RESTRICTEDWORLD TRADE
ORGANIZATIONG/C/W/243
23 November 2000
(00-5011)
Council for Trade in Goods Original:  English
THAILAND’S REQUEST FOR THE EXTENSION OF TRIMS:
REPLIES TO QUESTIONS FROM THE EUROPEAN COMMUNITIES.
The following communication, dated 20 November 2000, has been received from the
Permanent Mission of Thailand.
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1. Please describe in detail the measure for which the Government of Thailand (GoT) is
requesting an extension (sectors and type of investment,  local content percentages,  type
of producers to which it applies,  product coverage etc.)
Thailand is requesting a 5-year extension, until the end of 2004,  for the use of local content
requirement (LCR) for the manufacturing of ready-to-drink milk.  Specifically,  the measure requiresthe purchase of 10 unit of domestic raw milk to every 1 unit of imported skimmed milk powder for
the manufacturing of ready-to-drink milk with a successive increase in the purchase of domestic raw
milk of at least 20 per cent per year.  This measure is applied only to the manufacturing of ready-to-
drink milk,  which accounts for 20 per cent of the total market of imported skimmed milk powder,
while other dairy manufacturers and producers,  such as for condensed milk,  ice-cream,  and biscuits,
are permitted to import skimmed milk powder under the tariff-quota system without LCR.
2. We understand that fulfilment of TRIMs is condition to obtain certain advantages in the
form of exemption from corporate income taxes and customs duties on certain imports.
Is this correct?
The fulfilment of the TRIMs measure which Thailand is currently requesting for an extension
does not accord advantages and/or benefits in the form of exemption from corporate income taxes or
custom duties.
3. Please quantify the total value of these benefits (foregone custom duties and foregone
income taxes) on a yearly basis for the last 5 years and describe how they accrue tobeneficiaries.
Please see answer to question 2.
4. Please describe the evolution (if any) of the present legislation as compared to the
original (1986?) legislation.
The legislation and regulations related to the manufacturing and purchasing of domestic raw
milk in Thailand and their evolution are as follows:
4.1 The Board of Investment Announcements No. 3/2529 (16 April 1986),  No. 11/2530 (29 June
1987),  and No. 2/2536 (1 April 1993),  which have been notified to the WTO,  accordG/C/W/243
Page 2
incentives in the form of import duties on machinery and equipment and income tax reduction
for manufacturers of raw milk,  powdered milk,  and pasteurized milk.  These
Announcements have been abolished as of 1 January 2000.
4.2 The Announcements of the Ministry of Commerce which require;
(i) Manufacturers of ready-to-drink milk to purchase 20 units of domestic raw milk for
every 1 unit of imported skimmed milk powder,  as measured by actual weight.
(ii) Importers of ready-to-drink milk to purchase 2 units of domestic raw milk for every 1
unit of imported ready-to-drink milk,  as measured by actual weight.
These Announcements have been abolished since 1995.
4.3 The Notification of the Ministry of Industry1 regarding the manufacturing of milk and dairy
products which requires;
(i) Manufacturers of ready-to-drink milk to purchase 10 units of domestic raw milk to
every 1 unit of imported skimmed milk powder for the manufacturing of ready-to-
drink milk with a successive increase in the purchase of domestic raw milk of at least
20 per cent per year.
(ii) Manufacturers of powdered milk to purchase domestic raw milk of at least 50 tons
per day in the first year of operation with a successive increase in the purchase ofdomestic raw milk of at least 20 per cent per year.
Thailand is requesting for an extension of i) from the WTO,  while ii) is inoperative
.
