Laos' trade sector growing but challenges lie ahead
VIENTIANE (Vientiane Times/ANN) - Since the introduction of a market economy in the late 1980s, Laos has enthusiastically participated in international trading blocs.
The country joined the Asean Free Trade Area (AFTA) in 1997 and gained membership in the World Trade Organisation (WTO) in 2013. This was followed by the opening of the Asean Economic community in 2015, of which Laos is also a member.
Membership in these bodies gives Laos access to wider global markets and enables it to attract more foreign investment. The situation has improved to such an extent that the country has become a model for other Least Developed Countries (LDCs) undertaking trade reform, according to a recent World Bank report.
Despite the Asian financial crisis of 1997, Laos maintained average trade growth of about 16.5 percent annually from 1991 to 2013 and trade openness increased from 38.2 percent in 1991 to 89.8 percent in 2014.
Laos is committed to continue its outward-looking policy to cultivate trade relationships with countries in the region and the world.
Director General of the Foreign Trade Policy Department at the Ministry of Industry and Commerce, Dr Laohoua Cheuching, says “We are reinforcing and expanding our trade relations with all countries in the world.”
As a WTO member, Laos is authorised to export products to over 160 nations but is currently engaged in import/export activities with over 70 countries.
According to the Ministry of Industry and Commerce, the total value of exports to 76 countries exceeded US$3.43 billion in 2013-14. In the meantime, the value of goods imported from 73 countries reached US$4.68 billion.
Laos' key trading partners are its neighbours including Thailand, Vietnam and China as well as other Asean member states.
The share of Laos' exports to Thailand, Vietnam and China accounted for 57.8 percent of the country’s total exports in 1995 and this increased to 79.9 percent in 2013, according to a new study by the Economic Research Institute for Asean and East Asia.
The study, titled “Lao PDR at the Crossroads: Industrial Development Strategies 2016” also suggested that exports to Thailand recorded remarkably strong growth during this period, from US$83.3 million in 1995 to US$1.63 billion in 2013, which was 47.5 percent of total exports in 1993.
Geographical proximity and similarity of cultures and traditions make Thailand Laos’ closest trading partner.
Exports to Vietnam remained almost constant from 1995 to 2005 but expanded strongly from 2006-13, increasing from US$151.45 million to US$519.11 million.
Total exports to China, which is regarded as a potentially huge market, were higher than exports to Vietnam after 2008, reaching US$595.75 million in 2013.
An increase in both bilateral and multilateral trade agreements may have been a significant factor explaining the rapid growth of Lao exports.
However, average exports under the preferential treatment awarded by AFTA decreased slightly, falling from 8.77 percent in 2010 to 6.97 percent in 2013.
Laos also benefits from the trade-related generalised scheme of preference (GSP) applied by over 40 nations, which means investors operating in Laos pay low taxes on exports. Laos' main exports are minerals, electricity, garments, agricultural and forestry products (such as coffee and rubber), silk and cotton handicrafts, and wood products.
Although mineral products accounted for more than half of the country’s total exports between 2005 and 2013, they declined by 38.6 percent from 2010 to 2013. Mining used to be Laos' main income earner, but the falling price of minerals on the world market has contributed to a revenue shortfall over the past three years.
Laos has always imported more than it has exported since first engaging in foreign trade in 1986. The trade balance has been negative every year in recent decades, but the highest trade deficit was recorded in 2012 at US$784 million, according to the Economic Research Institute for Asean and East Asia.
Laos' main imports are vehicles and parts, petrol and gas, construction materials, items used in manufacturing, electrical goods, food, household consumer goods, electronic and communication items, and products needed for agriculture.
Trade deficits are likely to be the norm for a developing country like Laos where high economic growth results from the strong growth of foreign investment in the resource sector.
Another reason for Laos' trade deficits is that domestic producers are less competitive than foreign suppliers. Lao businesses are mostly small production bases managed by SMEs that are often reported to lack finance and production diversity.
Concerning bilateral trade between Laos and the United States, the value of two-way trade between the two countries has increased five-fold since the resumption of normal trade relations in 2004.
In 2005, the value of two-way trade was just US$14 million but the figure rose to US$84.9 million in 2011 before declining to US$69.7 million in 2015.
However, the value and volume of this two-way trade are still considered small and much more needs to be done to further enhance economic cooperation between the two countries.
Laos has been regarded as one of the high GDP growth countries in the region. Its annual average 7 percent GDP growth from 1991 to 2014 was higher than that of other Least Developed Countries.
GDP growth has seen strong fluctuations since the country’s substantial integration into global trade. GDP growth dropped sharply in 1998 when the country was hit hard by the Asian financial crisis, falling to a record low of 4 percent.
As Laos is centrally located in the region, the government intends to turn Laos' weakness (its land-locked location) into its strength (a land-linked location).
A ground-breaking ceremony for a railway linking Laos and China took place in December last year and another railway linking Laos and Vietnam is planned.
If completed, these two rail links will facilitate economic activities between Laos and other countries, helping to reduce the cost of transporting imports and exports.
Economists agree that there are a lot of opportunities and challenges in doing business in Laos amidst growing regional economic competition and integration.
Of course, in order to reap the benefits of these changes we must learn to adapt to them so that we don't become a victim of regional and international integration.