (2007), and Hausmann and Rodrik (2003) argued that due to the nature of investment, where externality is involved, without any interventions such as subsidies or trade protection for innovative activities, the investment levels of these products are likely to be suboptimal.

A number of recent studies have also offered new seeds of thought regarding the use of industrial policies, addressing the shortcomings of past failures and highlighting the conditions necessary for such initiatives to work effectively going forward. Melitz (2005), Greenwald and Stiglitz (2006), and Aghion et al. (2015) were in favor of the role of industrial policy in generating economic growth, but the effectiveness of such policy depends on the supporting environment. For example, Melitz (2005) highlighted the role of industry characteristics such as learning potential, the shape of the learning curve, and the degree of substitutability between domestic and foreign goods that must be taken into consideration when assessing policy effectiveness. Aghion et al. (2015) pointed to the importance of domestic competition for suitably designed industrial policies in inducing innovation and productivity growth. In the absence of domestic competition, firms may choose to operate in different sectors to face lower competition in product markets, leading to high sectoral concentration and low incentives to innovate.

Debates on the impact of globalization go beyond growth, productivity, and innovation. The trade liberalization–wage nexus is another aspect receiving attention. Based on a neoclassical trade model, it is expected that the wage difference between skilled and unskilled workers will contract as a corollary outcome of international trade, generating a favorable effect on income equality. Supporting evidence has been uncovered in some countries, such as India (Mishra and Kumar 2005), Kenya (Bigsten and Durevall, 2006), and Indonesia (Amiti and Cameron, 2012). However, such a theoretical postulation is not always supported by empirical studies. The wage premiums have been found to be persistent in a number of studies, for example, the cases of Morocco (Currie and Harrison, 1997), Mexico (Hanson and Harrison, 1999), Argentina (Galiani and Sanguinetti, 2003), Colombia (Attanasio et al., 2004), Turkey (Meschi et al., 2016), and Ethiopia (Haile et al., 2017). Friction in labor markets, pre-liberalization and post-liberalization protection structures, and the skill-enhancing trade hypothesis provide explanations for the persistence of the wage skill premiums revealed in these studies.

Another crucial aspect of the debate relates to the shift of manufacturing share from industrialized to emerging countries and emergence of ‘global value chains’ (GVCs). From the 1990s onwards, the manufacturing share of G7 nations fell noticeably from two-thirds to under a half (Baldwin and Okubo, 2019), and many multinational enterprises shifted the labor-intensive stages of production to low-wage nations. Not only did production processes move out of G7 countries, but also some parts of managerial, technical, and marketing operations migrated offshore away from the G7 participants. In addition, rapid advances in production technology and technological innovations in transportation and communications, along with liberalization in trade and investment policy, allowed companies to ‘unbundle’ the stages of production so that different tasks were able to be performed in disparate locations. This has resulted in a pivot in the composition of exports (trade) towards intermediate goods (parts and components [P&Cs]) and has facilitated global integration in many countries, especially within Asia. Some scholars argue that productivity improvements emerge under this type of trade with ample business opportunities for firms to grow and become internationally competitive (Jones and Kierzkowski, 1990, Jones and Kierzkowski, 2001 and Deardorff, 2011). Technology spillovers, especially vertical spillover, induced by the involvement of multinational enterprises (MNEs) in GVCs helps boost productivity in a host country (see, for example, Javorcik, 2004 and Blalock and Gertler, 2008).

However, the shift of manufacturing share from industrialized countries and the emergence of GVCs, partly induced by trade and investment liberalization, have led to concerns, especially relating to the effects on labor market outcomes. Artuc et al. (2010), Autor et al. (2013), and Ebenstein et al. (2014) found that trade with lower income countries depresses wages and employment in the industries, occupations and regions that are subject to import competition in developed countries. In addition, many studies (such as Feenstra and Hanson, 2001 and Bhagwati, 2000) point to the relative increase in the demand for skilled workers due to the increasing importance of global production networks, resulting in a persistent wage gap between unskilled and skilled employees. Employment polarization and burgeoning income inequality became some of the prime causes driving the recent anti-globalization trade tension between the United States and China and tariff hikes in many countries.

The emergence of GVCs and relocation of MNEs have raised concerns, not only for developed countries, but also for developing nations. While participating in GVCs provides ample business opportunities for firms to grow and become internationally competitive, such prospects tend to be unevenly spread and are usually in favor of large and/or multinational enterprises. In many cases, the growth openings for these organizations come at the expense of small and medium enterprises. Hence, participating in GVCs potentially results in even greater productivity disparities across firms, which may not guarantee overall improvement in a country’s productivity. In addition, the shift in favor of the demand for skilled workers in developed countries in response to GVCs and the relocation of MNEs may imply an increase in the demand for unskilled labor in developing countries. As a result, with the continued specialization in global production, the wage gap between unskilled and skilled workers in developing countries will potentially contract, but this raises alarm bells in terms of broader economic development issues since the expanding global production network might result in a trap involving low-skill, low-quality production in developing nations having an adverse impact on overall economic development, as well as sustainable economic growth. However, some scholars, for example Feenstra (2004), Leamer and Schott (2005), and Kiyota (2012), argue that firms operating in developing and developed countries face different cones of production. Unskilled labor-intensive activities outsourced by firms in developed countries might require relatively skillful workers in developing countries. Therefore, it is possible that the demand for skilled workers could increase in both developing and developed countries simultaneously.

