Impacts of free trade agreements on Thailand dairy imports

Abstract

Thai dairy industry is heavily intervened by the government and depended on a large proportion of dairy product imports. New Zealand and Australia are the most important suppliers to Thailand dairy import market. Both countries together contribute more than 50 percent to Thailand total dairy import market. In 2005, Thailand signed free trade agreements with Australia (Thailand-Australia Free Trade Agreement: TAFTA) and New Zealand (Thailand-New Zealand Closer Economic Partnership: THNZCEP). Both agreements include tariff liberalisation in dairy products which directly affect Thai dairy industry. It is debatable whether both agreements create or divert resource allocation efficiency for Thailand dairy production. This study assessed the welfare impacts of the implementation of THNZCEP and TAFTA. The modified gravity model was employed to assess trade creation and trade diversion effects of both agreements in seven dairy product categories: non-concentrated milk and cream, concentrated milk and cream, buttermilk and yogurt, whey, butter, cheese and curd and total dairy products. The modified gravity model for each dairy product was estimated by pooling the data from 1991:Q1-2009:Q4 across Thailand top five trading partners using Time Series and Cross Sections (TSCS) estimation. In addition, the study employed the import price model to examine effects of the Thailand tariff reduction for New Zealand and Australian dairy products on the prices of New Zealand and Australian dairy products and the relative price of non-FTA member to New Zealand (Australian) dairy products in Thailand market. The results show that the implementation of THNZCEP and TAFTA leads to net positive trade creation in most dairy product categories which indicates their members’ welfare improvement, except in whey for THNZCEP and concentrated milk and cream for TAFTA. In addition, it is found that the reduction in tariffs for dairy products from New Zealand and Australia has negligible effects on the Thailand import prices of dairy products from both countries while other factors such as exchange rate, competitor price, and drought have significantly larger effects. Furthermore, the reduction in tariffs for dairy products from New Zealand and Australia significantly increases the ratio of non-FTA member to New Zealand (Australian) prices in some dairy products in Thailand market. This finding indicates that the dairy product prices of non-FTA members are relatively high in Thailand market after the implementation of THNZCEP and TAFTA.