Are Laos’ New Railways a Solution to its Lack of Trade with the West?

When Phankham Viphavanh, the prime minister of Laos, wrapped up a cabinet meeting last month, there were more questions than answers about what his government was doing to fix the economy. The national currency, the kip, is in free fall, while inflation hit 30 percent year-on-year last month. The World Bank now estimates the economy will grow just 2.5 percent this year, down from an earlier forecast of 3.8 percent. Even in the years before the COVID-19 pandemic, growth was faltering. A default on the state’s mounting debt is not unlikely.

One possible solution, which some communist politicians have argued for years, is diversification. In 2019, China, Thailand and Vietnam bought about four-fifths of Laos’ exports, according to United Nations data. South Korea has been the obsession of apparatchiks in Vientiane this year; A large number of new cooperation agreements and pacts have been signed.

The biggest problem is the West. Laos’ bilateral trade with the United States was worth just $252 million last year; The United States bought only $218 million of Laos’ total exports of about $7 billion. Between 2010 and 2020, Laos’ exports to the US increased by just 79%, but Vietnam’s grew 435% and Cambodia’s 184% over the same period, according to an analysis of Census Bureau data The European Union may be Laos’ fourth-biggest trading partner, but last year it was worth just $500 million, about 3.6 percent of Laos’ combined trade, according to EU data. .

Some analysts believe that could change if landlocked Laos becomes better connected to the rest of the region. The $5.9 billion railway connecting the capital Vientiane with the southern Chinese city of Kunming opened with great fanfare last year. Additional tracks have been laid to improve links with Thailand, eventually connecting Vientiane with the Thai port of Laem Chabang. Potentially just as important is a $5bn railway that will connect Vientiane to the Vietnamese deepwater port at Vung Ang. The Lao government owns a 60 percent stake in the port. The proposed railway, whose construction is expected to start in November, would also intertwine with Vietnam’s North-South Railway, connecting Vientiane with the Vietnamese capital Hanoi.

The construction of new railways, including the Laos-Vietnam railway, could mean that “shipments from Southeast Asia to Europe could take just over 10 days by rail,” a recent report claimed. instructions of Dezan Shira & Associates, a research firm with offices in Vietnam. “Currently, ASEAN exporters use the huge seaport of Singapore as the main transportation hub, which takes about 45 days to reach Europe,” he added. It would also allow Lao traders to take advantage of progress made by Vietnam, which saw its first freight train service to Europe begin in July 2021, when a container left Hanoi and arrived in Belgium a month later.

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An EU spokesman told me that “a faster and possibly cheaper trade route could attract more European investors to consider Laos as a potentially interesting new trade and investment destination.” Having access to Vietnamese ports “could provide an alternative trade route to the EU, which could lead to increased trade with Laos,” they said, adding that this could also be aided by planned investments to facilitate the transport of goods by rail from Laos to ports in Thailand.

“However, it is too early at this stage to assess the impact of this planned rail infrastructure on Laos’ trade with the EU,” the spokesman added. The European Investment Bank, the EU’s lending arm, is helping with the expansion of National Highway 13, the most important highway in Laos, part of which will help transport goods by road to the port of Vung Ang in Vietnam.

In August, the US-ASEAN Business Council visited Vientiane for the first time since 2018, where a roundtable conference was held. “Our goal is to help [Laos] to help their businesses prosper.” fixed the US ambassador to Laos, Peter M. Haymond. However, he noted that “this is a critical time for the government and the private sector to work together to address barriers to investment, accelerate economic growth and create job opportunities for the modern economy.” Oudet Souvannavong, president of the Lao National Chamber of Commerce and Industry, was more cautious. Trade and investment figures between Laos and the United States “look moderate, but are growing on decent paths,” he said, according to a conference transcript.

Laos is part of the EU’s Everything But Arms (EBA) preferential scheme, which grants duty-free and quota-free trade. Agricultural export products accounted for only 8 percent of total exports to the EU in 2020, but the 2021-25 strategy for Team Europe, a European initiative in Laos, is to promote trade in free coffee, tea and timber exports. of deforestation.

However, a research work published in March by Viengsavang Thipphavong, Bounlert Vanhnalat, Chanhphasouk Vidavong and Somdeth Bodhisane, noted that “agri-food exports to the EU have benefited significantly from the EBA but appear to be underutilized”. Transportation costs were a major impediment to trade, he noted. “The land transportation costs that Lao exporters are responsible for paying are relatively high, around 15,000,000 kip ($1,500) per shipment for coffee and sugar exports. It takes about a month to send agri-food products to the EU market.”

But a bigger problem when exporting to Western markets is documentation, given the extensive licenses and controls that producers must provide to export, especially agricultural products. The aforementioned research work pointed out that “the typical time for document processing for an export takes between 2 and 7 days, with costs ranging from 800,000 to 5,000,000 Kip (80-500 US$) per shipment, depending of product types and quantity. It can be seen that there is [a] high cost charged by the agri-food export operation in Laos”.

That is not going to change because of the new railways. However, if they can reduce transport costs, that could provide a financial balm as authorities and the Lao business sector continue to develop licensing, analysts say. After all, one could question the motivation of Lao companies to spend the time and money to learn how to provide the documentation required by the US and the EU when there is little demand from those markets and when additional sums and energy are needed. to enter those markets. and when transportation costs are prohibitively high. However, progress on the latter could encourage some progress on the first two issues.

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