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Are Laos’ New Railways A Solution To Its Lack Of Trade With The West?

Source: TheDiplomat

When Phankham Viphavanh, the prime minister of Laos, concluded a cabinet meeting last month, there were more questions than answers over what his government was doing to fix the economy. The national currency, the kip, is in freefall, while inflation reached 30 percent year-on-year last month. The World Bank now reckons the economy will only grow by 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 stumbling. A default on the state’s mounting debt isn’t improbable.

One possible solution, which has been floated by some communist politicians for years, is diversification. In 2019, China, Thailand, and Vietnam purchased around four-fifths of Laos’ exports, according to United Nations data. South Korea has been the obsession of apparatchiks in Vientiane this year; a slew of new deals and cooperation pacts has been signed.

The bigger issue is the West. Laos’ bilateral trade with the United States was worth just $252 million last year; America bought only $218 million of Laos’ total exports of around $7 billion. Between 2010 and 2020, exports from Laos to the U.S. rose by just 79 percent, yet from Vietnam, they grew by 435 percent and from Cambodia by 184 percent over the same period, according to an analysis of data from the U.S. Census Bureau. The European Union may be Laos’ fourth largest trading partner but that was worth just $500 million last year, around just 3.6 percent of Laos’s combined trade, according to EU data.

Some analysts reckon that could change if land-locked Laos becomes better connected to the rest of the region. The $5.9 billion railway connecting the capital Vientiane to the southern Chinese city of Kunming opened with much fanfare last year. Additional tracks have been laid to improve connections with Thailand, which will eventually connect Vientiane to the Thai port of Laem Chabang. Potentially as important is a $5 billion railway that will connect Vientiane to the Vietnamese deep seaport in Vung Ang. The Lao government owns a 60 percent share of the port. The proposed railway, for which construction is expected to begin in November, would also interlace with Vietnam’s North-South railway, connecting Vientiane to the Vietnamese capital Hanoi.

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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,” asserted a recent briefing from Dezan Shira & Associates, a research firm with offices in Vietnam. “Currently, ASEAN exporters utilize Singapore’s huge seaport as the main transport hub, which takes approximately 45 days to reach Europe,” it added. It would also allow Lao traders to piggyback on advances 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 one month later.

An EU spokesperson told me that “a quicker, and possibly cheaper, trade route could indeed attract more European investors to look at Laos as a new potentially interesting investment and trade destination.” Having access to Vietnamese ports “could provide an alternative trade route to the EU, which could lead to an increase of trade with Laos,” they said, adding that this could also be helped by planned investments to facilitate the transport of goods by rail from Laos to Thailand’s ports.

“Nevertheless, it is too early at this stage to assess the impact of this planned railway infrastructure on Laos’ trade with the EU,” the spokesperson added. The European Investment Bank, the EU’s lending arm, is assisting with the expansion of National Road 13, Laos’ most important highway, part of which will help transport goods by road to the Vung Ang port 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 assist [Laos] in helping its businesses thrive,” stated the U.S. ambassador to Laos, Peter M. Haymond. Yet he noted that “this is a critical moment for the government and the private sector to work together to address barriers to investment, accelerate economic growth, and create employment opportunities for the modern economy.” Oudet Souvannavong, president of the Lao National Chamber of Commerce and Industry, was cagier. Trade and investment figures between Laos and the U.S. “look moderate, but they are growing in acceptable paths,” he said, according to a transcript of the conference.

Laos is part of the EU’s preferential Everything But Arms (EBA) scheme, which grants tariff- 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 deforestation-free coffee, tea, and timber exports.

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Yet a research paper published in March by Viengsavang Thipphavong, Bounlert Vanhnalat, Chanhphasouk Vidavong, and Somdeth Bodhisane, pointed out that “Agri-food exports to the EU have significantly benefited from the EBA but appear to be underutilized.” Transportation costs were a major impediment to trade, it noted. “In-land transportation costs that Lao exporters have a responsibility to pay up are relatively high at around 15,000,000 kip ($1,500) per shipment in the case of coffee and sugar exports. It takes approximately one month for shipping agri-food products to the EU market.”

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

That isn’t about to change because of the new railways. Yet if they can bring down transportation costs, that could provide some financial balm whilst the Lao authorities and business sector continue to develop licensing, analysts say. After all, one could question the motivation for Lao firms to spend the time and money to learn how to provide the documentation that the U.S. and EU require when there’s little demand from those markets and when it takes additional sums and energy to break into those markets, and when transportation costs are prohibitively high. Progress on the latter, though, could encourage some progress on the former two problems. Authors

Contributing Author

David Hutt

David Hutt is a journalist and commentator. He is a research fellow at the Central European Institute of Asian Studies (CEIAS), a columnist at The Diplomat, and a correspondent for Asia Times.