5. Please describe the main features of the Thai industry in the sectors at stake.
In the past,  a majority of the Thai farmers have had to rely solely on monocrop farming,
which provided scant and unstable source of incomes.  As such,  for more than a decade,  the Thai
Government has vigorously promoted dairy farming as an alternative means of livelihood.  At present,
there are up to 22,900 households or at least 90,000 individuals directly involved in this sector.  Yet,
dairy farming is still a fledging industry in Thailand,  mainly consisting of small-scale farmers many
of whom are poor and have very limited access to necessary resources,  capitals,  and know-hows.This being the case,  this newly established industry was unprepared for the abrupt economic
downturn which began in 1997 and was severely affected by the resultant crisis.  Evidently,  the crisis
had not only resulted in a sudden reduction in the purchasing power of Thai local consumers and thus
a dramatic declined in the demands for raw milk but it also led to the closure of numerous milk and
dairy manufacturing and processing firms due mainly to insufficient funds and limited sources offinance.  Subsequently,  this adverse market environment,  coupled with the fact that a large number
of milk and dairy products, manufacturers and processors decidedly turned to cheaper imported milk
powder to lower their cost of production,  soon led to an excessive inventory of raw milk to the extent
that dairy farmers have had to discard their unsold fresh milk in a total value of around 17 million
Baht or U.S.$ 425,000 (Baht 40/$1) in 1999.
                                                     
1 There is no difference between an Announcement and a Notification and the terms may be used
interchangeably.G/C/W/243
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6. Please describe the facilities in question (investors,  level of investment,  location,  and
type of production,  markets etc.)
Investments in the manufacturing of domestic raw milk in Thailand can be classified into two
main categories:  investments in dairy farming and investments in the collection and distribution ofraw milk.
Investments in Dairy Farming;  A majority of Thai dairy farmers possess an average of five
cows per household with a start-up investment for construction,  equipment,  and breeding of
around 240,000 Baht (U.S.$ 6,000) or approximately 5,500 million Baht (U.S.$ 137.5
million) in total national investment.  Apart fr om private investment,  the Thai Government
has also committed a substantial amount of capital into research and development onlivestock-raising,  the improvement of farming techniques and production efficiency,  the
training of local farmers,  and in the setting up of Dairy Cooperatives to effectively manage
and administer strategic development plans and policies.  (The specific amount of public
investment in the milk and dairy industry cannot be provided since investments are allocated
on a general basis to the entire livestock industry).
 Investments in the Collection and Distribution of Raw Milk:  These are  investments made by
the Dairy Cooperatives,  the Thai Government,  and the Thai private sector in the
establishment of approximately 130 collection depots and sites around the nation with a total
investment of not less than 850 million Baht (U .S.$ 21.3 million) as well as in the provision
of transport facilities and other necessary machines and equipment of around 100 million
Baht (U.S.$2.5 million).  By and large,  as a majority of Thai dairy farmers are members of
the Diary Cooperatives,  these collection centers,  which are mainly situated in the center,
north,  and northeastern part of Thailand,  have served as a focal point where raw milk is
collected from local farmers and is distributed to the respective milk and dairy manufacturersand processors.
7. What has been,  according to the GoT,  the effect of the legislation establishing TRIMs
on Foreign Direct Investment (FDI) in the re levant sectors?  Do you consider that the
existing TRIMs have attracted or rather discouraged inflows of FDI?  Please provide a
breakdown of FDI by country of origin in  the relevant sector for the period during
which the legislation has been in force and for the preceding 5 years.
In practice,  the manufacturing of raw milk in Thailand is carried out primarily by local
farmers and local investors with no foreign direct investment and/or joint ventures.  However,  there
exist foreign direct investment and joint ventures in the manufacturing and processing of milk and
dairy products,  such as for ready-to-drink milk,  condensed milk,  ice-cream,  and other products.Among others,  the major foreign manufactures and/or processors of milk and dairy products in
Thailand are Foremost Friesland of the Netherlands,  Nestlé Dairy and Nestlé Foods of Switzerland,
New Zealand Milk Products (NZMP) of New Zeala nd,  and Dumex of Denmark.  As mentioned in 1,
LCR is applied only to the manufacturing of ready-to-drink milk,  which accounts for 20 per cent of
the total market of imported skimmed milk powder,  while other dairy manufacturers and producersare permitted to import skimmed milk powder under th e tariff-quota system without LCR.  As such,
the application of LCR on the manufacturing of ready-to-drink milk seems to have had little negative
impact on FDI inflows.  This is reflected by the fact that the latter two companies cited above were
recently established in Thailand during the time when the request for the extension of the use of LCR
was under serious consideration.G/C/W/243
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8. Please provide annual data for the period 1991-1999 as regards:
- Value and volume of production
- Main export markets
Volume and Value of Raw Milk Production
Year Volume (tons) Value (Baht: million)
1991    164,340           1,068.21
1992    215,457           1,508.20
1993    287,164           2,153.73
1994    320,894           2,406.711995    348,212           2,611.59
1996    380,101           3,325.88
1997    406,000           3,552.50
1998    431,000           4,633.25
1999    455,000           4,891.25
Source:  The Office of Agriculture Economics,   Ministry of Agriculture and Cooperatives.
