huy a ui nd ena gonvararathT H B a V N

Technical Background Paper for the third National Human Development Report Lao PDR 2006

International Trade and Human Development

TRADE STRUCTURE

AND THE POLICY

ENVIRONMENT

OF LAO PDR

Vientiane 2006

Acknowledgements

First of all, we would like to express our sincere gratitude to the National Human Development Report team and to the lead project author, Dr. Charles Myers, for his enthusiastic assistance in providing support, advice, suggestions and materials. We are also grateful for the generous assistance and contributions of many individuals, institutions and organisations for their time and for kindly providing valuable data and information for our research. In addition, our special thanks go to the National Statistics Centre and (i) the Ministry of Communications, Transport, Post and Construction: the Transportation Department, the Telecommunications Department, and the Social and Environmental Division; (ii) the Ministry of Commerce: International Trade Department, Import-Export Management Department and World Trade Organisation technicians, and the Certificate of Origin Division; (iii) the Ministry of Finance, Customs Department: Mr. Vilaykone (Technical Staff) from the Statistics Division, the International Relations Division, and the Tax Department (iv) the Ministry of Foreign Affairs: ASEAN Economics Cooperation Division (v) the Bank of the Lao PDR: the Economics Research Department (vi) the Committee for Planning and Investment: the Investment Department and the Lao-Vietnam Cooperation Commission Office (vii) the International Monetary Fund based in Vientiane; and (viii) the Lao Trade Promotion Centre.

Our report would not have its present shape and form without the kind support and data provided by the trade departments, customs offices, transport departments and the departments of cooperation and planning in Luang Namtha, Oudomxay, Bolikhamxay and Savannakhet provinces.

Table of contents

Acknowledgements ..................................................................................................................1 Table of contents ......................................................................................................................2 Abbreviations and Acronyms ............................................................................................6 Introduction ..........................................................................................................................12 Part I: Overview of Lao Trade...................................................................................13

1. 1. Trade trends and fluctuations..........................................................................14 1. 2. Trade structure ..................................................................................................17 Data Considerations: .....................................................................................................17 Data comparisons:..........................................................................................................18 Changes in trade structure: .........................................................................................20 1. 3. Direction of trade ...............................................................................................20 1. 4. Agriculture - Rising role in export revenues ..................................................23 Agricultural exports with high potential:..................................................................26

Part II: Trade Policy........................................................................................................30 2. 1. NEM - initiating the reform of trading system ...............................................31 2. 2. Medium and Long-term Development Strategies: .......................................31 2. 3. Current trade policy: .........................................................................................32

2. 3. 1. Lower tariff levels: ..............................................................................32 2. 3. 2. Wide range of exceptions for duties:...............................................33 2. 3. 3. Import - export participation ..............................................................34 2. 3. 4. State controls over import-export and licensing requirements: ..35 2. 3. 5. Quantitative Restrictions: ..................................................................36 2. 3. 6. Allocation of import quotas: ..............................................................37 2. 3. 7. Price Control .......................................................................................37 2. 3. 8. Customs and procedures:.................................................................37

2. 4. Behind-the-border policies:..............................................................................37 2. 4. 1. Domestic Tax Policy ..........................................................................37 2. 4. 2. The preparation of a Value-Added Tax (VAT) law and the scenario ..............................................................................................................38 2. 4. 3. Policies that distort competition: ......................................................39 2. 4. 4. Other Policies and Their Inconsistency: .........................................39

2. 5. Multilateral Trade Policy:..................................................................................40 2. 5. 1. The ASEAN Economic Cooperation ...............................................40 2. 5. 2. AISP - ASEAN Intergrated System of Preferences: .....................44 2. 5. 3. ASEAN - China Free Trade Area and the Early Harvest Program: 44 2. 5. 4. Negotiation for WTO membership ...................................................46 2. 5. 5. Other Multilateral Trade Integration Framework: ..........................47

2. 6. Bilateral Trade Relations..................................................................................48 2. 6. 1. Bilateral trade relations with the EU: ...............................................48 2. 6. 2. BTA with the US: ................................................................................53 2. 6. 3. BTR with Thailand ..............................................................................55 2. 6. 4. BTR with Vietnam...............................................................................68 2. 6. 5. BTR with China...................................................................................69 2. 6. 6. Bilateral relations with other trade partners: ..................................72 2. 6. 7. Usage of Form D and utilization of other ASEAN preferential treatments:..........................................................................................................73

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2. 6. 8. Practical Implementation of Trade Concessions...........................74 2. 7. Constraints generated by policy .....................................................................74 2. 8. Challenges facing the Lao PDR and Policy Implications:...........................78

Part III: Transit trade.......................................................................................................80 Introduction ......................................................................................................................81 3. 1. Geographic location and transportation: .......................................................81 3. 2. Transport and Transit Agreements: ...............................................................86

3. 2. 1. ASEAN arrangements for transport and transit:............................86 3. 2. 2. GMS Transport and Transit Agreement: ........................................87 3. 2. 3. Bilateral agreement with Thailand ...................................................91 3. 2. 4. Bilateral agreement with Vietnam ....................................................92

3. 3. Cross-border transportation.............................................................................92 3. 4. Transportation Costs, Logistics and Trade Facilitation ...............................93

Solving the problem of being landlocked: Transit to seaports ............................93 Constraints of the logistics sector and Recommendations: ..............94 Breakdown of transportation cost: ............................................................95

3. 5. Transit trade through the Lao PDR: ...............................................................96 Summary of provincial transit trade ..........................................................97 Summary of transit trade by product: .....................................................102

3. 6. Contribution of transit trade to human development: ................................104 3. 6. 1. Contribution of transit trade to the government revenue: ...104 3. 6. 2. Direct contributions of transit trade to local livelihoods, income opportunities and human development...................................107

3. 7. Policy recommendations: ...............................................................................108 References ..........................................................................................................................110 Appendix I: Trade Statistics ...........................................................................................113 Appendix II: Tariff rates ...................................................................................................117 Appendix III: Trade Preferences ...................................................................................119 Appendix IV: List of agencies, organizations and people visited and interviewed..........................................................................................................................140

List of boxes Box 1: The ASEAN CEPT Scheme .......................................................................... 41 Box 2: The rise of Lao coffee ................................................................................... 52 Box 3: Early benefits from the US-BTA .................................................................... 54 Box 4: BTA and Challenges ..................................................................................... 55 Box 5: Thai Investment in food processing using Lao preferences .......................... 56 Box 6: Significant Increase in Lao exports to Thailand............................................. 56 Box 7: Cross-border trade with China: Sugarcane in Luang Namtha....................... 71 Box 8: A rubber plantation in Namtha district, Luang Namtha province ................... 72 Box 9: The GMS and regional integration ................................................................ 84 Box 10: The East West Economic Corridor and prospects for transit trade.............. 84

List of tables Table 1: The value of Lao trade 1995-2004 (International Data)............................................14 Table 2: Annual percentage changes in Lao trade 1996-2004 (International Data) ................14 Table 3: Major economic indicators from 1999-2003 (International Data) ............................14

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Table 4: Cargo Rates from Bangkok to Selected Destinations................................................18 Table 5: Comparison of 2003 export data................................................................................19 Table 6: Mineral exports (National data).................................................................................19 Table 7: Mineral exports (International mirror data)...............................................................19 Table 8: Lao exports in aggregate classification, from 1998/99 to 2004/05 (National data) ..20 Table 9: Main destinations of Lao exports (commodity exports including electricity) 1995 - 2004..........................................................................................................................................21 Table 10: Import Origin (Commodity Trade) 1990-2004........................................................23 Table 11: Agricultural Exports 2001-2005 ..............................................................................24 Table 12: Agricultural exports as a percentage of total Lao exports (2001-2005) (National data)..........................................................................................................................................24 Table 13 and Table 14: Lao Agricultural Exports Mirror Data in 2003..................................25 Table 15: Lao Agricultural Exports .........................................................................................26 Table 16: Lao Exports of Coffee, Tea and Spices in 2003 ......................................................27 Table 17: Lao Spice Exports in 2003.......................................................................................27 Table 18: Cereal Exports 2003 ................................................................................................28 Table 19: Lao agricultural exports under HS code 12 in 2003 ................................................28 Table 20: Lao exports of plaiting materials in 2003 ................................................................29 Table 21: Change in the structure of Lao economy.................................................................29 Table 22: 2001 CEPT List .......................................................................................................42 Table 23: 2005 Lao CEPT Lists...............................................................................................42 Table 24: Main Lao exports to the EU.....................................................................................51 U

Table 25: The increase in Lao agricultural exports to Thailand since AISP zero-tariffs and the “One-Way Free” Trade ............................................................................................................67 Table 26: Lao exports of some agricultural and forestry products to China in 2002-2004 .....70 Table 27: Lao exports of sugarcane and rice to China in 2002-2004 ......................................70 Table 28: Usage of Form D 2001–2004 ..................................................................................73 Table 29: Usage of ASIP Forms ..............................................................................................74 Table 30: Cross-country comparisons on procedures and license requirements .....................75 Table 31: Cross-country comparison on tax payments............................................................76 Table 32: Cross-country comparison on the ease of registering property ...............................76 Table 33: Cross-country comparison on the ease of getting credit..........................................76 Table 34: Cross-country comparison on the ease of cross-border trade..................................77 Table 35: Freight transport 2000-2004 ....................................................................................82 Table 36: Freight traffic 2000-2004.........................................................................................82 Table 37: Length of the roads in the Lao PDR 1990-2004......................................................83 Table 38: Lao PDR’s road network in 2003 ............................................................................83 Table 39: Status of Protocols - ASEAN Agreement on the Facilitation of Goods in Transit 1998..........................................................................................................................................87 Table 40: List of Annexes and Protocols of the GMS Cross-Border Transport Agreement ...88 Table 41: Negotiation process of Annexes and Protocols under the GMS Cross-Border Transport Agreement ...............................................................................................................89 Table 42: Milestones of the GMS Cross-border Transport Agreement...................................90 Table 43: High cost in previous years, Transport cost for export and import via Thailand ....96 Table 44: Estimate of Transit Trade by MOC, as of July 2005. (US$) ...................................96 Table 45: Transit trade by Province 2003–2004......................................................................97 Table 46: Statistics of vehicles entering and exiting Savannakhet ..........................................99 Table 47: Imports for re-export, Savannakhet province 2002-2004) ......................................99 Table 48: Bolikhamxay transit trade 2004–2005...................................................................100 Table 49: Trend of transit trade in Luang Namtha 2001-2005 ..............................................101

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Table 50: Luang Namtha transit trade (26/9/2004-25/6/2005) ..............................................101 Table 51: Transit trade in Khammouane by products 2004-2005 .........................................102 Table 52: Garlic Imports and Exports in 2003.......................................................................103 Table 53: Re-exports to motorbikes to Vietnam 1994-1999 .................................................104 Table 54: Fee collection on vehicles crossing Lao border.....................................................106 Table 55: Lao over-flight charges:.........................................................................................107

List of figures Figure 1: Lao commodity trade (1986-2004)...........................................................................15 Figure 2: Inflation rate 1992–2002 ..........................................................................................16 Figure 3: Exchange rate changes 1992-2002 ...........................................................................17 Figure 4: Main markets for Lao commodity exports (including electricity) 1986-2004.........21 Figure 5: Main trading partners for Lao commodity imports, 1986-2004...............................22 Figure 6: Tariff distribution ....................................................................................................33 Figure 7: Garment exports to EU-15 from mirror data. (International data) ...........................49 Figure 8: Total Lao garment exports (national data) ...............................................................50

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Abbreviations and Acronyms

ACMECS Ayeyawady-Chao Phraya-Mekong Economic Cooperation

Strategy organization ACFTA ASEAN/China Free Trade Area ADB Asian Development Bank AFAS ASEAN Framework Agreement on Services AFTA ASEAN Free Trade Area AISP ASEAN Integrated System of Preferences ASEAN Association of South East Asian Nations AIPS ASEAN’s Integration of Priority Sectors BTA Bilateral Trade Agreement BTR Bilateral tariff reductions CEPT ASEAN Common Effective Preferential Tariffs CIF Cost, insurance, freight CLMV Cambodia, the Lao PDR, Myanmar and Vietnam CLV Cambodia, the Lao PDR and Vietnam DOTS Direction of Trade Statistics (IMF database) EBA “Everything But Arms” EHP Early Harvest Program (under the ASEAN-China Free Trade

Agreement) EU European Union FOB Free on board FTA Free Trade Agreement GMS Greater Mekong Sub-region GSP Generalized System of Preferences HS Harmonised System ICAO The International Civil Aviation Organization IMF International Monetary Fund IPR Intellectual Property Rights LDCs Least Developed Countries MAF Ministry of Agriculture and Forestry MFN “Most-Favoured Nation” status MOC Ministry of Commerce MTCPC Ministry of Transport, Construction, Posts and Communication NGPES National Growth and Poverty Eradication Strategy NTB Non-tariff barrier NTFP Non timber forest products NTM Non-tariff measure NSC National Statistics Centre NTR “Normal Trade Relations” status QR Quantative restriction RO Rules of Origin SAD Single Administrative Document S&D “Special and differential” TBT Technical Barries to trade TRIPS Trade Related Aspects of Intellectual Property Rights Agreement

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UNCTAD The United Nations Conference onTrade and Development UNDP The United Nations Development Programme VAT Value Added Tax WB World Bank WTO World Trade Organisation

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Executive Summary International trade is of growing importance in the economy of the Lao PDR. How human development will benefit from this growth is the ultimate concern of all the Technical Background Papers. The objective of the study is to examine the foreign trade structur and the policy environment of the country. The main questions are: (i) which domestic policies (both trade and trade-related) are hindrances to trade and (ii) what the country needs to do to make use of the favourable international environment. Integration in the regional trade system brings benefits, but at the same time challenges the country’s reform process. The report comprises three parts. Part I seeks to provide an overview of Lao trade structure and composition. Part II describes Lao trade policy, how policies hinder or create difficulties for the participants and beneficiaries. The analysis focuses on the trade opportunities that the Lao PDR has and needs to use fully, and what challenges it must face in the regional and international trade integration. Part III takes a close look at Lao transit trade, a phenomenon that is often overlooked in the overall trade picture but can contribute to human development and poverty reduction. The Lao PDR is a geographic “crossroads” for international transit trade so there is a new opportunity for the country to become part of the regional hub. Part I: Overview of Lao Trade The changes in trade patterns, trade composition and trading partners are the main foci in this section. In analysing the data both national and international mirror data were used extensively. Comparisons between these two sources can point to those informal exports recorded only by importers. Agricultural exports are examined in detail as these emerging exports play a large role in the restructuring of the agricultural sector, transforming the traditional subsistence production into commercial production and thus contributing to poverty reduction and human development. Part II: Trade Policy The spectacular growth and performance of a country’s foreign trade sector are often attributed to positive changes in policy. Lao trade policy has changed significantly since the initiation of the New Economic Mechanism (NEM) in 1986. The NEM kicked off the economy’s exposure to market forces. It adopted the “one market - one price” principle and the dismantling of the state-owned enterprise (SOE) monopoly in foreign trade. The National Growth and Poverty Eradication Strategy (NGPES) – the strategic framework for growth and development – emphasises commercial production and promotion of export-oriented sectors while improving market linkages and facilitating trade.

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Tariff measures In 1993, the Lao government began to reduce taxes on trade - with a major reform of the tariff structure in 1995. The current un-weighted average Most Favoured Nation (MFN) tariff is now slightly above 10 percent - the highest is only 40 percent. Export duties are now collected only on natural resources and electricity. Tariff reductions and exemptions are, however, given to imports and exports for a wide range of purposes. Official data show that much of the total import duty payable was foregone because of exemptions and reductions. Thus, the effective MFN tariff barrier to imports is in fact quite low. Non-tariff measures Importing and exporting are now open to more actors. Regulations do not limit either types or quantities of products. However, many products still need technical approvals from the line ministries are required. Although the number of controlled products is significantly smaller evidence shows that the time-consuming procedures for technical approval from the ministries hinder to trade. Time and effort wasted on unproductive procedures increase the competitive disadvantages of enterprises. “Behind-the-border” Policies Domestic tax policies are protectionist and favour import-substitution. Taxes are calculated on a cumulative basis inclusive of customs duty - the overall import tax can be very high – leading to high final prices. The different taxes on imported and domestic goods further aggravate the bias against imports. Foreign direct investment (FDI) policy, offering both import duty and profit tax exemptions and reductions, is more favourable to foreign investors. There is a bias against domestic producers. Another bias exists in the wood industry where SOEs are favoured by the non-competitive allocation of logging quotas. Trade Agreements and Preferences Future trade patterns will be affected by the country’s membership in the ASEAN Free Trade Area (AFTA) and the bilateral agreement with the United States (US), and the future membership in the World Trade Organisation (WTO). AFTA: The Lao PDR should benefit from the opening up of and integration with the ASEAN1 market. There are preferences: tariff reductions under the Common Effective Preferential Tariff Scheme (CEPT) and the ASEAN Integrated System of Preferences (AISP) offered by the six original ASEAN members. However the Lao PDR must implement its own tariff reduction schedule - reduce 98 percent of the tariffs in the Inclusion List (IL) to between 0 - 5 percent by 2008 and eliminate these by 2015. (There is timeline fleixibility with some tariffs to be eliminated by 2018.) Government revenues might be affected. Protected sectors need to be prepared for the opening of market to foreign competition.

