Thailand’s Trade Policy: A Weak Instrument for Resisting Structural Change
Published
Like many other countries, Thailand has employed changes in trade policy to resist the declining economic importance of agriculture. Research shows the effects are very limited.
Countries vary in their long-term patterns of economic development, but most share two stylised features. Both are illustrated by the experience of Thailand.
The first is the sectoral pattern of structural change encapsulated in the changing composition of output and employment. Agriculture declines as a share of both GDP and total employment, while the combined share of industry and services expands correspondingly. This process of economic change coincides with rapid urbanisation.
A second widespread feature of economic development is the changing sectoral focus of trade policy. An important contribution of economics has been the recognition that the protection of one sector —through tariffs, export taxes, or quantitative restrictions on trade — is necessarily at the expense of other sectors. Most poor agrarian countries tax agriculture and subsidise industry, but as incomes rise, this pattern gradually reverses. Eventually, most high-income countries, such as Japan, Korea, the US, and the countries of Western Europe, provide heavy subsidies to agriculture and thereby tax industry.
Over time, agricultural producers face declining profitability, which induces the sector to release resources to other sectors. This leads to low and slowly growing incomes — possibly declining incomes — for the farming population, even though national average incomes are rising, bolstered by growth in the non-farm sectors. Unrelenting economic pressure on agricultural producers is the market’s brutal instrument for achieving structural change. The result is ongoing economic hardship for large numbers of farming households. In most developing economies, the rural agricultural populations experience the highest poverty rates, which spurs rural-urban migration and the ageing of the agricultural workforce.
The apparent paradox is that as the agricultural sector shrinks in economic importance it becomes increasingly successful at convincing governments to implement trade policies and other interventions that favour it relative to other sectors.
The apparent paradox is that as the agricultural sector shrinks in economic importance, it becomes increasingly successful at convincing governments to implement trade policies and other interventions that favour it relative to other sectors. Several explanatory theories have been offered to account for the coexistence of these two phenomena. The shifting focus of trade policy seems to happen in both democracies and autocracies. Theories involving rural gerrymandering, which grants disproportionate electoral power to rural populations, may be relevant for democracies but possibly not for autocracies. These theories are probably not the full story.
Another simple theory is that the changing structure of trade policy derives from policy resistance to agriculture’s declining economic importance. That is, the shift in trade policy toward favouring agriculture can be understood, at least partly, as an effort to mitigate the market pressures and falling incomes faced by farming households, along with other perceived negative consequences of structural change.
Data for Thailand illustrate both of the long-term phenomena described above. Figure 1 shows the declining share of agriculture and the mirrored rise in the share of industry in Thailand’s total GDP from 1960 to 2023. The share of services remained roughly constant. Table 1 confirms that the structure of Thailand’s trade policy has also changed significantly.
In 1990 agriculture received negative protection, mainly through some remaining export taxes, which were gradually being phased out since the mid-1980s. These taxes reduced the market prices faced by agricultural producers, compared with estimates of what these prices would have been in the absence of any trade policy interventions, by an average of about 9 per cent.
Meanwhile, industry enjoyed positive protection through restrictions on competing industrial imports. These interventions raised industrial goods prices, again compared with estimates of what these prices would have been in the absence of any trade policy interventions, by an average of about 18 per cent. The combined effect was a net positive rate of protection for industry relative to agriculture of about 27 per cent. By 2011, this difference in protection rates between sectors had greatly diminished.
Figure 1. Thailand: Share of agriculture, industry and services in GDP (value-added), 1960-2023
Table 1. Thailand: Declining rates of trade protection by sector, 1990 and 2011
updated by the author to 2011.
An important feature of Thailand’s agricultural sector is that it is highly export-oriented. This makes the trade policy transition to subsidising agriculture more difficult than in countries such as Indonesia and the Philippines, whose agricultural sectors are predominantly import-competing. In the latter countries, agriculture can be subsidised simply by restricting agricultural imports, raising the domestic prices of those products. But subsidising agricultural exports contravenes WTO rules. Nevertheless, the transition away from taxing agriculture relative to industry is evident from the Thai data shown in Table 1.
Is trade policy an effective means of resisting the forces of structural change? A recent study used economic modelling to analyse the forces driving structural change in the Thai economy. The change in trade policy, as described above, was one of these factors; changing technology, in the form of different rates of observed total productivity growth across sectors, was another.
The findings are summarised in Figure 2. The data shown refer to changes in the share of each sector in total GDP (sectoral value-added/GDP). “Actual change” (red bars) means the percentage changes in the shares of agriculture, industry and services between 1990 and 2011, as observed in the data. These changes in shares necessarily add to zero. The blue bars show the statistical model’s estimates of the contributions that two of the drivers of structural change made to these outcomes. According to these estimates, changing technology explained almost all of the structural change that occurred between 1990 and 2011, while changes in trade policy led to changes in the predicted directions but were quantitatively minuscule.
Figure 2. Thailand: Actual structural change and estimated impacts of trade policy and productivity growth (% change in value-added share)
The above findings are based on the best information available on the structure of the Thai economy and key behavioural parameters. Like any economic modelling exercise, it is heavily simplified and rests on assumptions about economic relationships that are open to debate. But the difference between the estimated impacts of changing trade policy and changing technology is dramatic. Agriculture may have contracted even more if trade policies had not changed, but these estimates imply that the effect was very small. While changing trade policies may be, in part, an understandable response to structural change, they seemingly do very little to abate its inexorable progress.
Author’s note: The economic modelling results are from a forthcoming paper by Peter Warr and Arief Anshory Yusuf, “What Causes Structural Change? Evidence from Thailand”, Working Papers in Trade and Development, Crawford School of Public Policy, Australian National University.
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Peter Warr was a Visiting Senior Fellow at ISEAS – Yusof Ishak Institute. He is the John Crawford Professor of Agricultural Economics Emeritus at the Australian National University (ANU), Canberra, and Visiting Professor of Development Economics at the National Institute of Development Administration (NIDA), Bangkok.
