VZCZCXYZ0001
RR RUEHWEB

DE RUEHBK #4685/01 2141206
ZNR UUUUU ZZH
R 021206Z AUG 06
FM AMEMBASSY BANGKOK
TO RUEHC/SECSTATE WASHDC 0635
RUCPDOC/USDOC WASHDC

UNCLAS BANGKOK 004685 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EB/TPP/MTA 
STATE PASS USTR FOR MARIDETH SANDLER 
USDOC FOR JKELLY 
 
E.O. 12958:N/A 
TAGS: ECON ETRD TH
SUBJECT:  THAILAND AND THE END OF GSP: WHO LOSES, WHO WINS? 
 
¶1. Summary:  Thai manufacturers exporting to the U.S. under the 
Generalized System of Preferences (GSP) program predict that if GSP 
benefits are redirected from Thailand, the primary beneficiary would 
be China rather than other GSP users.  China competes fiercely with 
Thai exports and is already quickly dominating many of Thailand's 
traditional export markets despite preferential tariff treatment. 
For the U.S., the net result of eliminating GSP benefits for 
Thailand would likely be a broadening of our substantial trade 
deficit with China and little change in trade with other GSP users. 
Thailand would likely see curtailment of certain export industries 
and a serious blow to many small and medium-sized enterprises (SME) 
that both directly export and support export industries.  One means 
to limit the inevitable political and economic fallout, and 
distribute benefits more widely, would be to target GSP 
restructuring to product categories where less developed countries 
have a demonstrated production capacity and potential to compete in 
export markets.  End Summary. 
 
¶2. Thailand is one of the top users of U.S. GSP benefits, exporting 
more than USD 3.5 billion in products tariff-free under the program 
in 2005, 18 percent of Thailand's total exports to the U.S.  Exports 
under GSP through May of 2006 are up 32.6 percent year-on-year from 
2005, placing Thailand just behind India as the leading user of GSP 
worldwide.  Chief exports under the program include jewelry, 
televisions, radial tires and a host of other diverse products.  Two 
top exports for 2005, plastic sacks and bags and aluminum cookware, 
were eliminated as GSP-eligible products for Thailand on July 1 
after the 2005 GSP review. 
 
GSP removal a gift to China 
--------------------------- 
 
¶3. Leading exporters in the electronics, jewelry and plastics 
industries made clear to Econoff that elimination of GSP benefits 
for their exports would greatly affect their competitiveness and 
quickly lead to a loss of export market share to their fastest 
growing competitor, China.  In nine out of Thailand's top ten 
exports under GSP, which together account for more than one-third of 
Thailand's GSP exports, China is one of the top three exporters to 
the U.S. 
 
¶4. The jewelry industry, which incorporates nearly a quarter of all 
Thailand's GSP exports, competes directly with China and India in 
numerous export categories.  The three competitors have long 
traditions of jewelry craftsmanship and strong export industries, 
but industry experts see China as the chief beneficiary of export 
growth if GSP benefits are eliminated.  Although Thai exporters 
naturally consider their workmanship superior to that of China's, 
jewelers complain that China's substantial mineral resources give it 
a natural advantage, and their undervalued currency give it an 
artificial advantage over Thai exports.  Although the jewelry 
industry is well entrenched in other export markets, nearly half of 
Thailand's jewelry exports are to the U.S. and are a vital part of 
the industry's revenues. 
 
¶5. Electronics industry representatives told Econoff that TV 
manufacturers had already lost price competitiveness to China and 
were competing for the moment on superior quality, but were 
convinced their survival depended in large part on continued GSP 
benefits.  Manufacturers pointed to China's rapid growth in market 
share as a foreboding portent of things to come (In 2001, China 
exported USD 141 million in color televisions (HTS 852812) to the 
U.S.; in 2005 the number was USD 2.2 billion.  2006 exports are up 
nearly 70% yoy.) 
 
Other GSP users won't even get the crumbs 
----------------------------------------- 
 
¶6. Thailand competes very infrequently in GSP categories with other 
GSP users (with the exception of the other top users of GSP, Brazil, 
India and Indonesia) and virtually not at all with least developed 
countries.  In examining trade statistics on Thailand's top 25 
exports to the U.S. under GSP, it is clear that Thailand's primary 
competition is from China, the developed world, and other top users 
of GSP.  In only two categories out of Thailand's top 25 GSP exports 
could it remotely be said that another non-top GSP user is 
considered a competitor.  Removal of GSP benefits for Thailand would 
likely increase export share for its current competitors, but hardly 
at all for any other GSP user. 
 
