Prime Minister Thaksin Shinawatra says Thailand will look at gradual steps toward cutting tariffs on cars and steel from Japan under a proposed free-trade agreement (FTA), following threats by Japanese auto makers to pull plans for 41 billion baht ($1.0 billion) in investment unless tariffs are reduced.

Thaksin earlier met with Japan Automobile Manufacturers' Assn. Chairman and Nissan Motor Co. Ltd. co-Chairman Itaru Koeda to discuss the trade negotiations.

In addition to lower tariffs on vehicles and parts, the Japanese auto makers want tariffs reduced on imported steel.

JAMA Chairman Itaru Koeda

Koeda tells local media that future investment by Japanese manufacturers in the Thai auto industry is at stake.

“We cannot guarantee whether the 41 billion baht in new investments we plan to make in Thailand over the next few years will shift to other destinations if the Thai government fails to heed our call,” he is quoted as saying.

“We think that the tax reductions we have requested will result in a win-win situation between Thailand and Japan.”

Koeda says the association wants steel import tariffs cut because Thai suppliers cannot meet quality standards and other industry requirements.

He also says local parts companies have been unable to fully meet industry needs, while limited economies of scale make it difficult to supply Thailand's growing market.

The association puts the value of finished-vehicle production in Thailand by all manufacturers at $8 billion annually. Of this, $890 million is exported to Japan and $3.7 billion is shipped to other markets. The group says auto imports from Japan total $2.8 billion, including $2.2 billion in parts.

Thaksin says any tariff cuts on Japanese cars likely would be similar to concessions offered under the Thailand-Australia FTA, but several details have yet to be finalized. (See related story: Thai, Australian Manufacturers Agree to Expand Trade)

The pact with Australia, which took effect Jan. 1, eliminated tariffs for cars with engines below 3L in size.

Thaksin says the vehicle tariffs issue has drawn concern from European and U.S. car producers and will need to be considered carefully.

U.S. and European auto makers, along with Thai components manufacturers, are concerned any cuts will result in increased imports from Japan.

The Japanese want a zero-tariff import quota for cars with engines larger than 3L. Cars with smaller engines would be protected until 2010. Tariffs on car components would be cut by 2010, according to Japanese proposals.

Levies on hot-rolled steel also would be cut gradually to allow local producers time to adjust, Thaksin says. But Thai manufacturers are opposing any move to ease tariffs and restrictions on Japanese steel, saying protection is needed to help the industry develop and survive.

The Japanese say the high-quality steel required by car makers cannot be made locally and must be imported, arguing that lowering steel and auto tariffs will strengthen Thailand's position as a regional auto center by reducing production and material costs.

Japan is calling for immediate tariff cuts on high-quality steel not made locally. Under the Japanese proposal, Thai-made hot-rolled steel, accounting for 28% of the market, would be protected for only six years instead of 10 as proposed by Thai manufacturers.

Arguing Thai production cannot meet demand, Japan also has asked for a tax-free import quota for a 6-year period.

The two countries are aiming to finalize an FTA before the end of the year.