1 The Association of South East Asian Nations comprising the Federation of Malaysia (Malaysia), the Republic of Singapore (Singapore), the Kingdom of Thailand (Thailand), the Republic of Indonesia (Indonesia), the Republic of the Philippines, Negara Brunei Darussalam (the Sultanate of Brunei), the Socialist Republic of Vietnam (Vietnam), the Union of Myanmar (Myanmar), the Kingdom of Cambodia (Cambodia) and the Lao People’s Democratic Republic (the Lao PDR).

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In 2005, the non-weighted average CEPT tariff rate in the Lao IL was reduced 6.16 percent. Eighty five percent of IL tariff lines (Harmonised System (HS) 8-digit) are between 0 - 5 percent. The simple average tariff rate (non-weighted) of all IL tariff lines is 4.05 percent, down from from the 2001 average of 7.5 percent. The European Union Generalized System of Preferences) (EU GSP) The Lao PDR has received trade preferences under the EU-GSP from the early 1990s; and since 1997, GSP coverage for Lao products has been extended and preferences given regional cumulation. Since 2002, almost all Lao products have been eligible for duty free export to all EU countries under the “Everything But Arms” (EBA) initiative. US Normal Trade Relations (NTR): The NTR agreement has lowered average tariffs on Lao exports to the US from 45 to 2.4 percent. Products with potential for the Lao PDR include silk textiles (from 90 to 0.8 percent), handicrafts and wood products (from 42.5 to 0 percent), and coffee (from 10 to 0 percent), NTR is not a trade preference. It means only that Lao exports compete on an equal footing with exports from all other WTO members. Bid for WTO Membership The Lao PDR is negotiating for WTO membership with accession expected in 2007 or 2008. Although the Lao PDR would be then entitled to WTO “special and differential” (S&D) treatment, this would inevitably and gradually erode the value of current preferential access regimes. Thus WTO membership and the advancement of MFN-based liberalisation should be carefully considered. China, The Early Harvest Program - ASEAN/China Free Trade Agreement (ACFTA) By 2010 there will be free trade between China and ASEAN under ACFTA and by 2015 for the four new members - Cambodia, Myanmar, the Lao PDR and Vietnam (CLMV). China and the ASEAN countries began to reduce tariffs on 7,000 products in July 2005. The Early Harvest Program (EHP), part of this framework, aims is to accelerate tariff reductions on selected products - mainly agricultural and food. China and ASEAN-62 are scheduled to complete this between 2004 and 2006, while the Lao PDR has until 2006 - 2009. China also offered other bilateral trade preferences. The Lao PDR as a least developed country (LDC) is eligible for some preferential tariffs. Some local Chinese authorities give free entry to many cross-border trade goods. Thailand: The CLMV members will be offered AISP trade preferences. In 2004, AISP preferences, with tariff rates of 0 to 5 percent were offered on more than 300 Lao exports (not on the Lao IL) to Thailand. Moreover, in the same year Thailand agreed to a “One Way Free Trade” concession applying a zero tariff on 9 Lao agricultural exports to Thailand.

2 ASEAN-6 refers to the six founding members of ASEAN whose economies are further ahead in regional integration than the newer members. The ASEAN-6 are Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand.

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Statistics and anecdotes on cross-border trade show that Lao exports have increased as a result of these tariff reductions and preferences. The export of those agricultural products eligible for zero tariff have increased dramatically. Vietnam: The 1999 “Cua Lo Agreement” introduced bilateral tariff reductions (BTR) and since then each year the agreed coverage has been extended. From September, 2005, the coverage of products eligible for 0 and 50 percent reductions of the normal tariff will substantially effect bilateral trade. Challenges facing the Lao PDR and the Policy Implications:

The current commitments mean that foreign trade liberalisation is inevitable. Although WTO membership will give the Lao PDR greater opportunities it willd also challenge the domestic producers with more competition. Policy must create a level playing field for all. Any bias or discriminatory treatments would create only temporary benefits for some while harming the competitive foundation of the economy.

The gradual erosion of the value of current preferential access regimes along with the advancement of MFN-based liberalisation is also inevitable. Reliance on preferential access to certain markets may not be sustainable. Actions to improve competitiveness and productivity of national firms and farmers should be emphasized.

Under-utilisation of AFTA concessions and AISP has been reported in both the Lao imports and exports either due to the documentary procedures or administrative inefficiency. Administration reforms and improving the capacity of trade facilitating agencies are critical.

A lack of information, limited human resources and weak infrastructure limit the potential benefits of trade preferences. The impact of the EHP between China and the Lao PDR may not have a demonstrable effect on cross-border trade, either because of the current informal trade flows or the lack of information and low awareness of provincial and district trade, and customs officials. There is even less information among traders and producers. The lack of information means that Lao farmers who could increase production for export may lose markets in Southern China to competitors from Myanmar, Thailand, and Vietnam. This highlights the need to speed up reforms in both administration and institutions, and investment in capacity building.

Part III: Transit trade The GMS framework and its infrastructure projects offer the Lao PDR an opportunity to become land-linked and take part in regional trade. Two infrastructure projects that run through the country are Route 3 - linking southern China to northern Thailand via Luang Namtha and Bokeo provinces - and Route 9 - linking Thailand and Vietnam via Savannakhet. The transit route through Savannakhet is one of the more important carrying about 64 percent of the total Lao transit trade (MOC data of 2003-04). Once the East-West Corridor has been completed, trade flows are estimated to double between 2000 and 2010 and double again in the following decade. The Lao PDR has the chance to benefit from this.

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Introduction Increasing international trade can benefit the economy and the people of the Lao PDR. But these benefits, to a large extent, depend on what is being traded, how trade is carried out, who participates and who gains. Trade policy, thus, is one of the determining factors for successful trade and global integration. The Lao PDR is striving to end its LDC status, reduce poverty, and achieve equitable economic growth. The country has the great challenge of steering the economy towards integration with the international trading system and regional cooperation.

Objectives The main objective of this study is to identify and assess the opportunities for and obstacles to trade resulting from the policy environment. The importance of the contribution of international trade to human development can be appreciated only through an understanding its structure and some of its prominent features. The current LDC status of the Lao PDR means that trade objectives are set by the main trading partners and by those preferences offered by the multilateral organisations.

Methodologies Secondary research, both qualitative and quantitative, was used. Some primary qualitative research - interviews and field visits - was used to verify, validate and update the secondary sources as well as to enrich and deepen the research findings. Interviews with selected government officials in administrative positions and with field staff were important inputs for policy research. Interviews with international trade enterprises provided some anecdotes demonstrating the impacts of international trade. The list of people interviewed and sites visited are given in the appendix. Data collection was a crucial part of the research. Data from different sources were used as much as possible but also with great caution. Careful judgement was used in combining and comparing the data from different sources, namely field data, official national data and published international data of international organizations and trading partners.

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Part I: Overview of Lao Trade

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1. 1. Trade trends and fluctuations

Over the last decade trade in the Lao PDR has increased. International trade data shows the merchandise trade in both imports and exports doubled between 1995 and 2004 (see table 1). Table 1: The value of Lao trade 1995-2004 (International Data)

Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Imports 588.8 689.6 408.5 644.6 808.9 689.8 719.4 723.1 810.2 1,056.7 Exports 311.2 320.7 192.1 370.8 462.5 391.1 375.5 385.9 437.4 540.3 Total trade 900.0 1,010.3 600.6 1,015.4 1,271.4 1,080.9 1,094.9 1,108.9 1,247.5 1,597.0

Units: Millions of current US$ Source: DOTS, IMF, 2005. Table 2: Annual percentage changes in Lao trade 1996-2004 (International Data)

Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 Imports 17.1% -40.8% 57.8% 25.5% -14.7% 4.3% 0.5% 12.0% 30.4% Exports 3.1% -40.1% 93.0% 24.7% -15.4% -4.0% 2.8% 13.3% 23.5% Total trade 12.3% -40.6% 69.2% 25.2% -15.0% 1.3% 1.3% 12.5% 28.0%

Source: Based on data from DOTS, IMF, 2005.

Trade revenues have increased but trade still contributes only a small amount to the Lao GDP. This shows that in many respects, the openess of the country’s economy is still low. There are many reasons for this fall in the contribution of trade to the GDP. One explanation is the high growth rate of the economy, high enough that international trade did not keep pace. The Lao economy grew steadily at 5 - 7 percent per year between 1999 and 2003 despite the Asian financial crisis and even between 2000 and 2002 when trade was strongly affected. Another factor was the significant drop in revenue from the country’s two main traditional exports - timber exports (at least formal timber exports) as a result of the 2001 government ban and - coffee exports as a result of the dramatic fall in world prices. Table 3: Major economic indicators from 1999-2003 (International Data)

Indicators 1999 2000 2001 2002 2003 Trade in goods (% of GDP) 57.62 50.56 49.09 42.42 42.51Trade in goods (% of goods GDP) 75.36 67.14 65.32 56.37 56.85Exports of goods and services (% of GDP) 35.96 30.52 29.41 26.92 25.49Imports of goods and services (% of GDP) 44.29 34.89 32.82 27.42 25.27Trade in services (% of GDP) 22.63 14.85 13.14 11.92 8.25GDP (current US$) 1.45E+09 1.71E+09 1.75E+09 1.72E+09 2.12E+09GDP growth (annual %) 7.31 5.81 5.68 5 5GNI per capita, Atlas method (current US$) 290 290 310 320 340

Source: DOTS, IMF, 2004 and 2005.

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External factors are critical to the growth of Lao trade. The Lao economy is highly susceptible to regional and global turbulences because it is small, highly dependent on imports and there is a concentration of both export commodities and trading markets. External shocks result in high inflation rates and affect the country’s capacity to import and export. Exports of electricity fell from US$29.7 million in 1996 to US$20.8 million in 1997 as demand in Thailand fell as a result of the Asian economic crisis. They rose again in 1998 as new capacities came on stream. Timber exports - controlled to protect the sustainability of the industry - also fluctuated according to world prices. The exports slumped from US$124.6 million in 1996 to US$89.7 million in 1997 when the word market price of Indonesian timber also fell.3 Exports of coffee fell from over US$49 million in 1997/98 to US$29 million in 1999/00 due to the fall in world coffee prices. Figure 1: Lao commodity trade (1986-2004)

Trade volume - Lao PDR

0

200

400

600

800

1000

1200

1400

1600

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1986

1988

1990

1992

1994

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1998

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2004

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Valu

e (m

illio

ns o

f cur

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)

Imports from the WORLD

Exports to the WORLD

Total trade volume

Source: DOTS, 2005.

External shocks affect the economy through different channels. After the 1997 Asian financial crisis FDI declined significantly as the main investors were the ASEAN nations - Thailand and Malaysia - and the US, South Korea, the EU - France and the Netherlands - and China, Taiwan, and Australia. The net investment volume decreased from about US$130 million in 1996 to about US$25 million in 2001 and 2002.

3 WTO/ACC/LAO/3 dated 28 March 2001.

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Figure 2: Inflation rate 1992–2002

The inflation rate during the Asian financial crisis skyrocketed to three-digits4 - reaching a 12-month value of 167 percent in early 1999. The foreign exchange rate also fell dramatically, with the Lao kip falling against the US$ by over 100 percent and by 50 percent against the devalued Thai Baht. The kip further drastically depreciated in 1998 and 1999 (see graph below) affecting the trade performance of the country as export values decreased in US$ terms. However, the impacts were limited since 1999 saw a surge in electricity exports, from about US$57 million to $107 million, and in 2000 mineral exports emerged as a major export product increasing from US$767,000 in 1998/99 to nearly US$6 million in 1999/00, according to Lao national data.

4 The reason for the high inflation rate in 1999 was lax macroeconomic policies and a weakening exchange rate as a result of the depreciation of the currencies of other regional economies. Excessive government expenditures, in particular the plans aimed at self sufficiency in rice production through massive investment in the construction and rehabilitation of irrigation systems, which led to the excess demand for construction materials (World Bank, East Asia Update, quarterly issues 2000, 2001, 2000). The sharply tightened macroeconomic policies undertaken from mid-1999 and the pick up of government revenue in 2001 and 2002 brought the inflation rate (on a 12-month basis) down to 9.88 and 11.77 percent in 2001 and 2002 respectively. In 2003, inflation rate rose slightly, to about 16.71 percent (World Development Indicators, WB). This was due to the high demand for construction materials (cement, etc), and also cost push inflation caused by price increases in fuel, transportation cost, water supply, and electricity, which led to the higher cost of production and consequently to price increases. Besides, since tax collection was not as successful as expected, money circulation in the whole economy could not be managed, while money supply increased about 1.2 percent and commercial production for the domestic market could not increase significantly. As a result, supplied commercial goods could not meet high demand for goods, thus, leading to excess demand - so called demand pull inflation (CUTS, 2005, Country Report on Competition Scenario of Lao PDR).

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Figure 3: Exchange rate changes 1992-2002

1. 2. Trade structure

The increase of trade flows in the Lao PDR can be partly attributed to the effects of the trade liberalisation and globalisation taking placing around the world and the fast growth momentum in the region. However, a closer look at changes in the commodity structure confirms that the Lao PDR has gone a long way in strengthening the economy and making the production base more market-oriented.

Data Considerations: The data from the Ministry of Commerce (MOC) - the official source of data on exports from the country - are to some extent quite limited in terms of disaggregation and are not up to international standards. International data, therefore, are useful in supplementing this lack of national data and to provide comparisons which can throw light on the nature of trade – much of which is informal. International disaggregated data are compiled from trade data reported by Lao trading partners to the UN COMTRADE. The data presented in this paper are mirror data, classified in HS 2002, unless otherwise indicated. However, the latest data available are only from 2003. (Thailand and Vietnam had not reported their 2004 trade data to COMTRADE, as of December 2005). The main concern when using mirror data is this Lao export data are reported as CIF (Cost-Insurance-Freight), while imports are FOB (Free-On-Board). However, the nature of Lao exports and logistical features reduce this concern. Many Lao exports are cross-border trade with neighbouring countries, like Thailand, Vietnam, and China, thus no transport cost between the two borders occurs.

For bulk export products - agricultural produce (including coffee but excluding processed foods), garments, footwear, and wood products - Lao exporters bear the transportation costs to the seaports (in Thailand or Vietnam), while buyers pay the sea freight to the destinations. Several studies (Arnold, J., 2003; DTIS, 2005) have

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shown that the transport and logistics cost for Lao exports to Thai sea ports is very high, and in some cases, higher than the sea freight from the Thai ports to the final destinations - major Asian partners: Japan, Korea, and Indonesia. Thus the total difference between the FOB and CIF is not of much of concern. Arnold (2003) quoted total transport costs of between US$1,100 and $1,300 from Vientiane to Bangkok for a 20’/40’ container on a trailer with an empty return. Although the rate decreased to US$925 in 2005 (DTIS, 2005), this cost is still high for the distance of 664 km. Sea freight from the Thai seaports to major destinations is as shown below. The overseas destinations of Lao exports are mainly European countries and Japan. Table 4: Cargo Rates from Bangkok to Selected Destinations

20 foot container 40 foot container Destination Baht US$ Baht US$

Transit time in days

European main ports*

73,000 1,837 139,000 3,498 26-30

New York 103,300 2,599 137,700 3,465 31-32Los Angeles 81,000 2,038 109,400 2,753 22-24Osaka 28,200 710 47,800 1,203 8-10Singapore 16,000 403 30,800 775 3Hong Kong 13,400 337 22,300 561 5Jakarta 19,700 496 30,800 775 7

*: European main ports: Antwerp, Hamburg, Felixstowe, Le Havre, Rotterdam and Southampton - Price includes terminal handling at origin, but not at destination; - Rates do not include customs clearance for exports or shipping line charges. Source: The Board of Investment of Thailand, August 2004

Another concern is that the national data are reported in fiscal years - from October to the end of September in the following year. This is incompatible with the mirror data which are reported in calendar years. However, it is possible to adjust the national data to calendar years (for example for calendar year 2003) by assuming that the export value for October to December, or the first quarter of the fiscal year, is equal to one fourth of the whole fiscal year. With this assumption, the export value (national data) in a calendar year can be estimated based on the data of 3 consecutive fiscal years. For example: EXPORT_2003 = EXPORT_2002/03 + 1/4 * (EXPORT_2003/04 – EXPORT_2004/05).

Data comparisons: There are some noticeable gaps between Lao national export data and mirror data. National data show much higher exports of rattan and bamboo in 2003 - more than US$2 million - than were shown in the mirror data – about US$1 million. As these products are exported only to neighbouring countries - namely Vietnam, Thailand and China - it is possible that the flow into these countries is informal and unrecorded. In contrast, national data of Lao exports of wood and wood products are much higher than shown in the mirror data. The difference is striking. The COMTRADE data is more than double the national data (see tables 5 and 6 below).

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Table 5: Comparison of 2003 export data

HS code Description

2003 exports, combined mirror

data

2003 exports, adjusted national

data

2002/03 exports, national data

14 Vegetable plaiting materials (Rattan and Bamboo)

1,035,079 2,370,912 2,896,835

44 -46 Wood and wood products 149,469,293 66,232,884 67,053,370Source: MOC, COMTRADE, 2005. Unit: US$.