¶7. As an example, Thailand's second largest export under GSP is 
televisions incorporating a VCR or player (HTS 85281228).  The 
export market is completely dominated by only three countries, 
Malaysia, Thailand and China; no other country has exported TVs 
under that category thus far in 2006.  Thai TV manufacturers told 
Econoff they faced little overall competition from other GSP users 
and were confident that any loss of market share for Thailand would 
inevitably pass to China.  None were able to point to a least 
developed country with sufficient manufacturing capacity to pick up 
any decline in Thailand's exports. 
 
SMEs will take the hit 
---------------------- 
 
¶8. Thailand's major GSP users are typically SMEs in labor-intensive 
industries.  The jewelry industry employs nearly one million people 
working in thousands of small factories around Bangkok and a number 
of other nearby provinces.  Nearly 80 percent of jewelry 
manufacturers are SMEs, most employing between five and thirty 
craftsmen.  With a small domestic market, nearly every jewelry 
manufacturer produces for export, primarily to the U.S.  The 
plastics industry calculated that five percent of plastics 
manufacturers were considered large (more than 500 employees), 30 to 
40 percent medium-sized and the rest small (10 - 50 employees). 
Industry leaders predicted that large firms could survive a loss in 
GSP, but that SMEs would be hit the hardest, estimating that 30,000 
of the industry's 200,000 workers would be affected. 
 
¶9. Although the electronics industry is dominated by large, 
foreign-invested firms, industry reps pointed to their supply chain 
as predominantly SMEs which would suffer from a loss of GSP for 
electronics exports.  Television manufacturing, once little more 
than assembly of imported parts, now sources 80 percent of its 
component parts from Thai-owned domestic suppliers.  Including the 
supply chain, the industry employs approximately 100,000 workers. 
 
Some CNL waivers outlived their usefulness 
------------------------------------------ 
 
¶10. Thailand currently receives Competitive Need Limit (CNL) waivers 
in ten export categories, though only a few appear to be necessary. 
For buffalo leather (HTS 41071940 and HTS 41079940), Thailand has 
not exported under this customs heading for years.  In two others 
(ceiling fans HTS 84145130 and electrostatic photocopying apparatus 
HTS 90091200), trade statistics for 2006 show Thailand's once 
vibrant export market has been lost almost completely to China.  In 
two other categories (ignition wiring sets HTS 85443000 and 
artificial flowers HTS 67029065), exports have declined and appear 
to be safely under the maximum export limits under GSP rules. 
 
¶11. Thailand's remaining CNL waivers are in jewelry (HTS 71131120, 
71131150 and 71131950) and televisions (HTS 85281228).  Although 
Thailand surpasses value or percentage limits in three of these 
categories, keeping GSP treatment appears to be crucial to 
maintaining market share against strong competition from China in 
these categories as noted previously. 
 
¶12. Comment:   Consideration of GSP restructuring has focused on 
shifting benefits to the least developed countries and those with 
weaker export industries.  However, eliminating Thailand's GSP 
benefits would appear to be counterproductive, resulting in 
production shifting largely to China rather than other GSP users. 
Net results for the U.S. would be an even wider trade deficit with 
China and a smaller trading relationship with our long-time key ally 
in Thailand.  In contrast to a number of other trading partners, 
Thailand has been a constructive partner in bilateral and 
multilateral trade arenas.  However, we have heard rumors that the 
RTG is considering tying renewal of U.S. investment privileges under 
the Treaty of Amity and Economic Relations (AER) to renewal of GSP 
benefits. 
 
¶13. The Thai public will inevitably consider an end of GSP benefits 
as retribution for lack of progress in bilateral FTA talks with the 
U.S.  To limit political fallout, and better distribute benefits, a 
restructured GSP program could target product categories where less 
developed countries have an established industry and the potential 
to effectively compete if leading GSP users, including Thailand, 
were withdrawn from those categories.  Alternatively, or perhaps 
additionally, GSP benefits could be expanded to products where less 
developed countries have shown export potential but continue to face 
tariff barriers.  End Comment. 
ARVIZU