Thailand’s Trade Imbalance and Stunted Industrialisation: Will the Upgraded ASEAN-China Trade Agreement Help?

Trade integration between Thailand and China has expanded markedly since the early 2000s, with the ASEAN–China Free Trade Area (ACFTA), in effect since July 2005, playing a crucial role. While Thailand’s exports to China have recently stagnated, imports, particularly in the manufacturing sector, have expanded rapidly, intensifying concerns over the country’s large goods trade deficit and industrial development. The recent ACFTA upgrade (Version 3.0), signed in October 2025, does not directly address the Thailand-China trade imbalance but may indirectly alleviate the situation.

Thailand’s trade with China burgeoned from the early 2000s, but with import growth exceeding export growth, Thailand’s annual trade deficit widened from USD2 billion (1.1 per cent of GDP) in 2005 to USD15 billion (3.3 per cent of GDP) in 2017. Following the US-China trade war in 2018 which pushed China to broaden its export markets, Thailand’s deficit with China expanded sharply, reaching approximately USD48 billion or 11 per cent of GDP during for 2025 (Q1-Q3). Quarterly trade balance data underscore the recent steep increase in the deficit (Figure 1). The trend throughout these years was driven entirely by the manufacturing sector, in which exports to China stayed constant while Chinese imports into Thailand increased across key sub-sectors, including mechanical appliances, electronics, and vehicles (Figure 2).

The ACFTA has played a crucial role in facilitating Thailand’s exports to China, as evidenced by the substantial increase in FTA utilisation — defined as the value of preferential exports relative to total exports — from 57 per cent in 2015 to nearly 80 per cent in 2023-2024, exceeding 90 per cent for agricultural and food products and approaching 70 per cent for manufacturing. This expansion has been supported by generous tariff concessions covering approximately 95 per cent of total tariff lines, and relatively relaxed rules of origin (ROOs).  

Nevertheless, the pace of utilisation appears to have slowed for certain agricultural exports in 2025, particularly tropical fruits such as durian, due to tighter sanitary and phytosanitary (SPS) requirements, including stricter laboratory certification to verify contamination levels and rigorous border inspections. While the ACFTA has also contributed to rising imports, its impact appears moderate, with import utilisation reaching only 33 per cent in 2023–2024, up from 27 per cent in 2018, reflecting the availability of alternative tariff-exemption schemes in Thailand.

Beyond its effect on the trade deficit, imports under the ACFTA also have implications for Thailand’s industrial development. The agreement was signed prior to China’s accelerated technological progress, which later transformed China into a manufacturing powerhouse that continues to enjoy low tariffs on its exports to Southeast Asia. Moreover, the US’s efforts to curb imports from China have compelled China to seek non-US markets.

The electric vehicle (EV) sector is instructive. Following the 2018 trade war, Thailand’s zero-percent tariffs on electric vehicles (EVs) imported from China under the ACFTA — which is not extended to other vehicle producers under their respective FTAs with Thailand, notably Japan and South Korea — were debated more vigorously due to the resulting unequal treatment among market players. The move could also hinder the country’s ambition to become an EV production hub, as the US–China trade war incentivised China to expand its EV exports to Thailand. Chinese EV imports thus enjoy advantages over domestic production and imports from other producers, particularly given that government initiatives to strengthen Thailand’s EV manufacturing capacity are still at the nascent stages. These measures include the EV 3.0/3.5 schemes, which set import-to-domestic production ratios and offer tariff reductions to other EV producers.   

Another example concerns imports of photovoltaic cells. Preferential imports, including unassembled cells and parts, increased during 2018–2023, despite the absence of a tariff margin incentive (i.e., no difference between applied and preferential rates). The surge in components and unassembled cells has raised concerns that Thailand may be used as an assembly and transshipment hub without substantial transformation of local manufacturing. This risk is reinforced by the relatively simple RoOs, which require either a change in tariff subheading (CTSH), where imported inputs must change Harmonised System (HS) classification at the 6-digit level through processing, or show that 40 percent of its contents are domestically sourced. Because components, unassembled cells, and assembled cells are classified under different 6-digit HS codes, these relatively uncomplicated RoOs, particularly the CTSH criterion, may be exploited for transshipment activities, particularly for exports to the US.

Can ACFTA Version 3.0 resolve Thailand’s large goods trade deficit and industrial developmental challenges? It is unlikely that the upgraded agreement can address these issues directly, as it introduces no policy amendments in the Market Access chapter, which covers preferential tariff rates and rules of origin (RoOs). Moreover, while liberalisation under this chapter has substantially facilitated Thailand’s exports to China, it has also constrained Thailand’s policy space to revise tariff schedules. Any reversal of liberalisation through tariff rescheduling would risk undermining the sustainability of economic cooperation between Thailand and China.

The agreement was signed prior to China’s accelerated technological progress, which later transformed China into a manufacturing powerhouse that continues to enjoy low tariffs on its exports to Southeast Asia. Moreover, the US’s efforts to curb imports from China have compelled China to seek non-US markets.

However, the new and enhanced chapters under ACFTA 3.0 may indirectly address some of these concerns. The upgrade introduces five new chapters, two of which are particularly relevant: Supply Chain Connectivity, and Competition and Consumer Protection. These chapters provide a platform for deeper cooperation in technology and innovation, strengthening trade and investment ties among members across various sectors, including motor vehicles, and enabling more proactive responses to unfair trade practices, particularly transhipment activities and sub-standard products.

The ACFTA Joint Committee and the forthcoming working group under the Economic and Technical Cooperation chapter should vigorously advance such cooperation. Although these measures may not directly reduce the trade deficit, strengthening technology and innovation cooperation, along with proactive responses to unfair trade practices, would help build more resilient supply chains in Thailand that involve indigenous firms, thereby supporting the country’s industrial development and potentially reducing trade deficits in the medium to long term. Notably, the high utilisation rate of the ACFTA may incentivise deeper engagement compared with other plurilateral FTAs, especially the Regional Comprehensive Economic Partnership (RCEP), where utilisation rates for both exports and imports are below five per cent.

Additionally, the upgraded SPS chapter under ACFTA 3.0 aims to enhance information exchange and technical cooperation, particularly in agriculture and food trade. The newly established SPS Sub-Committee should proactively facilitate legitimate standard-setting and promote mutual recognition agreements among members. Such efforts would help Thai exporters better prepare for compliance, reducing production and logistics costs amid the increasingly widespread and rigorous application of non-tariff measures, including SPS.

ACFTA Version 3.0’s ability to address Thailand’s large goods trade deficit and industrial development challenges will depend on engagement by its committees and member countries’ willingness to deepen regional cooperation. Most importantly, the new Thai government must strengthen domestic supply-side capacity in agriculture and manufacturing through appropriate industrial policies.

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