Mirror data show Lao mineral exports to be far below those in the national data. And the national data show gold exports were the main income earners. But in 2003 COMTRADE has no record of any trading partner importing gold from the Lao PDR. It is possible that some gold flowed informally into neighbouring countries, and that Austalian imports from the Sepon mine were missed because they occurred as intra-company transfers. Table 6: Mineral exports (National data)

Lao exports 2001/02 2002/03 2003/04 2004/05 Ores: Gypsum and others 3,903,928 11,376,464 6,332,793 45,342,508 Gold 35,126,442 61,102,735 83,010,893 Total mineral exports 3,903,928 46,502,906 67,435,528 128,353,401

Source: MOC. Unit: US$.

In 2003, COMTRADE data recorded only coal, tin ore and gypsum in the main mineral exports which totalled only about US$14 million, much lower than the US$46 million in the 2002/03 national data. Table 7: Mineral exports (International mirror data)

HS code Minerals Lao exports 2003, mirror data (US$)

Main export destinations

25-27 Oil and Mineral products 5,836,023

2520 Gypsums; anhydrite 1,085,000 Vietnam

2609 Tin ores and concentrates 1,878,716 Thailand: $1,867,716 (the rest to Vietnam)

2701 Coal; briquettes, ovoids and similar solid fuels manufactured from coal. 2,017,934 Thailand

68-70 Stone, ceramic and glass products 18,306 Honduras, France

71 Jewellery and precious metal products 2,170,344 Belgium

72-83 Base metals and their products 6,133,593 Honduras, Austria; some to Thailand.

Total 14,156,026

Source: COMTRADE, 2005.

In general, COMTRADE data has two main shortcomings. Electricity exports are not included in the HS classification, and the recorded mineral exports were much lower than in the Lao data. If electricity exports were included, then the total 2003 Lao exports would be US$467,940,076, much higher than the US$352,624,287 reported by the MOC for 2002/03. If this total were corrected for the low records of mineral exports, then the total Lao merchandise exports would be nearly US$500 million in 2003. (See Appendix)

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Changes in trade structure: Table 8 shows the national export data over the years 1998 - 2005. The major changes were the increased share of mineral exports, the decrease in both the value and the share of coffee, and the increased importance of other agricultural exports. However, the main Lao export products were still electricity, garments, minerals, and wood and wood products. These four main exports made up about three quarters of the country’s exports. Garments alone accounted for about 25 percent of the total. The share of electricity exports currently accounts for about 20 percent of total exports but this will increase rapidly once the ongoing large hydropower projects are completed. Table 8: Lao exports in aggregate classification, from 1998/99 to 2004/05 (National data) Product groups 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 Wood and wood products 62,271,712 71,270,000 80,193,611 74,725,357 67,053,370 71,443,411 72,129,382

Rattan & bamboo 3,074,349 2,896,835 970,656 1,970,591

Minerals (*) 767,000 5,993,248 4,890,667 3,903,928 11,376,464 6,332,793 45,342,508 Gold 35,126,442 61,102,735 83,010,893 NTFPs 2,548,709 4,163,165 6,617,544 8,223,654 5,722,816 3,368,684 3,907,743 Live animals 4,062,409 3,107,908 Coffee 31,164,000 29,030,000 15,303,833 9,773,937 10,915,964 13,021,172 9,599,327 Other agricultural products (**)

11,234,100 5,092,457 5,706,247 7,661,796 2,258,278 13,156,006 19,645,326

Handicraft 3,008,000 5,100,199 3,850,480 2,736,675 12,492,600 1,987,010 2,756,635 Garment 80,500,000 94,370,000 100,139,447 99,937,863 87,115,268 99,134,385 107,582,471 Other industrial goods 22,464,155 1,955,533 16,871,067 17,054,591 7,166,805 10,777,159 11,388,150

Electricity 57,102,000 107,000,000 91,312,939 92,694,000 97,360,000 86,295,857 94,629,997 Others 2,832,608 4,274,603 2,667,723 553,682 Total 271,059,676 323,974,602 324,885,835 322,618,759 352,624,287 374,320,000 455,624,613

Note: (*) This data includes gold for the years before 2002/03. (**) This data includes live animals for the years before 2003/04. Source: MOC. Unit: US$.

1. 3. Direction of trade

Exports: The main export markets for Lao products are Thailand, Vietnam and the EU. The graph below shows the steady increase of EU imports from the Lao PDR, especially after August 1997, when the EU restored its GSP to the Lao PDR. (GSP to the Lao PDR was suspended in November 1995 after some suspicions about Country of Origin violations) and even eased restrictions on Rules of Origin (RO) on textile and garment exports from the country. Exports to Vietnam have increased in recent years but are still much lower than during the 1990s. Formal exports to Vietnam decreased dramatically from 1999 due to the changes in trade policies - Vietnam banned imports of motorbikes from the Lao PDR (in fact this was transit trade). And the Lao PDR banned the exports of logs in 2001. Exports to Thailand after the sharp

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decrease in 1997 and 1998 due to the financial crisis have reverted to a growth trend. Figure 4: Main markets for Lao commodity exports (including electricity) 1986-2004

0

100

200

300

400

500

600

700

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004 Year

Expo

rt Va

lue

(mill

ions

US$

)

EUROPEAN UNIONTHAILANDVIETNAMWORLD

Source: IMF DOTS (2005) and electricity export data from national data. Table 9: Main destinations of Lao exports (commodity exports including electricity) 1995 - 2004

Export destinations 1995 1997 1998 1999 2000 2001 2002 2003 2004

Asia 59.4% 18.8% 43.7% 55.0% 45.2% 41.4% 40.3% 37.9% 36.3% China (Mainland) 2.8% 0.1% 1.9% 1.9% 1.5% 1.8% 2.3% 2.3% 2.1% Japan 1.7% 3.5% 4.8% 2.7% 2.8% 1.7% 1.6% 1.5% 1.3% ASEAN 55.0% 18.1% 40.5% 52.1% 43.1% 38.8% 37.6% 36.0% 34.1% Vietnam 28.2% 0.1% 32.2% 38.8% 24.6% 16.5% 14.7% 12.6% 13.4% Thailand 26.8% 17.9% 7.8% 11.1% 17.6% 21.6% 22.0% 21.6% 19.3% EU 10.9% 41.5% 25.8% 22.1% 26.2% 29.4% 29.9% 28.8% 28.6% France 3.6% 10.4% 6.3% 3.9% 6.9% 9.0% 8.8% 7.7% 8.0% Germany 4.1% 8.4% 5.8% 5.8% 5.3% 6.8% 5.7% 5.4% 5.3% UK 0.3% 7.7% 2.1% 2.7% 1.8% 2.5% 3.5% 3.2% 5.0% US 1.7% 3.6% 5.4% 2.7% 2.3% 1.0% 0.7% 0.9% 0.6% Canada 0.0% 0.0% 0.3% 0.4% 0.4% 0.5% 0.6% 1.0% 1.2%

Source: DOTS, 2005

One of the main characteristics of Lao exports is their concentration in a few markets. In 2004 nearly 80 percent of Lao exports went to three main markets - the EU, Thailand and Vietnam. However if service exports of which international tourism and labour exports are two, then half of the total Lao export revenue comes from Thailand. The Thai and Vietnamese market shares have decreased, while the new markets - China and Canada - are increasing.

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Imports:

The main trading partners for Lao imports are Thailand, China, Vietnam and the EU. Imports from Thailand dominate. From 2000 - 2004, imports from Thailand were constant - at around 60 percent of the total. Imports from China have recently been increasing. Trade with China is particularly important in the north of the Lao PDR. And after the creation of the ACFTA it should grow quickly and will possibly act as a balance - reducing the dependence on Thai imports. Imports from developed economies like the EU are increasing as a result of improved access to facilities like ports and transport services. Increased networking, direct investment and foreign aid could also be reasons. Figure 5: Main trading partners for Lao commodity imports, 1986-2004

0

100

200

300

400

500

600

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004 Year

Impo

rt Va

lues

(miil

ions

US$

)

THAILAND VIETNAM CHINA,P.R.: MAINLAND EU

Source: IMF DOTS, 2005.

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Table 10: Import Origin (Commodity Trade) 1990-2004

Oriigin of Import 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Thailand 48.7% 48.9% 45.0% 82.4% 63.8% 55.9% 60.7% 62.8% 61.4% 61.9% 60.5% Vietnam 11.8% 4.1% 3.7% 6.1% 12.5% 22.5% 11.3% 9.8% 9.8% 7.0% 7.1% Singapore 0.0% 2.7% 2.5% 0.1% 3.4% 4.6% 4.8% 4.0% 4.0% 2.8% 4.0% ASEAN 56.1% 51.6% 88.7% 80.1% 83.2% 77.4% 77.0% 75.5% 71.9% 71.9% China (Mainland) 10.7% 3.7% 3.4% 1.2% 3.0% 3.0% 5.5% 8.3% 8.3% 13.3% 10.3% EU 9.0% 1.2% 1.1% 0.6% 5.0% 4.6% 6.5% 4.4% 5.3% 5.8% 8.0% US 0.7% 0.3% 0.2% 0.1% 0.6% 0.1% 0.7% 0.6% 0.6% 0.6% 0.6% Japan 14.5% 8.3% 7.6% 2.5% 3.3% 3.1% 3.4% 1.8% 2.7% 1.9% 1.5% Finland 0.42% 0.00% 0.00% 0.00% 0.07% 0.15% 0.04% 0.18% 0.05% 0.01% 1.52% France 2.10% 1.05% 0.97% 0.41% 0.95% 0.94% 3.98% 1.18% 1.24% 1.45% 0.99% Germany 0.66% 0.00% 0.00% 0.21% 2.39% 1.18% 0.52% 1.03% 0.57% 0.93% 2.65%

Source: DOTS, 2005. The over dependence on imports from Thailand is mostly the result of the geographic proximity and the similarity in culture and language, and the high transportation costs especially transit costs through neighbouring countries. (For more information see Part III - Transit Trade.) After a peak in 1999 imports from Vietnam now have a smaller share of total imports. The recent agreement on tariff exemption implemented in September 2005 will probably increase imports from Vietnam. With COMTRADE disaggregated data on agricultural trade, it is possible to analyse the potential of Lao agricultural exports, and trade trends and the trade structure in agriculture. .

1. 4. Agriculture - Rising role in export revenues

Raw coffee is no longer dominant in agricultural exports - instead various new agricultural products are breaking into foreign markets and are being recognised by trade partners. Both trade and production are increasing and reinforcing each other. Agricultural production for commercial purposes has been adopted and encouraged. In many parts of the country, cultivation is no longer only for subsistence. With the rural population constituting more than 60 percent of the labour force, commercial agricultural production has room to grow. External factors also boost this trend – as do changes in the policy environment. Cross-border trade is more open and encouraged, and more tariff preferences are offered to Lao exports by major partners like Thailand, China, Vietnam and the EU. The increased export opportunities open to the sector are incentives for farmers and investors alike to specialise in profitable cash crops and improve productivity. Tables 11 and 12 below show exports of agricultural products other than coffee and non-timber forest products (NTFPs). Live animals and vegetable products have increased significantly in recent years - from about US$ 7.7 million in 2001/02 to US$ 22.7 million in 2004/05.

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Table 11: Agricultural Exports 2001-2005 Agricultural Exports 2001/02 2002/03 2003/04 2004/05 Live animals 4,062,409 3,107,908 Coffee 9,773,937 10,915,964 13,021,172 9,599,327 Other agricultural products (*) 7,661,796 2,258,278 13,156,006 19,645,326 Rattan & bamboo 3,074,349 2,896,835 970,656 1,970,591 Other NTFPs 8,223,654 5,722,816 3,368,684 3,907,743 Total 28,733,736 21,793,893 34,578,927 38,230,895 Total excluding coffee 18,959,799 10,877,929 21,557,755 28,631,568

Note: (*) The total Agro-Animal exports in 2001/02 and 2002/03. Unit: US$. Source: MOC reports of different years. In 1992, coffee exports were around 80 percent of the agricultural exports and contributed 7.4 percent to the total exports of the country. Exports of other agricultural products were limited.5 Since then, exports of agricultural products other than coffee have steadily increased. NTFP exports are an important source of income for rural households. In 2001/02 these were more than US$8 million. In 2003/04 exports of live animals and other agricultural produce reached a record of more than US$17 million, higher than revenue from coffee exports (see table below). Changes in the composition of agricultural exports show the increase in exports of other agriculture products - rice, maize, vegetables, fruits and NTFPs. These are critical as they offset the loss of coffee exports due to the slump in the price of raw coffee in the world market. Table 12: Agricultural exports as a percentage of total Lao exports (2001-2005) (National data)

Exports 2001/02 2002/03 2003/04 2004/05 Live animals + other agricultural products (excluding coffee and NTFPs) 7,661,796 2,258,278 17,218,415 22,753,234

Share in total exports 2.37% 0.64% 4.60% 4.99%Coffee 9,773,937 10,915,964 13,021,172 9,599,327

Share in total exports 3.03% 3.10% 3.48% 2.11%Total agricultural exports excluding coffee 18,959,799 10,877,929 21,557,755 28,631,568

Share in total exports 5.88% 3.08% 5.76% 6.28%Total agricultural exports 28,733,736 21,793,893 34,578,927 38,230,895

Share in total exports 8.91% 6.18% 9.24% 8.39%Source: Data provided by MOC, 2005.

Several cross-border trade studies have shown that agricultural exports are largely informal so a comparison between national and international data is useful. The considerable differences between the two data sources confirm some agricultural trade flows are informal. If the mirror data (that recorded by importers) is higher than the Lao national data, then the trade flows out of the Lao PDR were informal. On the other hand, if the mirror data is lower than the national data, then this trade came

5 The Foreign Investment Management Committee (FIMC) – now the Committee for Planning and Investment (CPI), 1995 “Lao PDR in the Greater Mekong Sub-region, 1995” – available at the website of the Embassy of Lao PDR to the United States http://www.laoembassy.com/news/download/mekong.html

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into those importing countries either informally or was unrecorded. However, there is always the possibility - not to be excluded - that export trade from the Lao PDR and flowing into some importing countries is both informal, or not recorded (or reported) at all. In 2003 live animal exports as recorded by importing countries totalled US$2,647,460. The recorded national data total for both live animals and other agriculture exports (other than NTFPs and coffee) was lower at US$2,258,278 - not a big difference but significant none-the-less. Table 13 and Table 14: Lao Agricultural Exports Mirror Data in 2003.

HS code Description Lao exports in 2003,

combined mirror data 01-05 Animals and animal products $2,647,460 06-14 Vegetable products (all agricultural produce from plants) $22,984,484 01-14 Total agricultural exports $25,631,944

Source: COMTRADE

HS code Name Lao exports in 2003

01 Live animals $2,534,925 02 Meat and edible meat offal $3,392 03 Fish and crustaceans, molluscs and other aquatic invertebrates $28,127 04 Dairy produce; birds’ eggs; natural honey; $78,832 05 Products of animal origin, not specified elsewhere $2,184 06 Live trees and other plants; $23,638 07 Edible vegetables and certain roots and tubers $816,958 08 Edible fruit and nuts; peel of citrus fruit or melons $45,468 09 Coffee, tea, mate and spices $13,898,595 10 Cereals $2,219,602 11 Products of the milling industry; malt; starches; inulin $45,846 12 Oil seeds and oleaginous fruits $3,479,790 13 Lac; gums, resins and other vegetable saps and extracts $1,419,508 14 Vegetable plaiting materials; vegetable products nes $1,035,079

Total Agriculture Exports (HS code 01- 14) $25,631,944Source: Compiled both HS and SITC mirror trade data from COMTRADE (2005) by authors.

In 2003 the total agriculture exports were US$25,631,944, according to mirror data. However, the national data for fiscal year 2002/03 (from October 2002 to September 2003) reported a figure of US$21,793,893. Despite the limitations in comparisons between the two data sources, the difference of nearly US$4 million is quite significant.6

6 Estimations by the Bank of the Lao PDR and the IMF often assume CIF as 7 percent of the FOB value. Despite the difference of nearly US$4 million this is not considered significant.