Additional crucial debate is related to the impact of liberalization through the proliferation of free trade agreements (FTAs). FTAs represent one of the most notable phenomena emergent in the world economy since the onset of the new millennium (Baldwin and Jaimovich, 2012). The cumulative notifications of FTAs notified to the World Trade Organization (WTO) increased from 44 in 1994 to 501 in 2020. Whether and how exporters respond to FTA preferential schemes are open empirical questions with immense policy implications, because of the fact that not all exports are eligible to enter into preferential schemes. Products must comply with rules of origins (RoOs), that is, the rules proving the origin of goods for the purpose of determining their eligibility for tariff concessions. In addition, there exists a burden induced by the administrative procedures necessary to receive the preferential treatment. All in all, the impact of preferences on exports and other key variables like productivity is not as straightforward as usually expected in cases of multilateral and/or unilateral liberalization. Empirical studies have not yet reached consensus on the impact of FTAs on economic outcomes, especially concerning trade and productivity.⁶

1.1 Purpose of the book

With the unsettled debates ongoing, this book aims to examine the impact of globalization, especially in the context of trade and investment regimes, on key economic outcomes by using Thailand as a case study. The key economic outcomes under scrutiny in this book are informed by the debates discussed earlier, including trade, innovation, productivity, and labor market outcomes (wages and employment). Employing a country as a case study not only provides an insightful perspective, especially in terms of policy changes and their impacts, but is also in line with the firm heterogeneity theory postulated by Melitz (2003), where even within a narrowly defined industry, some firms are much larger in size, more productive, and more profitable than others. Thus, using firm-level or plant-level data to analyze the effects of globalization is more appropriate. So far there has been no empirical study which synchronizes all these issues/debates in analyzing the impact of globalization on key economic outcomes, particularly one using Thailand as a focus of research.⁷

Thailand provides a potentially illuminating case study for the subject at hand due to the following reasons. First, trade liberalization has been evident in Thailand since the late 1980s. Tariffs represent a core tool in conducting trade policy, while non-technical non-tariff measures (non-technical NTMs) have been used only across a narrow range of products, mainly certain sensitive agricultural goods such as soybean, palm seed, silk, and milk. Between the 1960s and the mid-1980s, as in other developing countries, the high tariff levels associated with an escalating tariff structure were used to promote industrialization. As part of its commitments under the WTO, a comprehensive plan for tariff reduction and rationalization was proposed in 1990 and implemented in 1995 and 1997. The Thai government again introduced tariff cuts, commencing in June 2003, followed by a 4-year period of tariff reductions from 2004 to 2008. Average tariff rates in Thailand have declined noticeably since 1995. The Thai government has also been active in signing FTAs. As a result, as of the end of 2020, 14 FTAs are in effect and another 5 are under negotiation. FTA partners include various countries in Asia and Latin America, including ASEAN (Association of Southeast Asian Nations) members, Japan, the Republic of Korea, China, Australia, New Zealand, India, Chile, Peru, and Hong Kong – many of which have more than one FTA running in effect concurrently. Whether such liberalization leads to better economic outcomes in Thailand, especially firm productivity improvements and better labor market outcomes, remains an unresolved issue.

An additional consideration is that Thai manufacturing is broad-based when compared to neighboring countries, covering a wide range of industries from traditional labor-intensive products such as garments and footwear to several key industries in the machinery and transport equipment sectors, including automotive, electronic, and electrical appliances. Multinational enterprises (MNEs) have engaged in the Thai manufacturing development over the past four decades, and foreign direct investment (FDI) has been a crucial channel supporting MNE involvement in Thailand. In attracting FDI, providing investment incentives through the Thailand Board of Investment (BOI) represents a key instrument. The direction of investment promotion has been altered several times, in line with implemented industry policies. A major change took place once again in 2017 with the BOI investment promotion plan (2015–2021), and ten newly targeted industries were selected to hopefully serve as new growth engines. The Eastern Economic Corridor (EEC), connecting three eastern provinces, was established as a new special promoting zone in 2017 to help enhance national competitiveness through research and development (R&D) and innovation. The means by which providing investment incentives through the BOI helps attract foreign investment and by which globalization via the involvement of MNEs helps enhance innovation, productivity, and skilled employment in Thailand remain unclear, and empirical evidence is also sparse. Previous empirical studies have been undertaken (such as Kohpaiboon, 2003, 2006; Wongseree, 2012 and Tanttratananuwat, 2015), but they examine the issue mainly from the perspective of the impact of MNEs on generating growth and technology spillovers, while little attention has paid to the role of BOI investment promotion.

Lastly, Thailand stands out among Southeast and East Asian countries as having intensively participated in GVCs, indicated by the relative importance of parts and components (P&Cs) in total manufacturing trade – around 24 percent and 30 percent of exports and imports in 2020, respectively (Table 4.7). As pointed out earlier, there is still an unresolved debate concerning the impact of GVCs in developing countries, particularly in terms of issues relating to the GVC-productivity nexus, GVC wage/employment, and GVC upgrading. So far there has been no empirical study examining these issues systematically within the Thai context. Chongvilaivan and Thangavelu (2012) and Kohpaiboon (2019) investigated the role of GVCs, but only in terms of labor market o...

Table of contents

• Cover
• Half-Title
• Series
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Acknowledgments
• 1 Introduction
• 2 The trade policy regime in Thailand
• 3 Free trade agreements and investment policies in Thailand
• 4 Trade and foreign direct investment in Thailand
• 5 MNEs, exporting, and R&D activities in Thailand
• 6 Trade and investment policies on firms’ productivity
• 7 Globalization and labor market outcomes
• 8 Conclusions and policy inferences
• References
• Index