(Current exchange rate:  43 Baht/US.$ 1)
Most of the raw milk produced by Thai dairy farmers is consumed domestically and is not for
export,  with exception to the small amount of pasteurized and sterilized milk which are exported to
the neighbouring countries.
9. What measures has the GoT undertaken,  in  the periods 1995-1999,  to prepare for the
elimination of the TRIMs in question?  Please explain in detail (legislative process,policy elements,  consultation with industry etc.)
Between 1995 and 1999,  the Thai Government has devised several plans and programs to
improve the productive capacity of dairy farming as well as the quality of domestic raw milk.  These
programs have been undertaken in close coordination with local farmers,  milk and dairy
manufacturers and processors,  and investors.  Needless to say, that one of the underlying objectives
of these development endeavors was to proceed towa rd the complete elimination of LCR in the milk
and dairy industry as originally scheduled,  as can be evidenced from the following activities:
8 September 1999: The Committee on National Livestock Policy and Development agreed to the
abolition of the Notification of the Ministry of Industry with respect to LCR
in the manufacturing of milk and dairy products
18 October 1999: The International Economic Policy Committee requested the Ministry of
Industry to abolish as soon as possible its Notification regarding LCR in the
manufacturing of milk and dairy products.
1 November 1999: The Ministry of Industry submitted its proposal for the abolition of its
Notification regarding LCR in the manufacturing of milk and dairy products
to the Secretariat of the Royal Thai Cabinet,  which was then distributed to
the related Ministries for consideration.
1 December 1999: The Ministry of Commerce reported to the Secretariat of the Royal Thai
Cabinet of its consent to the abolition of the Notification of the Ministry of
Industry with respect to LCR in the manufacturing of milk and dairy
products.G/C/W/243
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22 December 1999: The Ministry of Agriculture and Cooperatives reported to the Secretariat of
the Royal Thai Cabinet its consent to the abolition of the Notification of the
Ministry of Industry with respect to LCR in the manufacturing of milk and
dairy products.
However,  due to the large amount of work load,  in particular concerning the Thailand’s
economic reforms and recovery,  as well as the events which are cited in 10,  the Royal Thai Cabinet
could not reach a decision on the proposal of the Ministry of Industry to abolish its Notification
regarding LCR in the manufacturing of milk and dairy products.
10. When did the GoT realise that it would be unable to meet the deadline of 31 December
1999 to phase out the TRIMs?
At the end of 1999,  as Thailand began to experience a serious glut of raw milk within the
domestic market due to several reasons cited in 5,  it became increasingly clear to the Thai
Government that the established milk and dairy development programs were in urgent need of
reevaluation and readjustment.  At the same time,  a number of incidents had occurred which furtherexacerbated the existing market situation,  leading eventually to Thailand’s request for an extension in
the phasing out of the LCR for ready-to-drink milk.  Some of these incidents were:
During 1999: A large number of milk and dairy manufacturing and processing firms began to refuse
to purchase local raw milk though there was an increase in production.  This resultedin an over supply of raw milk in the Thai market.  After tolerating the situation for
some time and with no relief in sight, the local farmers began to discard almost 1,400
tons of raw milk with a value of around 17 million Baht (U.S.$ 425,000) at the end of
1999.
January to February2000:
The respective milk and dairy manufacturing and processing firms continued to
refuse to purchase local raw milk which led to more raw milk to be discarded by local
farmers, who eventually coordinated their efforts and demanded the Thai Government
to find a rapid solution.
7 March 2000: The Royal Thai Cabinet requested the related Ministries to reconsider the abolition of
the Notification of the Ministry of Industry regarding LCR in the manufacturing ofmilk and dairy products as it could have adverse repercussions to the already
deteriorating conditions of the milk and dairy industry.
4 April 2000: The Royal Thai Cabinet decidedly gave its consent to the maintenance of the
Notification of the Ministry of Industry regarding LCR in the manufacturing of milk
and dairy products and for Thailand to request for a 5-year extension of thetransitional period for LCR for ready-to-drink milk,  or until the end of 2004.