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Agricultural exports with high potential:

The 2003 COMTRADE data show clearly that amongst Lao exports there are some newly emerging agricultural products which will make greater contributions to the country’s overall exports. It is noteworthy that most Lao agricultural exports are still dependent on the proximity of markets (Thailand, Vietnam, China), or the special preferences (e.g. EU, Japan). Potatoes and garlic are the two main vegetable exports. Potatoes have a strong export potential as they are one of the agricultural products offered special preferences by Thailand. However, garlic exports are known as transit trade (re-exports) rather than Lao products. The COMTRADE data shows that the Lao PDR was also an importer of garlic – importing US$3,961,000 worth from Vietnam in 2003. (For more information see Part II - Trade Policy.) Table 15: Lao Agricultural Exports

HS code Exports - 2003 Value Main trading partners Others

070320 Garlic $379,843 Thailand ($360,878)

0701 Potatoes $334,824 Thailand 0704 Cabbages $41,298 Thailand [Others under code 07]

Other vegetables $42,993 Thailand

07 Total edible vegetables and certain roots and tubers

$798,958 Thailand ($755,730)

EU (Austria, France), Canada, Japan,

Honduras 08 Edible fruit and nuts; peel

of citrus fruit or melons $45,468 Viet Nam

($29,000)Thailand, Canada,

France, Austria Source: COMTRADE, UN STATISTICS, Dec, 2005. Coffee is still a major agricultural export, despite the decrease in its share. It is mainly destined for the EU market, utilising the EU GSP - “EBA”. Exports of raw coffee to the EU however are disadvantaged by the high transportation costs. Some coffee exports also go to neighbouring Vietnam, the second highest coffee exporter in the world market and whose demand for raw materials - especially for Lao high quality Arabica - is still below its supply,

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Table 16: Lao Exports of Coffee, Tea and Spices in 2003

HS code Exports -2003 Value Main trading partners Others

0901 Coffee 13,285,531

EU: ($8,883,053) (Poland, Switzerland, France, Germany, Spain)

Vietnam ($1,034,000)

0902 Tea 68,126 France China, Thailand, Czech Rep.

0903 -0910 Spices 554,838 Vietnam ($379,000)

Thailand, Pakistan, Saudi Arabia

09 Coffee, tea and spices $13,898,595 EU, Vietnam

Source: COMTRADE, Dec, 2005. In 2003 cardamom exports were more than half of all spice exports. Cardamom is an NTFP harvested mainly from the forest but some cultivation has now begun to supply the market. As the main cardamom market is Vietnam, it is likely that much of this cross-border trade is informal and the total exports should be higher. Table 17: Lao Spice Exports in 2003

HS code Exports - 2003 Value (US$) Main trading partners Others

091010 Ginger 97,989 Thailand None 090830 Cardamom 293,143 Vietnam ($265,000) Thailand ($28,143) [other code under 0903 to 0910]

Other spices (including pepper) 163,706 Vietnam

Thailand, Pakistan, Saudi Arabia

Source: COMTRADE, Dec, 2005. Thailand is the main market for cereal exports. Rice goes mainly to Vietnam and some to the EU countries, Canada and Thailand. In 2003 maize was exported only to Thailand.

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Table 18: Cereal Exports 2003

HS code Exports -2003 Value Main trading partners Others

1006 Rice exports 471,694 Vietnam ($130,694)

Thailand, Austria, Belgium, Canada, France, Germany

1005 Maize $454,554 Thailand [other under code 10] Other cereals $1,313,354 Thailand ($1,298,894)

China

10 Total Cereals $2,219,602 Thailand

Source: COMTRADE, Dec, 2005. Exports of oil seeds like groundnuts and sesame seeds are of high volume. Sugar cane exports are a major agricultural export from the north of the country to markets in China and Thailand. Exports of sugar cane recorded by COMTRADE to China in 2003 were US$ 778,563 and increased to US$ 885,000 in 2004. However, according to the Cross-Border Trade Study (NERI, 2006), a large volume of the sugar cane imported to China from the northern Lao provinces is in fact informal trade on the Chinese side since Lao sugar cane is traded as “Chinese sugarcane” in China. Thus, the actual sugar cane exports from the Lao PDR were much higher. Table 19: Lao agricultural exports under HS code 12 in 2003

HS code Exports - 2003 Value Main trading partners Others

121299 Sugar cane $1,208,798 China and Thailand 1202 Groundnuts $304,949 Thailand 120740 Sesame seeds $387,966 Thailand ($326,776) China, Italy 120730 Castor oil seeds $15,787 Thailand 121190 Plants and parts of plants

used primarily for perfumery/pharmaceutical/ insecticidal purposes.

$1,381,514 Thailand, China, France, Japan, Korea, Germany

12 Oil seeds; industrial and medicinal plants; $3,343,790 Thailand ($1,719,965)

China, EU, Japan, Korea

Source: COMTRADE, Dec, 2005.

Exports of plaiting materials (mainly NTFPs) are also on the rise. Once again markets for these exports are only close neighbours, especially Vietnam and Thailand. Rattan is an important input for handicraft production and since both Vietnam and Thailand are large handicraft exporters, this demand is likely to be stable.

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Table 20: Lao exports of plaiting materials in 2003

HS code Exports - 2003 Value Main trading partners Others

140120 Rattan $596,922 Vietnam ($489,000) Thailand, China [other under code 14] Other plaiting materials $438,157 Thailand ($424,108) China 14 Total plaiting materials $1,035,079 Vietnam, Thailand

Source: COMTRADE, Dec, 2005. Lao agricultural exports have great overall potential. The economy is still largely agriculturally based and with agriculture contributing half of the GDP any diversification of agricultural products is the most practicable way of quickly and steadily shifting towards export-led growth. Table 21: Change in the structure of Lao economy

Year 1999 2000 2001 2002

Agriculture, value added (% of GDP) 52.54 51.25 50.35 48.57

Industry, value added (% of GDP) 22.89 23.61 24.65 25.94

Services, etc., value added (% of GDP) 24.57 25.15 24.99 25.5

Source: DOTS, 2005.

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Part II: Trade Policy

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2. 1. NEM - initiating the reform of trading system

In 1986, the Government successfully introduced the NEM to broaden the economy’s exposure to market forces. It is built around the three pillars of macro-economic stability and fiscal adjustment; private sector encouragement; and public sector reorganization. The adoption of the “one market” principle leading to to the abolition of price controls paved the way for other reforms in the trading system. Privatisation and the conversion of the SOEs to other forms of ownership7 as well as the “Disengagement Plan”8 released the great potential of the private sector, especially in international trade participation. The rationalisation the network of trading enterprises and the eventual dismantling their foreign trade monopoly of many commodities was another boost for the country’s growth and increase in exports and imports. In 1993, the Lao government began to reduce the taxes on trade. However, major reform with respect to the tariff structure took place in 1995 when import tariffs were reduced to moderate levels - the highest being only 40 percent instead of 150 percent - and the tariff schedule comprised only six duty bands9 instead of the previous twelve. Export taxes were eliminated in 1994 and 1995 and only maintained on some exports of natural resources like wood, minerals and unprocessed NTFPs.

2. 2. Medium and Long-term Development Strategies:

The NGPES is the country’s comprehensive framework to achieve sustained economic growth and social development while ensuring poverty eradication and equity in the long term. The NGPES - the country strategic framework for growth and development - sets out strategic priorities for long-term development. These include enhancing market linkages and trade facilitation, and promoting economic cooperation with all partners and countries. The development of the private sector with an emphasis on those export-oriented sectors with a comparative advantage was also affirmed. This comprehensive development framework is translated into Five-year National Socio-Economic Development Plans, and eight government priority programs of which commercial production and foreign economic relations are two.

7 Decree No. 17 of 1990 on the Conversion of SOEs to Other Forms of Ownership laid out the first guidelines for privatisation in the Lao PDR. The Decree provided that most SOEs were to be transformed into enterprises under other forms of ownership, through leasing, sale, joint ownership, or contracting with workers' collectives; all by open tendering. (Country Report on the Competition Scenario in the Lao PDR, 2005) 8 Which emphasised: (1) privatising most large SOEs except those of ‘strategic’ significance, such as enterprises deemed necessary for the nation's security or economic and social health, such as utilities (electricity and telecommunications) and educational facilities; (2) closing heavily loss-making SOEs that could not operate without subsidies and loans; and (3) strengthening the finance of those that remained under state control. 9 The six duty bands are 5, 10, 15, 20, 30 and 40 percent.

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2. 3. Current trade policy:

2. 3. 1. Lower tariff levels:

Lao import tariffs are generally categorized in two groups: imports from countries with special arrangements with the Lao PDR which are subject to the arranged tariff rates, and imports from counties which are MFNs in the Lao PDR subject to normal tariffs. The current normal (MFN) tariff schedule has six rates: 5, 10, 15, 20, 30 and 40 percent which have been unchanged for several years. The 2005 un-weighted average tariff in the HS 8-digit is approximately 11 percen.t10 The trade-weighted average tariff for fiscal year 2003/04 is only 7.8 percent.11 A bias against manufacturing exists as the rate is higher in manufacturing than in agriculture (Fane and Khamlusa, 2005). (See the list of tariff rates by HS 2-digit in Appendix B.) The 5 and 10 percent duty rates apply to imports of raw materials, agricultural inputs, capital equipment and essential consumer goods, such as basic foods and pharmaceuticals. While most product groups are now under the tariff rates below 20 percent, some high tariff rates still apply to agricultural products that can be produced domestically or to luxury consumer goods. High tariff rates of 30 or 40 percent are applied mainly to some unprocessed agricultural products (meat, vegetables, fruits and nuts, coffee, tea and spices); beverages; tobacco; wood and products of wood, manufactures of straw; motor vehicles; some furniture. Cosmetics and most electrical machinery and equipment have tariff rates of 20 percent. As in many countries, the principle underlying the tariff schedule is to apply the lower rates of duty to raw materials used by domestic producers, and to use the higher duty rates to protect domestic producers against import competition (Fane, 2003). Export tax is now imposed only on some groups of products like wood products, mining products, NTFPs and electricity. In 1995, export tax on cultivated agricultural products (except wood grown for manufacturing), domestic (not wild) animals, meat and animal parts, processed products of wood and NTFPs was eliminated. Currently, raw NTFPs are subject to export duty of rates ranging from 2 to 50 percent if they are of rare species, but the rate for processed NTFPs is only 3 percent and for semi-processed it is 10 percent12. Wood products are subject to export tax from 5 to 30 percent. Export tax may also be collected as part of the royalties depending on the contract between the exploiting company and the authority. Royalties are collected on the electricity generated by hydropower projects, timber and minerals. Electricty royalties are from 5 to 15 percent, payable on the gross revenue. NTFPs royalties on natural forest harvesting are set by the Ministry of Agriculture and Forestry (MAF) and have long been seen as lower than the international market price (UNIDO, 2002). 10 10.99 percent by the authors’ calculation based on the data provided by the Customs Department, Ministry of Finance in 2005. 11 Author’s calculation based on the import statistics at HS 8-digit provided by the Customs Department, MOF 2005. The import data includes imports under concessional rates and exempted. Note that this estimate is lower than Fane and Khamlusa (2005)’s estimate of 11.3 percent for 2004 which used data of the dutiable imports only. 12 Advice from the Minister of Finance No. 230/MOF dated 4 March, 1995.

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The removal of tariff barriers is very important for exports, however some provincial policies still impose certain export taxes to gain specific objectives - perhaps provincial self-sufficiency or price control. Examples include the export tax on live animals - 5 percent on the export of buffalo from Nonghet, Xieng Khouang to Vietnam (Ikelberg, 2002) - and on some agricultural commodities - Luang Namtha province13 . A maximum rate of 5 percent is collected in some provinces. Figure 6: Tariff distribution

Concentration of MFN tariffs

49.66%

31.41%

0.09%

8.73%

4.39% 5.71%

0%

10%

20%

30%

40%

50%

60%

Tariff rate at 5% Tariff rate at10%

Tariff rate at15%

Tariff rate at20%

Tariff rate at30%

Tariff rate at40%

MFN rates

Con

cent

ratio

n of

a ta

riff r

ate

(per

cent

age)

Source: Author’s calibration from the 2005 data (tariff lines are HS 8-digit) provided by Customs Department, Ministry of Finance.

2. 3. 2. Wide range of exceptions for duties:

Exemption from duty is given to a wide range of imports including raw materials and intermediate products for export production or for re-export (after further processing). Exemptions and tariff reductions are also applied on an individual basis to imports of equipment, machinery and vehicles for use in large-scale development or investment projects which are expected to have significant favourable socio-economic effects for the country.

13 Report “Agricultural Marketing in Lao PDR”, MAF 2002, as part of the project TCP/LAO/0065

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Data reported by the Customs Department of the MOF shows that 29 percent14 of the total import duty payable in the fiscal year 2003-04 was foregone because of exemptions and reductions. This sizable exemption and reduction resulted in the ratio between duty paid and customs value of the total imports being only 5 percent. This means the actual tariff barrier is not high. The Customs Department also recorded large percentages of foregone export: royalties - 91.1 percent in 2003/0415. Thus the royalties paid were only about 1 percent of the customs value of total exports.

2. 3. 3. Import - export participation

There are two types of importers: business and specific purpose. Import businesses are those enterprises registered to engage in importing. Their business license application must include a list of goods specified for import.16. Specific purpose importers are those registered businesses (other than import businesses) which have the right to import equipment, machinery and raw materials for direct use in their production or business17. Exporters are all those individuals or juristic entities holding a business license to operate an export business. Exporters can export of all kinds of goods, except those controlled by the state which require an export license. Although more actors than ever before are engaging in import and export activities controls on their participation in trade still exist in certain sectors, at least at the provincial level. Restrictions of the number of trade licenses have been be used to serve other objectives - promoting local enterprises, stabilising prices and supplies for local consumption, or encouraging internal provincial trade18. As the number of trade (import-export) licenses is limited, if a small trader wishes to use a registered trader’s quota then he must pay a commission of about 2 - 3 percent of the traded value19. This practice creates an income for those with import/export permission and any price increase is transferred to the final consumers.

14 Calculation is based on the data of the fiscal year 2003-04, provided by Customs Department, MOF. 15 Report “Agricultural Marketing in Lao PDR”, MAF 2002, as part of the project TCP/LAO/0065 16 An importer is defined in the PM Decree on Import and Export Management No 205/PMO of 11 October 2001: “Importers includes an individual or juristic entity who has registered as a business according to this decree. Imported goods of these business entities are for sale within the Lao PDR.” (Unofficial translation version) 17 Article 19 of PM Decree on Import and Export Management No 205/PMO of 11 October 2001 states “a specific purpose importer has the right to import equipment, machinery and raw materials which will be used directly in production or business based on plan adopted by the related sectors”. 18 Ikelberg, J., 2002: “The government control the number of traders by issuing a limited number of trade licenses (in Xieng Khouang)”; “there would be a problem in letting private traders in, as it complicates the task of controlling the price”; “The Department of Commerce intends to promote private enterprises within Xieng Khouang province through promoting provincial trade and restricting imports from other provinces of products already produced in Xieng Khouang”. This quotation serves only as an example. There is evidence from other provinces as well. 19 The commission rate of 2 – 3 percent has been reported by a number of studies including the “Cross-border trade study of Lao PDR”, DAN, 2004.

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2. 3. 4. State controls over import-export and licensing requirements:

Import and export goods can be categorized into three general groups: prohibited goods, controlled goods, and general goods not requiring licenses. Controlled goods are subject to two types of licenses. Those strictly restricted are subject to import or export licensing from the MOC or the provincial trade office; and others under the line ministries need import and export licenses which are seen as “technical certification” for various reasons 20. For those goods not subject to import authorization or technical approval, the import volume is unrestricted. However, for the purpose of planning, importers must submit their import plan for each product category six months or one year in advance to the provincial trade unit and the “One Stop Service”21. On each import the amount is deducted from the planned total. The import and export of only those goods that would be damaging or dangerous to the economy, socety, politics, peace, safety and the traditions of the country is prohibited. Licensing is regulated by the Prime Minister’s Decree on Import and Export Management No 205/PMO of 11 October 2001. The list of goods to which particular provisions in the decree apply is updated annually by an MOC Notification. The current list of imported goods subject to import licenses, either licenses from the MOC or the provincial trade offices or technical approval from the line ministries is quite extensive. Goods requiring import permission from the MOC or the provincial trade departments are petroleum and gas; vehicles and spare parts; cement; steel construction steel bars; and processed precious mining products22. The goods subject to technical licensing from other line ministries are notified year by year by the MOC. The list of imported goods requiring technical certificates in the years 2002 - 03 and 2003 - 0423 are all kinds of prepared foods (either processed or non-processed), live animals; seeds and breeding animals; meat and animal or fish offal; agricultural produce as raw factory materials, agricultural products; all raw or semi-manufactured products used in manufacturing; fertilizers and pesticides; entertainment products like video cassettes, CDs, computer games; sculptures and paintings; drugs and cosmetics; chemicals; all kinds of vehicles; mineral products; and primary products of precious minerals. It can take a long time to obtain all the technical approvals required this depends on coordination between the line ministries - there may be up to three (even four24) agencies involved. 20 This observation is based on the content of the two regulations: PM Notification on Procedures of Import-Export and Circulation of Goods in the Country, No. 1691/PMO of 7 October 2004 and MOC’s Notification No. 0202/MOC.FTD dated 14 February 2003. 21 According to the PM Notification on Procedures of Import-Export and Circulation of Goods in the Country, No. 1691/PMO of 7 October 2004 22 “An annual import – export balance requirement is still issued to the provinces but serves only as an “indicative plan” and is non-binding”, p. 17 in IMF 2005. 23 Notifications No. 284/MOC and No. 285/MOC of 17 March, 2004 are for 2003-04. Notification No. 0202/MOC.FTD dated 14 February 2003 is for 2002-03. 24 For example: Fluorine (HS 28.01) as specified in NTMs list published on the ASEAN Secretariat website. The import of fluorine requires technical approval from four concerned agencies: (1) Department of Intellectual Property, Standards, and Measures, STEA (for chemicals which have

