Laos Comes of Age as Trading Partner

Laos Comes of Age as Trading Partner

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  • WORLD NEWS
  • Updated October 25, 2012, 9:59 p.m. ET
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By PATRICK BARTA

A vote on Friday that formally approved Laos’s application to join the World Trade Organization marked a key coming of age for the small, landlocked Communist country, which has quietly posted some of the world’s strongest economic growth over the past several years.

It also marked the latest step in a Southeast Asian push to integrate economies in the region of 600 million people as it tries to present itself as a single-market, more-viable investment alternative to China.

Laos remains one of the weakest links in Southeast Asia’s ambitious effort to create a 10-nation economic community by 2015, with streamlined customs procedures, better transport links and freer flows of labor, among other steps. With just 6.5 million people, poor road and rail links, and some of the lowest income levels in Asia, Laos is rarely seen as a serious contender for manufacturing or other investments and it carries relatively little weight in regional economic matters.

Most people familiar with the country still think of it as little more than an offbeat tourist destination where backpackers down bottles of locally made Beerlao along stretches of the Mekong River. Daily trading on Laos’s new stock exchange, launched in January 2011, fell to as low as $941 in April, according to the World Bank.

Joining the WTO isn’t expected to change that overnight. Nor is it expected to produce the kind of surge in investment that accompanied China’s and Vietnam’s accession to the global trade body in 2001 and 2007, respectively. Those countries already had sizable export industries when they joined, and their giant labor forces made them far more attractive for multinationals.

But over the longer term, Laos’s membership in the WTO is expected to provide a badge of approval for the country that could make it easier for global firms to do business there, especially as manufacturers look for substitutes for China, where wages have risen rapidly.

Accession to the WTO “sends a very positive signal to the international community that Laos has arrived,” said Jayant Menon, lead economist in the Office of Regional Economic Integration at the Asian Development Bank. “They’re on the radar now.”

It will also help make it easier for Southeast Asian leaders to make investors view the region as one giant market, with the ability to connect supply chains across its 10 countries, all of which will now be subject to WTO mechanisms for the first time. Even Myanmar joined in 1995, before the West launched its most crippling economic sanctions, which are only now being lifted after the country’s recent reforms.

“We hope the WTO will open our doors,” said Oudet Souvannavong, a vice president of the Lao National Chamber of Commerce and Industry who also runs an import-export business that imports construction equipment into the country from as far away as Australia. Although it will likely take a few years, he says, he hopes Laos will now start emerging as a serious option for Japanese and Western companies that currently source manufactured goods like mechanical parts from places like Thailand or Cambodia.

“We cannot afford to be out of the value chain,” he said.

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In particular, WTO membership could help Laos further develop its small, but growing, garments sector, an industry that has become a major source of jobs in other lesser-developed nations such as Cambodia and Bangladesh.

Laos’s landlocked position between Thailand, Vietnam and other countries means that anything it produces faces added transportation costs to get it to global markets. The country is heavily reliant on just a few industries, including copper and gold mines, and it lacks some of the institutional capacity to enforce WTO rules of larger countries such as China. But it has already made enormous progress in recent years, investors say, and its WTO membership talks accelerated rapidly over the past year after a slow start with years of little progress.

Laos’s small presence in the global economy goes back to the Vietnam War era, when U.S. bombing missions dumped more ordnance on the tiny nation than was dropped on Germany and Japan together in World War II.

Afterward, it became a Communist nation, but the government began encouraging private enterprise in the mid-1980s, and today the country is increasingly market-oriented. The U.S. normalized trade relations with Laos in 2004, and its new stock exchange, though small, is expected to grow.

This year, Laos is expected to post 8.3% growth according to the International Monetary Fund, which likely would make it the fastest-growing economy in Southeast Asia. That follows a decade in which Laos averaged 7% growth a year, driven largely by investments in mining and hydroelectric power, with 20 hydrodam projects now under development.

A number of U.S. companies have visited on trade missions over the past 18 months, including Coca-Cola, Chevron and Citibank. The main city of Vientiane is increasingly chock-a-block with traffic and new wine bars.

“We see real potential in Laos as another growth market for the region,” said Dave Westerman, Asia Pacific regional manager for export operations at Ford Motor Co. The auto maker is working with a local distributor to make “some significant additional investments to upgrade and expand our local operations” as part of plans to create a nationwide sales and service network, he said.

Under the terms of membership, Laos is agreeing to cap its tariffs at an average of about 19% and expand market access. It has also passed or is working on legislation to boost protections for intellectual property, improve customs procedures and otherwise bring the country into line with international trade norms.

After Friday’s vote at the 157-member WTO, Laos must still formally ratify the agreement. It is expected to do so in the coming weeks.

— Jacob Gronholt-Pedersen and Celine Fernandez contributed to this article.A version of this article appeared October 27, 2012, on page A9 in the U.S. edition of The Wall Street Journal, with the headline: Laos Comes of Age as Trading Partner.

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