The origin of goods and the act that undermines global trade: How the proliferation of free trade agreements creates an Asian noodle bowl that inhibits the world trade environment - A case study of Krusell Thailand Co. Ltd.

Abstract

Historically, the diversified nature and role that regional and multilateral trade agreements have in global trade have been widely discussed. One side argues that trade agreements are building blocks for strategic alliances at both a country- and a company-specific level. A different side argues that trade agreements, especially free trade agreements, can result in failure for global multilateral trade entities, as overlapping trade agreements can result in complex import and export rules. Preferential trade agreements have seen exponential development during the last century and as a result, there has been a proliferation of free trade agreements around the world. In connection to this, countries have created free trade zones for companies to facilitate temporary import and export activities without generating duty and value-added tax costs. As a result, companies from developed countries have offshored manufacturing activities to developing countries. However, the profusion of free trade agreements has indirectly created discrimination against certain countries’ trade picture and import and export activities. At an industry level, it affects companies’ manufacturing and supply chain operations due to higher tariff rates when importing or exporting products in comparison to companies located in countries with preferential trade agreements. Therefore, the purpose of this thesis is to investigate how companies whose manufacturing is located in disfavored countries can develop their manufacturing and supply chain activities so that their manufactured goods can be included in a preferential trade agreement, even though the companies and the country are not. A case study is presented on how the company Krusell Thailand can import semi-finished plastic cases from suppliers in China to a free trade zone warehouse in Thailand, where it will undergo value-added processes. By means of these value-added processes, the origin of the plastic cases can be changed from Chinese to Thai so they are eligible for the preferential tariff rates that Thailand and the EU have agreed upon. As a result of the changed origin, the duty costs will be reduced when plastic cases are exported to the EU, as compared to exports from China. The analysis illustrates that the proposed value-added processes at the free trade zone warehouse are sufficient to change the plastic cases’ country of origin. Moreover, the analysis shows that the proposal creates financial benefits at a specific break-even point where the quantity of plastic cases in an export shipment exceeds a certain volume. As a result, the reduction of duty mitigates the increased transport costs associated with the proposal. However, due to the proliferation of free trade agreements, the trade picture between Southeast Asia and the European Union is volatile. Thus, the proposal might prove to be more or less beneficial in the near future.