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The only export goods subject to MOC licensing are minerals, but many more are subject to technical approval from the line ministries including diamonds, minerals, seeds and breeding stock, animals and animal products, sawn wood and wood products, forestry products, and other products as notified by the line ministries. Most import licenses come under “technical certification” from the line ministries. It is possible that these measures are for quality control, safety, animal quarantine, and phyto-sanitary and sanitary measures. However, until 2003, the MOC or line ministries had a blanket provision to impose import licensing control on any product that they might wish25. With the progress of AFTA integration, the Lao PDR has published on the ASEAN Secretariat website the non-tariff measures (NTMs) of which 214 provincial NTMs are specified mostly as HS 4-digit, 15 percent of which are on agricultural products, 1 percent on fuels, 23 percent on other minerals, 43 percent on chemicals (including fertilizers), 14 percent on iron and steel, and 4 percent on other manufactures. However these provincial NTMs are administered by only the Trade Department of Vientiane Capital. Other NTMs may exist in the provinces but have not yet been reported. A number of existing non-trade barriers (NTBs) will have to be reviewed in the context of AFTA (and maybe WTO) - the licensing requirement for certain goods (e.g. pharmaceuticals and fertilizers), enterprise-specific restrictions (e.g. motorbikes), differentiated turnover tax rates discriminating against imports (broad categories of products), excessive pre-shipment inspection charges (applied to most goods at 1 - 6 percent of the FOB value).26

2. 3. 5. Quantitative Restrictions:

Despite the clear policies on licenses and licensing procedures which are seen as progress towards a more liberalized trade, quantitative restrictions (QRs) are still used extensively to protect domestic industries. QRs are currently applied to 45 percent of imports (fuel and lubricants, construction steel, cement, rice, motor vehicles, electricity, minerals, tobacco and timber products)27. Many export goods are also controlled by quotas. The existence of nationally negotiated quotas resulting from provincial policies affects the size of trade between provinces, and to some extent constrains international trade as well.28 In some cases, the number of traders is restricted by the province while there are no official restrictions on the volume of product traded29.

negative impact on environment); (2) Department of Food and Drugs, MOH; (3) Department of Industry, Ministry of Industry and Handicrafts; (4) Trade Department of Provinces, Vientiane Capital, and Special Zone. 25 MOC Notification No 0202/MOC.FTD dated 14 February 2003 “List of Goods subject to licensing by the MOC and technical certification from the related agencies prior to import and export for the fiscal year 2002-03”: Goods subject to MOC import licensing include “some products that need to be protected in each period such as cement, steel bars and others”; export goods subject to technical licensing from line ministries include “and some products that controlled on export in each period by the line sectors”. 26 “Country Report on Competition Scenario of the Lao PDR”, 2005 27 “Country Report on Competition Scenario of the Lao PDR”, 2005 28 Please refer to the part “Other Policies and the Inconsistency” in Section 4.

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2. 3. 6. Allocation of import quotas:

Allocation of import quotas to import-export companies is at the provincial level. The MOC issues an indicative plan to each province which then gives allocations to the individual provincial import-export companies based perhaps on the annual plans and previous year’s operations of the companies. However, since this is at the discretion of the line ministries, the purpose of these quotas is ambiguous. Are they to encourage import-substituting industries or are they for the protection of some state enterprises? Since only import-export companies are allocated import quotas these companies will later redistribute their quotas to their customers. This practice gives some monopoly or oligopoly in trade to the companies and results in higher domestic prices.

2. 3. 7. Price Control

Although price controls have been removed in principle, in practice some retail price control still exists. Rice is an example. The Department of Commerce in most provinces issues a floor price for buying paddy from farmers and a ceiling retail price for rice in urban markets, though in fact these prices are not effectively enforced30.

2. 3. 8. Customs and procedures:

Administrative reforms in customs are crucial to the effective implementation of trade policy. The Lao customs reform process has made some notable progress. The introduction of a “single administrative document” (SAD) instead of the 16 different forms required in the past has simplified and clarified declaration processes. The ASEAN 8 digit classification system has been applied since 2002. However, there are still a lot that needs to be done in order to harmonise the Lao customs with other ASEAN members and with international practices.

2. 4. Behind-the-border policies:

While tariff and non-tariff measures are of importance in trade, governments in fact use behind-the-border measures to protect domestic production, limit imports of some products, and give special treatment to certain economic actors.

2. 4. 1. Domestic Tax Policy

Protectionist and import-substitution policies are also displayed in various domestic taxes and in the definition of the taxable base. In the Lao PDR domestic tax is levied on the import value inclusive of the duty payable31. The cumulative effect of the various taxes makes the price of imported goods higher than similar domestic goods

29 An example is Nonghet district of Xieng Khouang province. In 2001 the district began to control the trade of livestock to Vietnam by giving permits to certain local traders. 30 “Agricultural Marketing in Lao PDR”, MOAF 2002 as part of the project TCP/LAO/0065 31 The excise tax is levied on the value of imports inclusive of the duty payable. The turnover tax is levied on the value of imports, inclusive of customs duty and excise tax.

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or causes trade distortion for those receiving exemptions32. Thus the overall tax rate can be very high. The domestic taxes which have these effects are turnover tax, excise tax, and additional excise tax. Excise tax is imposed on a wide range of products including luxury goods, vehicles and some controlled products like fuel. The bias against imported goods is further aggravated by the different tax rates for imported and domestic goods. According to the MOF Notification No. 1061/MOF of 13 June 2003, the “additional excise tax” applied to some goods has higher rates on imported goods than the same domestic goods33. The amendments to 1994 Tax Law in October 2002 introduced differentiated turnover tax rates for imported and locally produced goods - up to 10 percent higher turnover tax rates for imported goods. As part of the budget planning, in the fiscal year 2003/04, the increase of petroleum taxes was taken up34. For year 2004/05, the tax measures employed was a reversal of the turnover tax reduction and rationalization of excise duties enacted in 2002/03. The new Tax Law which comes into effect in late 2005 no longer includes additional excise tax but the discrimination against imported goods in the turnover tax rates still exists.

2. 4. 2. The preparation of a Value-Added Tax (VAT) law and the scenario

The government is committed to the introduction of a single rate VAT to completely replace the turnover tax in 2006/07. The new VAT is a broad-based tax, levied at multiple stages of the production distribution chain, with a rebate system which means there will be no double tax on any value transaction. In order not to erode the revenue base and even to offset the loss of import duties due to AFTA implementation, VAT has been set at a single rate of 10 percent.35 The current turnover tax applied at different points of sale in the Lao PDR is not much different to a VAT system36. However, turnover tax is collected from only about 5 percent of businesses – the large tax payers. The small tax payers in fact pay taxes based on negotiated rates and not on accounting records. If VAT is implemented, all tax payers, whether large, medium or small will be treated equally and there will be fewer gaps for tax evasion. At the same time, exporters will benefit as only the value added in the Lao PDR is taxable as opposed to the current practice of levying turnover tax on imported inputs.

32 Exemption and tax reduction is applied on an extensive scale. See the part on Exemption. 33 The difference is large, between 1.5 times and up to 10 times. For instance, additional excise tax on spirits and alcoholic beverages of strengths exceeding 15% vol. for domestic products is 500 kip/litre, while for imported products it is 5,000 kip/litre. 34 This was considered one of the vigorous government efforts to mobilize taxes in 2003/04. Tax revenue increased from 8.1 percent of GDP in 2002/03 to 8.9 percent of GDP in 2003/04, a significant additional tax effort of 0.8 percent of GDP. This led to a modest in total revenue of 0.1 percent of GDP, from 11.1 to 11.2 percent in GDP as there were offsetting declines in collections from timber royalties, non-tax revenue and import tax revenue due to AFTA tariff reductions in that year. (IMF, 2004 and WB, Feb 2005) 35 Vientiane Times 21 July, 2005. “Laos enters the AFTA in 2008 the national income from the import of goods will be reduced by about 0.7 percent of GDP. The income from VAT will replace the loss of import duty at that time,” Director General of the National Tax Department. 36 Comments from tax experts in the Lao PDR

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2. 4. 3. Policies that distort competition:

Bias against domestic as opposed to foreign invested producers was the case before the new 2004 Foreign Investment Law. Under the old regulations, foreign invested enterprises producing for export received tax incentives which included exemptions for imports of working capital, a concessionary rate (1 percent) for imports of raw materials used for export production, a reduction of import duty for import-substituting production, and reduced profit tax at only 20 percent instead of the normal rate of 35 percent. This policy put domestic producers at a disadvantage in producing for export. With the new Foreign Investment Law, foreign investors now will only receive more concessions than domestic investors if they invest in promoted areas and sectors. The 1999 Manufacturing Industry Law states that the state will issue customs privileges to support the manufacturing and handicrafts industries, but mainly the top priority state factories. It implies that individual SOEs will be privileged compared to smaller but emerging companies especially those in the secondary industry sector (UNIDO, 2002). Other biases exist in the wood industry where SOEs are privileged in the allocation of logging quotas, logging sites and kinds of wood37. Logging in the Lao PDR is in fact carried out by provincial SOE-like companies as all logging is directly under the technical and commercial planning, direction, supervision and monitoring of the provincial governments (UNIDO, 2002). Despite the PM Decree No 60/PM dated 13 October 2001 which states that logs shall be sold by competitive bidding under the responsibility of MAF this is still not fully implemented. Foreign investment in the wood industry is regulated by the annexes to the PM Decree No. 46/PM dated 23 March 2001 specifying that wood processing activities of ISIC 2020-202938 activities are all restricted and no licenses will be issued for such activities, unless “plantation wood” is used, in which case they will be promoted. There is therefore a distinction between being either promoted or closed based on the use of “plantation” or “natural” forests. The assumption is that the underlying reason for this distinction is the prevention of over-logging. But there are inconsistencies. Foreign investment in saw milling (ISIC 2010) - where the biggest Lao production overcapacity is found - is not banned. If no licences are issued for high value-added wood processing, existing sawmills are prevented from the production of more high value-added products and the establishment of new, more efficient enterprises is unlikely.

2. 4. 4. Other Policies and Their Inconsistency:

Some provinces apply restrictions on certain imports from other provinces - in particular on those goods which they can produce themselves.39 This is to promote

37 “Country Report on the Competition Scenario in the Lao PDR”, draft for comment, available on CUTS-International website. 38 ISIC is the International Standard Industrial Classification of All Economic Activities. ISIC code 2021 is used for the following activities: manufacture of veneer sheets; manufacture of plywood, laminboard, particle board and other panels and boards 39 Ikelberg, UNDCP, 2002. p. 19: “The Department of Commerce intends to promote private enterprises within Xieng Khouang province through promoting provincial trade and restricting import from other provinces of products already produced in Xieng Khouang.”

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certain provincial production or business sectors. This goes against the nationwide policy of enhancing free movements of goods and services within the country. Specifically, the PMO Notice 1691/PMO of October 7, 2004 simplifies export and import licensing arrangements and enhances free movements of goods and services within the country. The PM’s Order No. 12/PM of 22 September 2004 instructed the cancellation of all informal inspections, fees and service charges in moving of goods on all routes. The Instruction of Prime Minister No 1 2001 on decentralisation stipulated that the province functions as the strategic unit, the district as the planning-budget unit and the village as the implementation unit. Thus the province should have more control over economic and trade management. However, provincial strategies and implementing policies have not always been in line with the national guidelines.level. Moreover, harmonisation between provinces in planning and management does not always happen. Provincial protectionist policies mean quotas are imposed on external provincial trade and even though these are negotiated trade with other provinces could be restricted40.

2. 5. Multilateral Trade Policy:

2. 5. 1. The ASEAN Economic Cooperation

The 2003 Declaration of the ASEAN Concord II (the Bali Concord II) identified economic integration as one of the three pillars41 for the establishment of the ASEAN Community. Every effort is being made to institute mechanisms and measures to strengthen the implementation of existing economic initiatives - AFTA, the ASEAN Framework Agreement on Services (AFAS) and the ASEAN Investment Area - and to accelerate regional integration in the priority sectors; to facilitate movement of business people, skilled labourers and talents; and to strengthen the institutional mechanisms of ASEAN, including the ASEAN Dispute Settlement Mechanism. At the centre of AFTA is the CEPT Scheme, in which all member states agreed to reduce tariffs to 0 – 5 percent within a 10 year time frame.42 Import duties are set to be eliminated by 2010 for the ASEAN-6 and by 2015 for the CLMV43. By September, 2005, 98.99 percent of the products on the CEPT IL of the ASEAN-6 were in the 0 - 5 percent tariff range; with the elimination of tariffs on 64.19 percent of these products, thus the average tariff is now down from 12.76 percent in 1993 to

40 An example is the case of Xieng Khouang from Ikelberg, J., 2002. 41 The three pillars are political and security cooperation, economic cooperation and socio-cultural cooperation. 42 The 1992 Agreement on Enhancing the ASEAN Economic Cooperation originally agreed on a 15-year timeline for the establishment of AFTA. At the 1995 ASEAN Summit, it was agreed to accelerate the CEPT Scheme with an amended timeline of 10 years. The CEPT scheme was also expanded to include all manufactured products, including capital goods, and agricultural products, progress from the exclusion of unprocessed agricultural products in the original CEPT Agreement in 1992. 43 Import duties on products in the ILs of Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand shall be eliminated not later than 1 January 2010. Import duties on products in the ILs of Cambodia, the Lao PDR, Myanmar, Vietnam shall be eliminated not later than 1 January 2015, with flexibility however being accorded by allowing the duties on some sensitive products to be eliminated not later than 1 January 2018.

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1.87 percent. The CLMV countries have moved 87.81 percent of products onto the IL with tariffs on 71.05 percent of these products already in the 0 - 5 percent band.44 By September, 2005, 98.99% of the products on the CEPT IL of the ASEAN-6 had been brought down to the 0 -5 pecent tariff range. Tariffs have ben eliminated on 64.19 percent of these products, thus the average tariff of the ASEAN-6 is now down from 12.76 percent in 1993 to 1.87 percent. Box 1: The ASEAN CEPT Scheme The CEPT objective is to reduce tariff rates among member countries to 5 percent or less. The CEPT Product Lists are a compilation of the products which member countries have offered to include. Since the exchange of CEPT concessions is based on reciprocity, the size of the IL of a member country indicates those concessions that it would be eligible to receive.

• The IL includes all products currently subject to CEPT rates.

• The Temporary Exclusion List (TL) includes products that are deemed sensitive by each member country but that are to be moved to the IL according to agreed schedules. Products on this list will not enjoy any concessions until they are brought into the IL.

• The Sensitive List (SL) includes products that are considered highly sensitive to the countrym and will be moved to the IL within a longer time frame.

• The General Exclusion List (GL) includes products that are excluded from the concessions for reasons of public safety, public health, and culture. Most products in the GL are prohibited imports.

Under the CEPT Scheme, 98 percent of all the tariff lines in the IL will be from 0 - 5 percent by 2003 for the six original members, by 2006 for Vietnam, by 2008 for the Lao PDR and Myanmar, by 2009 for Cambodia. All sensitive products shall have final tariff rates of 0 - 5 percent with some flexibility. The time frames for these products are as follows:

Member states, with the exception of Cambodia, the Lao PDR, Myanmar and Vietnam, shall phase in sensitive products to the CEPT Scheme beginning 1 January 2001 but no later than 1 January 2003 and shall complete their phasing in by 1 January 2010.

• Vietnam shall phase in sensitive products to the CEPT Scheme beginning 1 January 2004 but no later than 1 January 2006 and shall complete the process by 1 January 2013. In the case of sugar, Vietnam shall complete the phasing in by 1 January 2010.

• The Lao PDR and Myanmar shall phase in sensitive products to the CEPT Scheme beginning 1 January 2006 but no later than 1 January 2008 and shall complete the process by 1 January 2015.

• Cambodia shall phase in sensitive products to the CEPT Scheme beginning 1 January 2008 but no later than 1 January 2010 and shall complete the process by 1 January 2017.

• Member states shall phase in highly sensitive products to the CEPT Scheme beginning 1 January 2001 but no later than 1 January 2005 and shall complete their phasing in by 1 January 2010.

(Protocol on the Special Arrangement for Sensitive and Highly Sensitive Products Singapore, 30 September 1999)

44 Joint Media Statement of the Nineteenth Meeting of the ASEAN Free Trade Area Council, 27 September 2005, Vientiane, Lao PDR.