11. Why did the GoT wait until 2 May to notify its requests for extension?
Apart from the fact that the Thai Government ha d used up a great deal of time searching for
ways to solve the dilemma within the milk and dair y industry as already mentioned,  additional time
was spent by the various Thai Ministries and related organizations in finding effective means and
mechanisms so as to prepare for the eventual remo val of LCR so that Thailand would remain steadfast
to the TRIMs Agreement.  Unfortunately,  since no alternative means could be found,  more
deliberations were undertaken by the Royal Thai Cabinet on the issue and a decision was finallyreached in April 2000 that Thailand needed to request for a 5-year extension of the transitional period
for LCR for ready-to-drink milk,  or until the end of 2004.  Thereafter,  there was further delay in the
administrative processes due largely to a number of resignation of various Thai high-officials and theG/C/W/243
Page 6
reshuffle of the Royal Thai Cabinet posts,  especially those within the Ministry of Agriculture and
Cooperatives which oversees the milk and diary industry in Thailand.
12. Please describe in detail why maintaining the TRIMs is essential for Thailand’s
development,  financial,  and trade needs.
The major reasons underlying Thailand’s request for the extension of the use of LCR in the
production of ready-to-drink milk can be summed up as follows:
12.1 During the transitional period of the TRIMs Agreement,  Thailand went through the worst
economic crisis in its history which significantly impeded the planned economic development
goals,  including those for the development of the fledging milk industry.  At the same time,given the sudden drop in the purchasing power of the Thai consumers,  the demand for local
raw milk had declined substantially and resulted in an excessive inventory of raw milk within
the Thai market.  This onerous situation was further aggravated by the closure of several milk
and dairy products manufacturing and processing plants due to the economic crisis, the
subsequent lack of capital as well as the refusal of large dairy manufacturers and processors topurchase local raw milk.  Indeed, these incidents have created a great hardship to local milk
and dairy farmers who heavily depend upon the selling of their produce for livelihood.  As
such,  the maintenance of LCR for another 5 years would considerably help Thailand readjust
its development plans and policies to the abrupt changes in circumstance brought about by the
recent economic crisis and to once more prepare for the elimination of all TRIMs.  Indeed,Thailand is fully aware that the full recovery of our economy in the current globalized world
market is possible only through the maintenance of a fairer and more open multilateral trading
environment.  Yet, given the still precarious situation of the Thai economy, some adjustments
in the reform and liberalization process are necessary if Thailand is to achieve long-term
sustainable growth and development.
12.2 Given the fact that milk and dairy farming has increasingly become a vital alternative means
of livelihood for small-scale rural farmers and the agriculture sector has helped to absorb a
large number of displaced workers as a result of the recent economic crisis, there is little
doubt that the extension of the transitional period for the use of LCR in the milk and dairy
industry would provide the Thai local farmers with the much needed time to make the
appropriate reforms as well as give the Thai Government the chance to reexamine andreadjust the current programs to phase out LCR and to build an effective social safety net in
preparation for further market liberalization.  Admittedly, without the maintenance of LCR in
the manufacturing of ready-to-drink milk at this critical juncture, there would be a substantial
financial loss to Thailand’s milk and dairy industry as well as the related sectors, as cited in
13.
12.3 More importantly, the longer time frame for the phasing out of LCR would allow the Thai
Government the period to put into effect the strategic development plan to improve the
productive efficiency and achieve cost effectiveness in the production of domestically
produced raw milk.  This is especially important considering that Thai milk and dairy farmersmust compete with the lower-price imported skimmed milk, part of which are the result of the
use of trade-distorting practices.  These distorted trading practices are demonstrated,  for
instance, by the fact that there has been no significant changes in the prices of imported
skimmed milk into Thailand prior to and foll owing our economic turmoil,  though the Thai
currency has undergone a massive depreciation from 25 Baht per US.$ 1 to 55 Baht perUS.$1 and has only recently begun to settle at  around 40-42 Baht per US.$1.  Likewise,  it is
evident that while the domestic price of raw milk in the U.S. and the EU is generally higher
than the domestic price in Thailand (12.14 Baht/kg and 10.97 Baht/kg,  respectively),  the
dairy products exported from the former markets tended to maintain lower prices,  of aroundG/C/W/243
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9.50 Baht/kg,  than their domestic counterparts in Thailand, of approximately 12.50 Baht/kg.2
This being the case, therefore,  the removal of LCR of the manufacturing of ready-to-drink
milk seems inappropriate at this point time since it would not only lead to the further
deterioration the competitiveness of Thai milk products in the domestic marketplace but also
contribute to further adversity for the rural fa rmers as well as to the economic recovery and
development of Thailand as a whole.
