Thailand's economic performance during the past two decades has been extremely favourable. The economic growth rate has been particularly impressive. In the last three decades, the economic structure of Thailand has changed significantly from agricultural to manufacturing based economy. Since the mid-1970s, Thailand has experienced an export boom. The outcome is an acceleration of aggregate economic growth, however the inequality of income distribution has increased.
One major policy that has played a very important role on the change in economic structure of Thailand is trade policy. After the Second World War, Thailand went through different trade policy regimes. From the late 1950s, Thailand embarked on industrial development through an import-substitution strategy. The emphasis of industrial policy, however, had swung increasingly towards export promotion during the 1970s. The growth of the manufacturing sector has become
increasingly export oriented since then. Moreover, the Thai government has recently signed the AFTA agreement under the common effective preferential tariff (CEPT) scheme. This is considered as another step of moving towards free trade.
A change in trade policy certainly has an economy-wide effect because it affects domestic commodity prices and hence many economic agents simultaneously. The general equilibrium analysis is therefore the most appropriate approach in evaluating the effect of change in trade policy.
In the past two decades there have been a great deal of effort focused on building applied general equilibrium models to support the formulation and conduct of economic policy in developing countries. The emphasis of the recent works focuses on the mixed-market nature of most developing economies. They attempt to model the market mechanism and include special institutional features and distortions.
objectives of this study are: 1) to construct a computable general equilibrium (CGE) model, called the THAITRADE model; 2) to generate a set of data base required by the model based on data from various sources; and 3) to employ the model using data base in examining the impact of trade policy, such as tariff reduction, on changes in macroeconomic variables, sectoral outputs, income distribution, and trade pattern between Thailand and other-ASEAN countries.
The THAITRADE model belongs to the Johansen class of general equilibrium models in that it is linear in proportional changes of variables. Two major differences between the THAITRADE model and the other existing CGE models, especially the models that apply to the Thai economy, are: 1) the THAITRADE model explicitly incorporates the trade relationship between Thailand and other-ASEAN countries; and 2) the THAITRADE model incorporates the pattern of investment allocation across industries. This is one of the
major contributions of this research. These extensions allow the THAITRADE model has capacity in analysing the effects of the ASEAN Free Trade Area (AFTA) agreement on tariff reduction and the effects of policy shock on investment allocation.
Another main contribution of this study is the assembly of the data from various sources in order to generate a set of data base required by the THAITRADE model. The year 1990 is set as the base year in this study. Compared to the existing CGE model applying to the Thai economy, the data base generated in this study is the latest and more up to date.
The THAITRADE model and the set of data base are thus employed to examine the impact of trade policy on the Thai economy. The simulation results show that a move towards free trade (i.e., tariff reduction) stimulates production and investment in manufacturing export industries, it also improves the current account deficit, and raises real GDP.
However, the downside of this policy is that it reduces the employment of unskilled labour and its effect on income distribution is unfavourable.
The sensitivity analysis of the key parameter which is the elasticity of substitution between domestic and imported commodities indicates that the accuracy of the estimated effects related to international trade and sectoral output depends on the accuracy of this elasticity. However, the estimated effects on the macroeconomic variables, in general, are not sensitive to these elasticities.