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The Lao PDR joined ASEAN and AFTA in 1997 and started to implement CEPT in 1998. The agreed time frame is to include 98 percent of the tariff lines in the IL at tariff rates of 5 percent or less by 2008, and at zero tariff by 2015. In 2001, the Lao PDR had 47 percent of its tariff lines in the IL, 48.32 percent in the TL, 2.5 percent in the SL and 2.1 percent in the GL. In 2005 8,556 out of 10,687 total HS 8-digit tariff lines - about 81 percent of the total - were in the IL. Those on the TL had decreased to only 13.73 percent. (See tables 11 and 12). The SL and GL have not in fact changed, but use the HS 8-digit classification produces a small change in their percentages in the total of all tariff lines. In the 2005 Lao IL, 7,270 out of 8,556 tariff lines (or 85 percent) are between 0 - 5 percent. The simple average tariff rate (non-weighted) of goods in the IL is 4.05 percent45, a decrease from the 2001 average of 7.5 percent46. Table 22: 2001 CEPT List

Country Inclusion List Temporary Exclusion List

General Exception List Sensitive List Total

ASEAN-6 Total 43,675 245 377 150 44,447

Percentage (%) 98.26 0.55 0.85 0.34 100

The Lao PDR 1,673 1,716 74 88 3,551

Percentage (%) 47.11 48.32 2.08 2.48 100

CLMV Total 12,005 8,415 452 210 21,082

Percentage (%) 56.94 39.92 2.14 1.0 100

ASEAN TOTAL 55,680 8,660 829 360 65,529

PERCENTAGE (%) 84.74 13.40 1.28 0.55 100

Source: http://www.us-asean.org/afta.asp

Table 23: 2005 Lao CEPT Lists Country Inclusion List Temporary

Exclusion List General Exception List Sensitive List Total

The Lao PDR 8556 1467 203 461 10687

Percentage (%) 80.06 13.73 1.90 4.31 100

Average tariff rate 4.05 % 6.80 % 27.49 % 33.36 % 6.16 %

Source: Calculation by the author based on the data provided by the Lao Customs Department, MOF In 2004 and 2005 CEPT implementation was delayed because the government was slow in issuing the enforcement act. Those importers who paid duty at MFN rates instead of CEPT rates for qualified imports at this time will be able to claim refunds the deduction of duties payable on future consignments.47

45 Author’s calculation based on the CEPT schedule of the Lao PDR updated in 2005. 46 According to WT/ACC/LAO/3 “Memorandum on the Foreign Trade Regime”, 28 March 2001, p.89 47 According to the Customs Office, these imports are very small and the claiming back of excess duty paid is likewise small.

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Lao transfers from the SL to the IL will be implemented from 2006 (however some delays are expected since the legal enactment was issued late). Transfers from the TL to the IL have been taking place since 2002 and will be completed by 2008 (for manufacturing products by 2005). With the PM Decree 16/PM of February 18, 2002, 425 additional HS-6 tariff lines were transferred from the TL to the IL. However, the substantial transfer is in 2006. Under the AFTA agreement, in order for the Lao PDR to be eligible for the preferential tariff of 20 percent or less from another ASEAN country for a particular item, then that particular item must be included in its IL and the rate applied must also be 20 percent or less. Although all the tariff lines in the Lao IL have already been reduced to less than 20 percent, in order to be eligible for the export of more products at concessional rates, the Lao PDR must shift more products from the TL to the IL. ASEAN Integration of Priority Sectors:

The ASEAN Framework Agreement for the Integration of Priority Sectors was signed on 29th November 2004. Eleven sectors were selected to accelerate CEPT implementation as well as deepening the cooperation. All CEPT tariffs in relation to products of these priority sectors (covered by the individual ASEAN Sectoral Integration Protocols), other than those in the sensitive, highly sensitive and general exception lists, will be eliminated by 1 January 2007 for ASEAN-6 and 1 January 2012 for CLMV. The eleven priority sectors are:

• agro-based products; • air travel; • automotives; • e-ASEAN; • electronics; • fisheries; • healthcare; • rubber-based products; • textiles and apparel; • tourism; • wood-based products.

The package for the integration of the priority sectors includes liberalisation of trade in goods, trade in services, and investment. A clear work programme for the removal of NTMs that are barriers to trade was established by 31 December 2005. Services liberalisation for the priority sectors has been brought forward to 2010. Investment in these sectors is promoted by eliminating restrictive investment measures ahead of other sectors. Manufacturing is promoted through the establishment of a network of ASEAN free trade zones to facilitate outsourcing activities beginning in 2005. Moreover, special incentives will be applied for CMLV to promote and facilitate the relocation of investment from the ASEAN-6 to CLMV - especially for labour intensive manufacturing activities.

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2. 5. 2. AISP - ASEAN Intergrated System of Preferences:

In addition to tariff lines with strictly reciprocal preferences, AISP was initiated to accelerate integration of the CLMV countries into the regional trade market. The original ASEAN members agreed to extend tariff preferences to new members beginning 1 January 2002. AISP is implemented on a bilateral basis amd is based on products proposed by the CLMV countries each year. The Lao PDR has been offered AISP from Thailand, Malaysia, Brunei and the Philippines. Thailand has been offering tax privileges at 0 - 5 percent tariff for some Lao products since 2002. Requests from the Lao PDR for AISP preference have based on the increase in the number of products eligible. In 2002 only 26 products were eligible - in 2004 186 products were eligible and by 2005, this list had expanded to 300 products in HS 8-digit. These current products fall into one of the nine following groups:

• fruits and vegetables

• coffee, tea and spices

• tobacco and manufactured tobacco substitutes

• salt, ores, slag, and ash

• leather and leather products

• wood and articles of wood

• furniture

• manufactures of straw

• articles of apparel and clothing accessories Malaysia has offered zero-tariff preferences to 12 Lao products since the beginning of the AISP programme in 2002. The preferences are given to tariff lines of the HS-9 digit. These 12 tariff lines include processed wood (parquet panels and parquet flooring) under Chapters 44.09 and 44.18 and articles of precious metals under Chapter 71.14. In 2005, at the request of the Lao PDR, Malaysia agreed to add 73 products to the list to include some vegetables, wooden furniture, textiles and garments (UNESCAP, 2005). The Philippines also offered preferential tariffs to 12 Lao products in 2005, an increase of only 2 over those offered earlier.

2. 5. 3. ASEAN - China Free Trade Area and the Early Harvest Program:

In 2002 the "Framework Agreement on Comprehensive Economic Cooperation between ASEAN and the Peoples’ Republic of China" was signed at the ASEAN Summit. This set concrete goals for a China-ASEAN FTA creating an economic region of 1.7 billion consumers with a regional GDP of about US$2 trillion and with total trade estimated at US$1.23 trillion. It will be the largest FTA made up of developing countries in the world. From July 1, 2005, China and ASEAN will begin their tariff-reducing process. Tariffs on 7,000 products will gradually be reduced or

44

eliminated for the original six ASEAN countries by 2010 and by 2015 for the four ASEAN members in the Normal Track48, with timelines for some sensitive products to be mutually negotiated. The framework agreement also offers some early benefits like boosting agricultural trade between ASEAN and China as EHP implementation started on 1st January 2004. The EHP aims to accelerate tariff reductions on some less sensitive agricultural products to deepen agricultural liberalisation while having significant impacts on poverty reduction. The extent of this program, however, largely depends on bilateral negotiations. Under the EHP, China first agreed to allow ASEAN members to taste "early harvest" by reducing tariffs on some 560 agricultural imports49 from ASEAN from the beginning of 2004. The tariffs applied on those products eligible were 10 percent in 2004, 5 percent in 2005, and from January 1st, 2006, all these were reduced to zero percent. However, not all products offered to the Lao PDR have a high export potential. Those for which exports are expected to soar are vegetables - cauliflowers, lettuce, asparagus, potatoes and manioc - and fruits - coconuts, bananas, mandarins, mulberries and longans. Table 61 in the Appendix III lists those products to have zero tariffs from 2006. The benefits for the Lao PDR are very much dependent on how the country exploits the proximity to China, the favourable conditions for agriculture and the comparative advantages in certain products. However, the benefits are rather limited as many products - tomatoes, carrots, beans, dried onions, garlic, mushrooms, egg-plants, sweet corn, cucumbers, manioc, sweet potatoes, chilies, watermelons, mangoes, and pineapples - that are appearing and thriving in cross-border trade with neighbouring countries are excluded. In the meantime, competition from neighbouring countries in trade with China is intensifying. In June 2003 as part of the EHP, China and Thailand signed a bilateral free-trade agreement on vegetables and fruit. This was implemented on January 1st, 2004. In June 2004, Singapore agreed to reduce tariffs on vegetable and fruit imports to zero. Since the beginning of 2005 tariffs on fruit have also dropped to zero between China and Malaysia, Indonesia, the Philippines and Brunei. These bilateral agreements and early implementation between China and other ASEAN members is putting the Lao PDR - the neighbour sharing borders with China - at a disadvantage in this great market. Of no less importance is the dissemination of information about the EHP, so that Lao farmers and traders know of the opportunities and can make the right decision when planning their crops and investments. But until July 2005, when the research team visited the northern provinces - where agricultural border trade with China is a main income source for the rural population – the customs officers hemselves did not know about the EHP tariff reduction schedules, let alone the producers and traders. This tardiness in publicising information could make Lao farmers lose to their competitors in the neighbouring countries.

48 Sensitive Track of the ASEAN-China FTA: products listed in the Sensitive Track by each member have their respective MFN tariff rates reduced in accordance with the mutually agreed end rates and end dates.

49 The EHP consists of: unprocessed agriculture products under Chapter 1– 8 of the HS; and specific products agreed between individual ASEAN countries and China.

45

2. 5. 4. Negotiation for WTO membership

In 2004 the first Working Party addressed 263 questions on all aspects of the Lao foreign trade regime, trade-related services and intellectual property rights (IPR). A further 93 questions on trade procedures, technical barriers to trade (TBT), sanitary and phyto-sanitary standards and IPR were covered in the second Working Party in early 2006. This led to legislative amendments including the 2004 amendment to the Lao constitution, the amended Foreign Investment Law, the new 2005 Tax and Customs Law, and the formulation of the law on competition. The Lao PDR is coming under increasing pressure from the WTO to accelerate economic reforms and to restructure and simplify the trade laws and regulations. As an LDC, the Lao PDR is entitled to “special and differential” (S&D) treatment in its negotiations for accession to and as a WTO member. These S&D provisions permit the higher and longer protection of agriculture, and a much more gradual liberalisation of other sectors than is required, or was required, of other developing countries when they joined. The rationale for the S&D provisions is that LDCs need more time to prepare for competition from worldwide exports particularly of agricultural products. Without that time, local agriculture, local industries and services might suffer unduly to the detriment of employment, income, and even social stability. The Lao PDR can benefit from WTO membership as follows:

• Market access with MFN and non-discriminatory treatment to major and developed markets.

• Opportunities to participate in WTO negotiations on the rules governing international trade. Access to the WTO’s dispute settlement mechanism enables a small and poor country like the Lao PDR to contest protectionist trade policies of other countries.

• As a land-locked country, to receive duty-free transit rights with all WTO members.

• Enhanced transparency and stability of its own trade regimes, which increases efficiency, boosts economic reform and enhances the ability to attract FDI.

• As an LDC the Lao PDR is entitled to differential and more favourable treatment, in terms of market access thresholds for contingency actions and more extended time limits and flexibility in implementing the commitments.

However, the accession process, which by its very nature is tough and often protracted, does not promise the Lao PDR all these benefits as, under the WTO agreements, countries get not what they deserve but what they negotiate.50.The accession process is a unilateral procedure in the sense that all requests and 50 The rules governing accession are in Article XII of the Marrakesh Agreement Establishing the WTO and state “Any State or separate customs territory possessing full autonomy in the conduct of its external commercial relations or for the other matters provided for in this Agreement and the Multilateral Trade Agreement may accede to this Agreement, on terms to be agreed between it and the WTO”.

46

demands are made by WTO members to the acceding country, thus the capacity of the country to analyse what is permissible and what is not under existing WTO provisions is crucial. Despite the “Enabling Clause” for developing countries and the decision of the General Council on Streamlining Accession of LDCs (2002)51, in practice, recent acceding developing countries were asked for a high level of concessions not only way beyond their capacities but also beyond WTO requirements (“WTO plus” conditions). This is also the case for acceding LDCs. Although initially there was strong pressure from the developed countries on Cambodia to forgo the right to use export subsidies in industrial sectors, in the end this right was retained, however Cambodia was unable to retain the right to introduce any agricultural export subsidies. Nepal was asked to implement the non-discrimination provisions (MFNs and national treatment52) contained in the Trade Related Intellectual Property Rights (TRIPS) Agreement right from the date of accession. Moreover, the developed countries did not refer to the Declaration on TRIPS and Public Health adopted by the trade ministers at Doha in November 2001. Vanuatu also agreed to offer duty free access for more than 160 tariff lines in aircraft, aircraft parts, and pharmaceutical products by 2005 under the Zero-to-Zero Tariff Reduction Initiatives and the Information Technology Agreement, even though in the past no LDC and only a few developing countries that were already WTO members had had to participate in these tariff agreements53.

2. 5. 5. Other Multilateral Trade Integration Framework:

In addition to the ASEAN-AFTA, ASEAN-China FTA, BTA with the U.S. and the WTO accession process - all of which are pushing towards major regional and global integration - there are other regional initiatives. The Asia-Pacific Trade Agreement signed on November 2nd, 2005, formally known as the Bangkok Agreement, between the six Asian countries of Bangladesh, India, the Lao PDR, the Republic of Korea, Sri Lanka and China (China acceded in 2001) is pledged to cut tariffs to 7 percent on average from July 1, 2007 on over 4,000 commodities. China has agreed to reduce taxes on 1,697 commodities; the Republic of Korea on 1,367; India on 570; Sri Lanka on 424; and Bangladesh on 209. Moreover, most of the countries offer special tariff preferences to the two LDCs - Bangladesh and the Lao PDR. As yet, since the Lao PDR has not issued its customs notification on tariff concessions offered it is not

51 The decision of the General Council dated 10 December 2002 on Streamlining Accession of the LDCs states that “WTO Members shall exercise restraint in seeking concessions and commitments on trade in goods and services from acceding LDCs, taking into account the levels of concessions and commitments undertaken by existing WTO LDCs' Members.” and “Acceding LDCs shall offer access through reasonable concessions and commitments on trade in goods and services commensurate with their individual development, financial and trade needs, in line with Article XXXVI.8 of GATT 1994, Article 15 of the Agreement on Agriculture, and Articles IV and XIX of the General Agreement on Trade in Services.” 52 MFNs (Most Favoured Nation status) requires nations to give each other the most favoorable or no worse treatment than they give any other (trading) partners (regardless of their labor, human rights, or environmental practices). National Treatment ensures foreign investors will not be "discriminated" against, which means nations are required to treat foreign investor or investments no less favorably than they treat their own. 53 UNCTAD (2003) WTO Commitments by Cambodia, Nepal and Vanuatu –Comparative Table, 18 September 2003/VO/MH/DITC, UNCTAD, Geneva:2006; Ratnakar Adhikari and Navin Dahal, 2004. “LDCs’ Accession to the WTO: Learning from the Cases of Nepal, Cambodia and Vanuatu”, South Asia Watch on Trade, Economics & Environment (SAWTEE), Kathmandu, Nepal.

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an effective member. Other members like India, the Republic of Korea and Sri Lanka have however extended their concessions to include the Lao PDR. Another trade agreement, the Ayeyawady-Chao Phraya-Mekong Economic Cooperation Strategy (ACMECS) of November 2003 between Cambodia, Myanmar, the Lao PDR, Thailand and, more recently, Vietnam plans to strengthen multilateral and bilateral economic cooperation, improve competitive edges, and narrow the development gap between the signatories. Better border cooperation is identified as one of the main tools for meeting the target. The Bagan Declaration identified trade and investment facilitation, agriculture and industrial cooperation, transport linkages, tourism and human resource development as topics for discussion at the second summit in November, 2005. The feasibility of the introduction of a single-visa system - the “five -countries, one-destination” scheme - allowing tourists to enter all five countries with a single visa to promote regional tourism, was given great attention. Discussions on agricultural cooperation focused on how to simplify the granting of certificates of origin, and import tax exemptions for farm produce traded in border areas.

2. 6. Bilateral Trade Relations

Lao trade policy is the main factor in determining the trading situation, especially of imports but the trade policy of the trading partners is also of great importance either encouraging or impeding the volume and types of goods that the Lao PDR can export.

2. 6. 1. Bilateral trade relations with the EU:

The rapid growth of Lao garment exports since the early 1990s was made possible by the EU-GSP. However, from November 1995 to July 1997 the GSP were suspended after accusations that the Lao PDR had violated the RO requiring that at least 70 percent of raw materials come from the Lao PDR. From 1997, the EU eased restrictions by allowing Lao producers of certain textiles to use more raw materials from particular ASEAN members. Since August 2000, the Lao PDR has qualified for the regional cumulation rule for exports of textiles to the EU, which relaxes the RO requirements and extends GSP coverage to Lao exports produced from imported intermediate inputs from any ASEAN country; as well as the GSP regional cumulation provisions (extended to SAARC and ACP countries since the late 1990s)54. Under the 2002 EBA initiative for LDCs, Lao products are given duty and quota free access to the EU market. However, sugar, rice and bananas are exceptions since the EU deems these sensitive products. The tariff quota for textiles is applicable to those products receiving RO derogation. 54 The Lao PDR received this RO derogation in August 2000 following the Commission Regulation (EC) No 1613/2000 of 24 July 2000 which has been renewed twice and will be effective until 31 December 2006. SAARC established in December 1985 by seven member countries: Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka, aims to encourage cooperation in agriculture, rural development, science and technology, culture, health, population control, narcotics control and anti-terrorism. ACP is an association of African, Caribbean and Pacific nations, which comprises of 79 countries at the present comprising 79 countries.

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Figures 7 and 8 show that not only are garments the main Lao exports to EU but also the importance of the EU market to these exports. The rapid increase of garment exports to the EU between 1997 and 2001 accounts for most of the spectacular export performance of the whole industry. Figure 7: Garment exports to EU-15 from mirror data. (International data) .