In short,  it can be clearly seen that without the maintenance of the LCR,  the development,
financial,  and trade needs of Thailand would be severely impaired,  and thus Thailand’s request for
an extension of the use of LCR in the manufacturing of ready-to-drink milk is consistent with Article
5.3 of the TRIMs Agreement.
13. Please provide an evaluation of the direct impact of the TRIMS on employment,
existing investment,  Foreign Direct Investment flows in the relevant sectors and
describe the methodology used to arrive at your assessment.
The removal of LCR in the manufacturing of ready-to-drink milk would no doubt have an
adverse impact on the local milk and dairy industry and especially on the Thai rural farmers.
Perceivably,  there would be a significant loss in the overhead investment cost of no less than 5,500
million Baht (US.$ 137.5 million) and in the collecti on and distribution of raw milk of approximately
950 million Baht (US.$ 23.8 million),  as well as in other related industries of around 280 million
Baht (US.$ 7 million).  Furthermore,  it is expected that the elimination of LCR at this juncture wouldfurther suppress the demand for local raw milk which could amount to a substantial loss of income to
the rurul farmers of around 5,900 million Baht (US.$ 147.5 million) and lead to an additional
unemployment of more than 70,000 farmers in the Thai rural sector.  Needless to say,  there would
also be inestimable adverse consequences on up- a nd down- stream sectors and industries which are
closely associated with the milk and dairy industry.
14. Why did the GoT request an extension for 5 years,  until 31 December 2004?  How did
the GoT arrive at the conclusion that this  period of extension was needed?  Please
explain in detail.
Prior to the economic crisis,  the Thai Government had formulated several plans and policies
to increase the efficiency in local milk and dairy production and the quality of local milk and dairyproducts which have an average implementation period of approximately 5 years.  However,  due to
the abrupt downturn of the Thai economy as the result of the crisis,  it became imperative for Thailand
to extend the time-frame so as to revamp existing developmental programs and to put them into effect.
Hence,  Thailand decided to request for the 5-year extension for the use of LCR on the manufacturing
of ready-to-drink milk.  It is the intention of Thailand to use the additional time to effectivelyreevaluate and made proper adjustments to the existing development and LCR phase-out plans in
order to proceed forth with our liberalization efforts.
15. What further measures does GoT plan to enforce during the period of requested
extension to prepare for elimination of the TRIMs?
To prepare for the anticipated removal of LCR in the manufacturing of ready-to-drink milk
and the liberalization of the local milk and diary industry,  the Thai Government has drawn up a
strategic development plan which encompasses the followings:
- An accelerated reform of the milk and dairy industry in order to increase overall market
competitiveness,  which includes,  among others,  the improvement of production yield,  cost
                                                     
2 Source:  1999 Dairy Review.  An Agra Europe Special Study,  Table 15: p.25.G/C/W/243
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reduction techniques,  and the development and tr ansfer of technological know-how to local
farmers.
- The intensification of research and development,  such as on animal-feeds,  the optimization
of livestock raising,  the improvement on the quality of milk and dairy products,  production
efficiency,  and the development of new and diversified dairy products to absorb greateroutput of local raw milk.
- The reform and development of existing management and administrative systems,  such as
farm management,  livestock-raising,  and the management of credit agencies.  Greater
attention will also be given to the role of the state agencies and the Dairy Cooperatives in
providing basic services to the local farmers and industry.
- Furthermore,  an action plan on milk and dairy industry is currently being considered by the
Thai Government which,  once enacted,  would help to administer,  plan,  and monitor thefuture Thai milk and dairy farming so as to ensure conformity with the market mechanisms
and the expectation of a fairer and more open multilateral trading system.
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