VZCZCXRO4888
PP RUEHCN RUEHDT RUEHHM
DE RUEHCHI #0034/01 0690853
ZNR UUUUU ZZH
P 100853Z MAR 09
FM AMCONSUL CHIANG MAI
TO RUEHC/SECSTATE WASHDC PRIORITY 0992
INFO RUEHKO/AMEMBASSY TOKYO PRIORITY 0050
RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHCHI/AMCONSUL CHIANG MAI 1074

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) 
 
CHIANG MAI 00000034  001.2 OF 003 
 
 
------------------- 
Summary and Comment 
------------------- 
 
¶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. 
 
-------------------------------- 
High Expectations, Harsh Reality 
-------------------------------- 
 
¶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). 
 
-------------------------------- 
JTEPA: An FTA Without Much Punch 
-------------------------------- 
 
¶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 
 
CHIANG MAI 00000034  002.2 OF 003 
 
 
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. 
 
--------------------------------------------- -- 
Investor Worries Persist After Airport Closure 
--------------------------------------------- -- 
 
¶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. 
 
--------------------------------------------- ------- 
Stimulus Aid Offers Businesses Little, Demands A lot 
--------------------------------------------- ------- 
 
¶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 
 
CHIANG MAI 00000034  003.2 OF 003 
 
 
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. 
 
-------------------- 
Long-Term Prospects 
-------------------- 
 
¶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