Exports of apparel to EU

40

60

80

100

120

140

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Millions

Year

CIF

val

ue (E

uro)

Exports of garment to EU-15, total of HS code 61 and 62

Total exports to EU-15

Unit of currency: Euro.

Source: Eurostat 2006

49

50

Figure 8: Total Lao garment exports (national data)

31909281202311426955255602593427064

202852050016500

103,486108,087

100,026

76,14673,056

62,000

87,000

103,380115,134

131,728

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year

Quantity in 1000 pcs Export Value in '000 USD

Unit of currency: USD. Source: Lao Textile and Garment Industry Group. (National data)

Other exports to EU that have recently emerged include processed foods (mainly vegetables, fruit and nuts), precious stones, and electrical equipment. However, disaggregated data show that exports other than garments are not yet either substantial or stable. Coffee exports to the EU decreased dramatically between 1995 and 2004, due to the fall in global coffee prices, increased competition from other exporters and the high Lao transportation costs. The Lao PDR is aiming for the niche market in organic coffee. There are some success stories of breaking into this market in the EU and the US. However, more success requires more investment, human resources and institutional support.

Table 24: Main Lao exports to the EU55

HS code - COMMODITY 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Jan-Sept.

2005

09-COFFEE, TEA, AND SPICES 8,826,633 6,233,177 12,298,420 14,417,410 10,837,882 11,167,184 7,245,194 7,681,804 3,590,734 2,837,898 2,963,221 20-PREPARATIONS OF VEGETABLES, FRUIT, NUTS 10,835 49,466 76,452 163,775 135,002 377,248 495,366 557,226 846,526 694,947 648,174 44-WOOD AND ARTICLES OF WOOD 4,227,317 981,418 325,267 434,650 813,477 1,257,672 1,060,566 830,536 755,485 1,096,284 137,053 61- APPAREL, KNITTED OR CROCHETED 20,089,072 20,272,025 29,758,980 32,540,804 46,407,895 51,902,269 52,035,919 52,389,747 46,696,030 56,834,979 41,932,085 62- APPAREL, NOT KNITTED OR CROCHETED 33,593,040 36,793,070 43,370,648 41,351,602 48,463,063 65,084,252 78,105,317 72,145,224 61,215,645 60,653,096 43,123,875 64-FOOTWEAR 295,149 1,737,638 1,573,800 1,513,157 2,065,954 3,592,445 5,211,092 6,208,617 3,685,374 4,305,779 3,483,071 71- PEARLS, PRECIOUS OR SEMI-PRECIOUS STONES, and PRECIOUS METALS : 3,214 18,794 137,249 105,465 13,422 447,231 1,548,388 1,902,578 3,059,360 3,922,246 85-ELECTRICAL MACHINERY AND EQUIPMENT 54,255 125,483 28,298 414,144 43,226 379,679 146,337 92,222 291,688 132,293 1,528,124 99-OTHER PRODUCTS 29,760 28,580 3,482 3,790 245,190 126,384 80,394 67,314 76,109 132,252 1,138,159 All-TOTAL 72,424,084 67,765,370 88,414,795 94,284,215 110,431,805 135,139,115 146,665,499 143,023,696 120,293,691 132,312,672 100,712,445

Currency: Euros.

Source: Eurostat.

55 The EU has comprised 25 member countries since 2005.

Box 2: The rise of Lao coffee

The Lao PDR is not in the same league as Brazil or even Vietnam in terms coffee production and export volumes. Only a tiny percentage - 0.25 percent - of the total global area of coffee plantations is in the Lao PDR and the annual production rarely exceeds 15,000 tons - no match for Vietnam’s 900,000 tons a year.

But Lao coffee is very different from any coffee grown in Vietnam being much more uniform in quality and appearance. This is because nearly all Lao coffee is grown in the same place - the Boloven Plateau in the south with an ideal climate for coffee. Some specialists say this is the best coffee growing place in the whole of South East Asia since the: temperatures and humidity, the amount of sunlight and shade, and the altitude are perfect for coffee.

In the early 1990s the collapse of the socialist bloc disrupted Lao coffee exports. These only began to recover after Thailand adopted the policy of the "conversion of battlefields into market places" (the Indochina policy initiative of the late Prime Minister Chatichai Choonhavan in 1988). Thai companies producing instant coffee began buying and processing Lao beans. At the same time, some of the old coffee families who had fled the country after the 1975 change of government reappeared. Some Paksong plantations changed their production to conform to French market specifications. As most of the returning planters had spent the previous fifteen years in France they had good French contacts. Export of Lao beans to Europe resumed. Simultaneously the coffee revolution began in Vietnam. Coffee was planted throughout the country. In 10 years production jumped from 20,000 tons to 200,000 tons, and did not stop at that. Vietnamese beans started pouring into the lower end of the world market with great success. At the same time a lot of Lao-grown beans entered Vietnamese exports through re-export deals and joint ventures.

Since the early 1990's the Lao government has been trying - with some considerable success - to help raise quality standards and to promote direct exports to European countries. The Lao PDR now exports green beans and roasted coffee to France, Germany and Poland. Some Lao coffee makes its way into the U.S. market. Negotiations are underway with Japan.

In 2003, over 23,000 Lao families made their living by growing coffee. Twenty nine companies, members of the Export Association, sell over 10,000 tons of Lao coffee abroad every year. The export-target means an increase in Arabica production from less than 4 percent (500 tons out of the total of 14,500 tons in 2003) to 50 percent of all coffee produced.

Quality is still an issue. At a recent seminar in Vientiane organized by MAF and the International Commercial Agency of Japan, the vice president of the Lao Association for Coffee Exports, Hunla Manivon, admitted that the lack of quality control without a unified standard is still an obstacle for Lao coffee exports to Japan. It is not the bean quality that is in question. Lao beans, as the French Coffee Research Institute has it, are among the 12 best in the world. It is the lack of an efficient standard for bean selection at the plantation level and further up. It is, actually, a management problem, which has nothing to do with bean quality.

However, there is another way to evaluate success - that is value addition. The Lao PDR, with its low production quantities, great coffee-growing climate and no fertilizer usage is a perfect place to experiment with specialty coffees.

Although most exporters continue to favour bulk deals, some are already trying to develop new elite products. Among these is a very special non-commercial organisation - a charitable program called the Jhai Foundation (Hearts and Minds Lao).

Lee Thorn, the chairman of the San Francisco and Vientiane-based Jhai Foundation, a veteran of the Vietnam war, came back to South East Asia six years ago to bring medicines and medical supplies to a hospital in Vientiane province. His foundation has been steadily growing ever since. When it became clear that there had to be a cash-earning operation that could fund other foundation activities, Thorn turned to coffee. Now Jhai is ready to import 10 tons of select specialty Lao Arabica to the U.S. every year.

It all began with the coffee importer “Thanksgiving Coffee” of Fort Bragg in California. Paul Katzeff, the Chief Executive Officer, and the immediate past president of the Specialty Coffee Association of America, is optimistic about the new brand - Jhai Coffee. Katzeff stocked Jhai Coffee in Safeway stores and put it on private specialty coffee lists.

Lao farmers are paid up to US$1.35 a pound for these select Jhai Coffee roasts - four times more for “Arabica typica” beans than they could get anywhere in the Lao PDR. They get even a bit more than the Fair Trade price. In exchange, Lee demands careful selection of beans by every grower. He works only with about 130 small growers. Jhai Foundation buys 60 tons of perfect “red cherries”, dries them, peels the skins off and extracts the green beans. Only the best beans are selected for export. The selection process is so strict that only 10 of the original 60 tons (less about 10 tons lost in drying and peeling) make it into the shipping.

Lee drinks a lot of coffee himself. His description of Lao coffee sounds like a poem: "It is mild and has a medium body with one of the finest finishes I have ever tasted - gentle and lingering on the tongue with not the slightest bitterness or acidity. Drinking Lao “Arabica typica” coffee is literally like drinking a fine wine. The taste affects your tongue from tip to stem in a way that brings you great pleasure. Is there anything to add?”

From “A Romance with Coffee Lao”. 2003. http://www.teacoffeeasia.com/news.asp?id=505

2. 6. 2. BTA with the US:

The Lao PDR was one of the very few countries excluded from NTR with the US. Although a BTA was reached in 2003; MFN treatment was not granted until December 2004, and in February 2005, the BTA came into force. NTR reduced tariffs on Lao exports to the US significantly from an average of 45 to 2.4 percent.56 on various products - silk textiles (from 90 to 0.8 percent), handicrafts and wood products (from 42.5 to 0 percent), and coffee (from 10 to 0 percent). NTR is not a trade preference. It simply means that Lao exports compete on an equal footing in the US market with exports from all other WTO member countries. The Lao-US BTA covers commodity trade, trade in services, and IPR. The Lao National Assembly was required to complete all the necessary adjustments in regulations to meet IPR commitments within 21 months from the effective date of the agreement and must implement those regulations within 27 months from its enactment57. The Lao PDR must accomplish the following trade reforms:

• Adopt and comply with the trade norms and standards at an international level (including those for WTO)

• Create a favourable environment for foreign investment

• Eliminate non-tariff barriers

• Concentrate closely on the IPR protections

• Improve the banking system and abide by requirements in BTA Article 1 towards the agreement on MFN and nondiscriminatory treatment.

56 In 2000, the average tariff on Lao exports to the US was 46.3 percent compared to a global average of 2.4 percent (Fact sheet on Laos, www.ffrd.org/indochina/laos/laofact.html). In 2001, this rate was 45.3 percent. 57 Article 30 of the Lao-US BTA

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Box 3: Early benefits from the US-BTA

The December 2004 NTR and the BTA effective as of February 2005 increased Lao exports - particularly handicrafts - to the U.S. Although handicraft tariff rates were much lower still a large proportion of handicraft export is informal. Many items are brought into the US as passenger’s belongings. US Census Bureau Statistics show that there has been no overall increase in exports but only in some specific products. Coffee exports predominated this new market access - in the first 10 months of 2005 exports were US$607,000 (customs value), nearly double the 2004 exports of US$302,000. Exports of certain garments - knitted and crocheted clothing - also increased dramatically - from US$169,000 in 2004 - to US$930,000 (customs value) for the 10 months from January to October, 2005. However, in the long run total garment exports have been decreasing from a peak of more than US$20 million in 1998 to just around US$ 2-3 million in recent years. Exports of works of art (categorized as handicrafts) increased dramatically - from US$28,000 in 2004 - to US$334,000 in first 10 months of 2005. Telecommunication equipment and accessories – a new Lao export – amounted to US$ 43,000 in first 10 months of 2005.

Source: US Department of State, October 2005; trade data drawn from US Census Bureau, October 2005 The Lao PDR could benefit from NTR by the following:

• A broader market for Lao exports to the US

• An increase in US FDI in the liberalised sectors - the agreement on Overseas Private Investment Cooperation (OPIC)58 will assist this

• More US tourists

• Increased Lao exports of silk textiles wood products, other handicrafts, and (organic) coffee

• An increase in Lao garment exports, particularly if the US imposes permitted restrictions on the rapid increase of Chinese garment exports to the US

• NTR will engender trust amongst WTO members and hasten the Lao accession process.

58 The OPIC Agreement signed by the Lao and US governments in May 1996 offers direct loans and guarantees to US private companies who venture into the Lao PDR (http://www.laoembassy.com).

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However NTR does not guarantee that Lao products will break into the US market for the following reasons:

• Many potential Lao export products such as electricity are excluded.

• The Lao PDR’s low production capacity is not attractive to trade partners.

• The US market is highly comepetitive.

• Lao export products - particularly garments - are still far below recognized standards.

• US IPR is much stricter than that of many other countries.

• There is the danger that the other WTO countries in the accession negotiation will want the same concessions made by the US in BTA.

Box 4: BTA and Challenges

Challenges for Lao Exporters Channels for Marketing

Understanding the US market Internet Identifying partners Lao-American

Community Understanding procedural

requirements Chamber of Commerce

Quantity and Quality Control Third Parties Trade Associations

Source: US Embassy website

More than one million people of Lao origin live n the US and the NTR could encourage more of these Lao-Americans to invest in their native country. Many studies show that networking between migrants in the host country and those in the home country increases trade between the two. NTR also makes it possible for the Lao PDR to apply for the US GSP from which most developing countries have benefited As an LDC, the Lao PDR qualifies for US GSP allowing the duty-free import of 4,650 products in the US HS schedule. However, most agricultural products eligible for GSP are either restricted by quotas or subject to peak tariffs.

2. 6. 3. BTR with Thailand

The Lao PDR has had preferential market access to Thailand under the AISP program since 2002. More preferences have been offered to the Lao PDR than to other older members of ASEAN-6.. Lao exporters use the AISP form mainly for exports to Thailand and these exports are increasing. In 2004 Thailand also granted a “One Way Free Trade” concession with a zero tariff rate on nine Lao agricultural exports under the ACMECS - a trade and cooperation agreement between Cambodia, the Lao PDR, Myanmar, Thailand and Vietnam. These exports include feed corn, sweet corn, eucalyptus logs, cashew nuts, castor oil beans, soy beans, groundnuts, potatoes, and pearl barley. Thus agricultural trade

55

56

is increasing (see part I - Overview of Lao trade structure). Foreign investment in food processing and contract farming is also on the rise. Box 5: Thai Investment in food processing using Lao preferences Source: Interview with the Director of the Company. Trade relations with Thailand play an important role in Lao imports and exports. Thailand is the main buyer of electricity and investor in Lao hydropower projects. However, the current trade pattern shows an over-dependence on trade with Thailand. This means that the Lao PDR is vulnerable to shocks in Thailand and would suffer a knock-on effect from an economic or financial crisis similar to that of 1997. Box 6: Significant Increase in Lao exports to Thailand

Lao Imports to Thailand increased significantly between 2004 and 2005. Thai Customs statistics show that the total imports (in CIF value) soared from about Baht 4.6 million in 2004 to Baht 7.6 million for the first eleven months of 2005. Products utilizing Thai AISP zero tariffs and the “One-Way Free Trade” included bananas; potatoes, vegetables (HS code 07.09.900); groundnuts and other oil seeds; maize and other cereals – rice, buckwheat, millet and canary seed (HS code 1008.900). (See table 25) The exports of other manufactured goods - certain garments particularly of not knitted or crocheted apparel like men and women’s suits have increased (Thai Customs’ statistics). The volume of trade between the Lao PDR and Thailand has increased also because of the wide implementation of CEPT. As one of the six founding ASEAN members, Thailand has included 98.99 percent of their products in the CEPT IL at tariffs of between 0 – 5 percent.

Savan Advance Processing Co. in Savannakhet is an up-and-coming food processing factory producing mainly dried groundnuts and groundnut oil and semi-processed products - soybeans, animal feed and some NTFPs (like Job’s tears). The company buys agricultural produce in Savannakhet, and in nearby provinces - Saravanh, Sekong, Champasak. It exports only to Thailand, utilizing the zero tariff preferences offered to Lao agricultural products. However, like many others, the factory only does semi-processing with final processing being carried out in Thailand. The processed products are re-exported to other Asian markets like Korea and Taiwan although are of Lao origin.

Table 25: The increase in Lao agricultural exports to Thailand since AISP zero-tariffs and the “One-Way Free” Trade

HS-CODE 2005 2004 2003 2002 2001 2

digits 4

digits 6 digits 7 digits or more Description CIF

Value (Baht) CIF

Value (Baht) CIF

Value (Baht) CIF

Value (Baht) CIF

Value (Baht) 07 EDIBLE VEGETABLES 07.01 Potatoes, fresh or chilled 0701.900...more Other 27,744,500 13,974,000 13,860,000 11,034,940 0

08 EDIBLE FRUITS AND NUTs

08.03 08.03...more Bananas, including plantains, fresh or dried 9,926,262 1,751,460 160 0 0

08.13 Fruit, dried, other than that of headings 08.01 to 08.06; mixtures of nuts or dried fruits of this Chapter." 0813.400...more Other fruit 8,026,580 1,061,444 341,158 96,987 0

10 CEREALS 10.05 10.05...more Maize (sweetcorn) 115,500,374 100,093,376 18,833,644 2,234,000 5,210,000 10.08 Buckwheat, millet and canary seed; other cereals." 1008.900...more Other cereals 128,041,734 86,763,324 53,699,084 16,327,101 1,183,262

12 OIL SEED AND OLEAGINOUS FRUITS

12.02

Ground-nuts, not roasted or otherwise cooked, whether or not shelled or broken 43,108,853 18,148,683 12,623,336 46,659,359 7,207,068

12.02.10 In shell 9,757,179 2,141,015 1,003,892 1,169,285 4,592,490 12.02.20 Shelled 33,351,674 16,007,668 11,619,444 45,490,074 2,614,578 12.07 Other oil seeds and oleaginous fruits, whether or not broken." 12.07.20 Cotton seeds 52,977 0 0 268,982 0 12.07.30 Castor oil seeds 1,471,173 812,550 653,515 407,042 62,020 12.07.40 Sesame seeds 24,297,204 25,971,431 13,526,812 741,885 964,662

14 VEGETABLE PLAITING MATERIAL

14.03 14.03.000…more

Vegetable materials of a kind used primarily in brooms or in brushes (for example, broomcorn, piassava, couch-grass and istle), whether or not in hanks or bundles 9,956,085 11,454,618 5,922,099 589,711 861,352

14.04 Vegetable products not elsewhere specified or included.

1404.90...more Other 8,429,799 4,452,978 6,472,726 616,444 238,492

20 PREPARATIONS OF VEGETABLES, FRUITS AND PLANTS

20.08 Fruit, nuts and other edible parts of plants, otherwise prepared or preserved, whether or not containing added sugar or other sweetening matter or spirit, not elsewhere specified or included. "

2008.990...more Other 9,059,739 1,316,960 21,600 174,400 198,800 Source: Thai Customs, January 2006.

2. 6. 4. BTR with Vietnam

The 1999 “Cua Lo Agreement” was a milestone in enhancing the close trade relations between Vietnam and the Lao PDR. It encouraged border trade with bilateral preferential tax policies and reciprocal tariff reductions that will be gradually extended every year. A new memorandum of understanding (MOU) in July 2005 offered either zero or 50 percent tariff reduction to many products. The content requirement of Lao exports was also relaxed. Now only 30 percent Lao content is required instead of the 40 percent local content required in AFTA’s RO or the 60 percent in the EU GSP. The MOU came into effect on 1st, September 2005, and should be highly effective since the zero percent tariffs are applied to a wider range of products. Since most Lao agricultural products are eligible for zero tariffs their exports should increase considerably. Only a few products are subject to 50 percent of the normal tariff: rice59, poultry, meat and offal, birds’ eggs and cane sugar (soild processed sugar)60. Some types of unprocessed tobacco and tobacco waste products are eligible for 0 percent tariff although they are on Vietnam’s GL.61 Many Lao exports of natural resources - minerals and wood products - are eligible for zero percent tariffs. And in the manufacturing sector, only few subgroups of products in the automotive industries are subject to 50 percent tariff, the rest are tariff exempted. Goods excluded from the preferential program are mostly those on Vietnam’s GL. The Vietnam’s negative list62 includes goods prohibited for social and safety reasons - opium, fireworks, arms, ammunition and products with chemical residues - and goods that are highly sensitive for Vietnamese industries - tobacco, petroleum, cars and motor cycles, either new or used, and re-treads or used rubber tyres. Irrespective of these trade boosts the future of Lao exports still depends on the production capacity and the industries. At present, some Lao export quotas are based on export capacity, and the quota is justified as a measure to prevent illegal flows of exempted goods from a third country to Vietnam. Within the GMS development cooperation framework, Vietnam and the Lao PDR are ahead in implementing the agreements.In 1999 Vietnam, the Lao PDR and Thailand signed the “Agreement on Facilitation of Cross-border Transport of Goods and People” to which other GMS countries later agreed. Until the end of 2005 Dansavan-Lao Bao checkpoint with Vietnam in Savannkhet province in the Lao PDR was the only “One-Stop” Customs Inspection point. 59 Paddy rice for sowing is at a zero percent tariff. 60 The normal tariff rate for poultry, meat, birds’ eggs and sugar cane is the MFN rate. Rice is at the CEPT rate as it is already in the Vietnam IL. 61 These types of unmanufactured tobacco and tobacco refuse are of AHTN code: 2401.10.10: tobacco, not stemmed/stripped, of Virginia type, flue-cured; 2401.10.20: tobacco, not stemmed/stripped, of Virginia type, not flue-cured; 2401.20.10: tobacco, partly or wholly stemmed/stripped, of Virginia type, flue-cured; 2401.20.40: tobacco, partly or wholly stemmed/stripped, of Burley type; 2401.30.10: tobacco stems (tobacco refuse). 62 The Negative List is a list of products that are excluded from the preferential tariffs under this MOU/agreement. Vietnam’s Negative List is the list of Lao products not considered for preferential tariffs when imported to Vietnam.

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Vietnam has also created border economic zones and upgraded markets along the Lao border (most notably in Lao-Bao on Route 9 connecting the Lao PDR to Vietnam) to promote border trade. On 24 November 2004 the Cambodia-Lao PDR-Vietnam (CLV) Summit met in Vientiane and adopted “The Establishment of the CLV Development Triangle” and the “Master Plan”. These offer special economic policies to sub-regions of the development triangle to foster sub-regional economic integration by creating an ideal business environment for cross-border economic activities. Market forces will be allowed to determine which sectors will exploit the development triangle, and there will be no preferential treatment.63

Vietnam also offers the Lao PDR a transit route to the sea. The revised 2000 transit transport and 2001 road transport agreements between Vietnam and the Lao PDR extend facilities for Lao goods to transit to Vietnamese seaports.There are no longer any restrictions on ports for Lao transit cargo. In 2001 Vietnam upgraded the Vung Ang port in Ha Tinh province specially for Lao transit cargoes. This port is about 666 km from the border via Route No. 8. Cua Lo and Da Nang (in central Vietnam) were also recently upgraded as transportation links.

2. 6. 5. BTR with China

The Chinese EHP offers each country preferential tariff rates for a wide range of agricultural exports. Tariffs on Lao agricultural exports to China were eliminated from 2006, while the Lao PDR is allowed until 2009 to complete the process for goods from China. The increase in the benefits for the Lao PDR may be somewhat limited as many of the new products in which cross-border trade is flourishing are excluded. These include tomatoes, carrots, beans, dried vegetables - onions, garlic and mushrooms - egg-plants, sweet corn, cucumbers, manioc, sweet potatoes, chilies, watermelons, mangoes and pineapples. As a sideline to the ACFTA Framework Agreement, China also agreed to offer zero tariffs to certain imports from ASEAN's poorest members - Cambodia, the Lao PDR, and Myanmar. This agreement came into effect in January 2004.

The EHP, however, is not the best deal China has offered. The Lao PDR, with its large and unexploited fertile land and favourable climate gives China the opportunity of promising land-intensive investment and a good source of raw material for its industries. China recognising this has encouraged cross-border trade especially in agricultural products. Since 2004 China has offered the Lao PDR preferential tariffs on 202 products. In 2005 (before the start of the EHP) the Bangkok Agreement offered Special Preferential Tariffs to 238 Lao products - mostly agricultural, forestry and mining products. China allows zero tariff imports from the Lao PDR of live animals and meat (of bovine animals, swine and poutry); fresh orchids and dried flowers; vegetables (cabbages, cassava (manioc) and sweet potatoes); fruit (bananas); coffee; buckwheat (cereal) and some spices and NTFPs (cardamom, mace, nutmeg, ginger, bamboo and rattan) and oil seeds (soyabeans and groundnuts). These preferences are supplementary to the EHP which includes only those HS 01-08 agricultural products and excludes cereals, coffee, spices, vegetable materials for plaiting, and food preparation ingredients. In addition China offers zero tariffs on mineral products whether natural or semi-processed, like salt, gypsum, coal, base metals clad with silver, gold, and copper, as well as to some

63 CLV Development Triangle Master Plan, 2004

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manufacturing products like woven fabrics of silk, cotton thread, ventilators, and some furniture. Table 26: Lao exports of some agricultural and forestry products to China in 2002-2004

Commodity 2002 Trade

Value 2003 Trade

Value 2004 Trade

Value

Cereals

[HS2002 code 10] $58,164 $14,460 $111,479

Oil seeds and oleaginous fruits

[HS2002 code 12] $1,439,860 $1,359,336 $1,262,255

Rubber and articles thereof

[HS2002 code 40] $1,428,399 $2,204,820 $1,498,000

Wood and articles of wood; wood charcoal

[HS2002 code 44] $6,378,896 $7,342,256 $9,422,362

Cotton

[HS2002 code 52] $0 $6,495 $42,445

Source: COMTRADE, 2005

Table 27: Lao exports of sugarcane and rice to China in 2002-2004

2002 2003 2004

Commodity Trade Value NetWeight

(kg) Trade Value NetWeight

(kg) Trade Value NetWeight (kg)

[HS2002 code 121299]

Sugarcane (in the case of Laos exports to China) $1,080,131 58,000,000 $778,563 42,300,000 $885,000 N/A

Rice.

[HS2002 code 1006] $58,164 200,000 0 0 $111,479 N/A

Source: COMTRADE, 2005

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Box 7: Cross-border trade with China: Sugarcane in Luang Namtha Luang Namtha in the north of the country exports both rice and rubber but mainly sugarcane. Lao farmers here have been growing sugarcane for export to China since the mid-1990s when representatives of Chinese sugar factories near the border introduced the idea. They now grow sugarcane with financial and technical assistance from a few of the big Chinese sugar factories in Yunan province (mostly in the La and Mang districts). In 2004 the export of about 34,000 tons of sugarcane earned Luang Namtha about 5 billion kip (local trade officials). In 2002 the sugar factory in Mengla imported about 26,000 tons of sugarcane from Namor in Oudomxay, and Bouneua and Bountai in Phongsaly (NAFRI, 2003). This increased demand has made sugarcane a major cash crop in the north, particularly in the Chinese border districts. Many households in Luang Namtha’s Sing district with a border gate to China now grow sugarcane as the main crop. In 2002, sugarcane was planted on 533 ha in Sing district. By 2003 this had expanded to 680 ha (NAFRI 2003) and in 2004 to 750 ha. Unlike many other agricultural products the cross-border trade in sugarcane is formal and is one of the most organized in the north (NERI, 2006). There is no preferential treatment but the high demand and the short supply in China means the Chinese sugar factories have been the more active in this cross-border trade thus making it easier for Lao farmers to find foreign buyers and to deal with the foreign trade procedures. It is doubtful whether this commercial production will increase incomes as much as it should because of the nature of the trade. The district agrees to supply a specified quantity to the Chinese factory. The farmers have no option but to agree to this “contract”. The factory “invests” (provides) seed, barbed wire for fencing and some technical advice. In return the sugarcane harvest must be sold to the factory at their set price. This dependence on one buyer means the farmers have no bargaining power and cannot make any investment decisions. Another concern is the payments made to the farmers. The Chinese buyer weighs the sugarcane by the truckload in the factory in China. The farmers have no way of checking the weight but can only agree with the stated amount. Sugarcane growers have also complained about late payments. (Many claimed it took 60 days). Moreover, the farmers must pay numerous extra costs - transport fees, Lao customs fees, fees for technical advice and commission fees. This brings the net price down to 105 Yuan per ton (or about 145,000 kip), from the gross price of 185 Yuan per ton (NERI, 2006). There are many other similar factories buying sugarcane from farmers - for example in Namor district in Oudomxay (NAFRI, 2003).

Source: Interviews with trade officials, local traders in Luangnamtha and other secondary sources.

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Box 8: A rubber plantation in Namtha district, Luang Namtha province

Rubber was first planted in Luang Namtha In the early 1990s as part of the government’s plan to reduce for poverty and to stop slash and burn cultivation in the mountains. The recent boom in rubber plantations in the north is largely due to Chinese cross-border trade and fuelled by China’s increasing demand and the falling domestic supplyr particularly in southern China - an area close to the Lao PDR. Chinese interest and investment are encouraging farmers to switch to rubber. As a result there are now many large rubber plantations in Namtha district in expectation of future Chinese demand. Initially the province had no financial resources and little experience in rubber growing so it simply provided the land and allowed the Chinese to invest, to supply the seedlings and carry out most of the work. There was little benefit for the local people. Then the farmers realized the commercial possibilities in growing rubber for the Chinese market. Chinese technicians were invited to train Luang Namtha farmers in rubber plantation techniques. Once these farmers had gained some knowledge they wanted to grow their own rubber. The provincial policy then changed and Lao farmers were given the right to own rubber plantations. Farmers are now able to obtain 8 - 10 year loans at 2 percent interest a year for rubber plantations (NAFRI, 2003). Since then rubber plantations have rapidly increased. At the beginning of 1994, there were 12,000 rubber trees or 26.6 ha (450 trees per ha) of plantations in Luang Namtha. In 2003, this had grown to 985 ha - with 335 ha of harvestable rubber in Namtha district. By 2010, there will be an estimated 10,000 ha of rubber. Rubber may be more profitable than other crops. In 2002 the raw latex price in China was 2.5 - 3 Yuan/kg, and 3.5 - 4 Yuan/kg for processed latex. Each tree yields about 5 kg of latex per year. Usually there are 450 trees per ha so at a latex price of 3 Yuan/ kg and an exchange rate of 1 Yuan = 1,300 kip, the total annual revenue from 1 ha is 8,775,000 kip/ha. As against this planting costs are quite high - about 6,200,000 kip/ha (including seedlings and labour), and it is 8 - 10 years (or 6 years for a recently developed variety of rubber tree) before any latex can be harvested. (NAFRI, 2003) Farmers usually sell their latex at the Chinese border. Neither the Lao nor the Chinese customs collect any tax on this small cross-border trade as both governments see this as a way to relieve poverty (NAFRI, 2003). The rubber factories in Mengla district (in Yunan province) welcome this supply since Luang Namtha latex is of good quality - it is pure and has no rocks, sand or water - and transportation is cheap. One factory that used to buy Thai latex is now buying Lao latex because of the lower transportation costs and the tax savings. However, it is diffucult for farmers to start planting rubber trees. They lack financial support and skills. Chinese seedlings are expensive - about 8 Yuan/tree in 2002 - and credit is not readily obtainable. In addition the farmers do not know much about rubber - in particular they do not know how to select the correct quality or variety. A seedling must be six months old before it is possible judge its quality. So investing in a rubber plantation is risky. Farmers may lose money and time on poor seedlings or low future yields.

Source: Interviews with trade officials, GTZ in Luang Namtha and other secondary sources.

2. 6. 6. Bilateral relations with other trade partners:

The Lao PDR is also eligible for some LDC preferences offered by other countries - Australia, Canada and Japan.

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Australia: Goods manufactured or produced by LDCs are allowed duty-free entry to Australia. Two categories - raw products or manufactured goods will be considered for duty-free entry. Canada: In January 2003, the Canadian government eliminated all duties and quotas on most imports from the 48 LDCs and introduced new measures for imports of textiles and apparel. In February 2004 the government passed Bill C-21 extending the General Preferential Tariff scheme and the LDC Tariff legislation for a further 10 years until June 2014. LDC textiles and apparel are eligible for duty free treatment. Moreover, the RO allows for accumulation of inputs from other GPT beneficiary countries.64 The governments of the Lao PDR and Canada signed an MOU on market access in March, 2003. Japan: Japan offers the Lao PDR GSP for a number of products. This has been used for the export of handicrafts, wild mushrooms, textiles and wood products. Japan is seen as a niche market for high quality, authentic and well-designed products that command high prices.

2. 6. 7. Usage of Form D and utilization of other ASEAN preferential

treatments:

MOC reports that the ASEAN preference (Form D) is under-uitilised. Before 2004 the Customs Office reported that very few imports from ASEAN made use of the CEPT rates, but this will change in 2005, because of both the sizable CEPT tariff reductions and improved information about and access to Form D. Fane and Khamlusa (2003) reported that the MOC data showed that up until the end of the financial year 2002-03, no Lao importer or exporter had ever obtained CEPT preferences. In the calendar year, only US$ 1.7 million exports made use of Form D. Table 28: Usage of Form D 2001–2004

Year Numbers of Form D issued

by the Lao PDR

Total Export Value declared under Form D (US$)

2001 1 17,100.00 2002 26 277,410.002003 312 1,700,002.802004 279 2,636,138.96

From Jan-June, 2005 451 4,221,571.75Source: Statistics provided by the Foreign Trade Department, MOC, 2005.

64 The Rule of Origin allows for accumulation of materials and intermediate products from other benefitary coutries in the calculation, provided that the value added in the exporting LDCs is at least 25 percent.

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Although Form D has recently been used much more, these exports still are only a small percentage - 0.5 percent in 2004 - of the total exported to ASEAN.65

Table 29: Usage of ASIP Forms

Year Numbers of ASIP Forms issued by

the Lao PDR

Total Export Value declared under ASIP Form (US$)

2003 6 26,558.90 2004 526 8,002,713.26

From Jan-June, 2005 128 2,093,142.46 Source: Statistics provided by the Foreign Trade Department, MOC, 2005.

Up to 2005 no trader had used Chinese EHP or GSP giving rise to concern amongst trade offcials. There are two possible explanations. Traders may not know of its existence because of the poor dissemination of information. Secondly, traders may be put off by the complex process of getting all the necessary papers including the certificate of origin. Moreover, the fact is that lenient border customs practices make informal cross-border trade a better alternative.

2. 6. 8. Practical Implementation of Trade Concessions

Neighbouring countries often fail to respect their commitments to trade liberalisation and the freeing-up of restrictions on bilateral trade with the Lao PDR. Although, the governments agreed to several initiatives not all have been implemented. The Thai policies, in response to recent WTO decisions on regional trade, are clear. The Lao PDR has received the documentation on specific commodities, in respect of quotas and tax rates. The Chinese response has been much slower (GTZ, 2002). There is a need to gather, update and disseminate all the information on Lao trade integration to the trade agencies and the private sector, in particular the trade businesses. Some coordination must be done to take advantage of the official quotas and concessionary tariff rates.

2. 7. Constraints generated by policy

A non-transparent policy environment often leads to a low level of efficiency in the economy and could enventually lead to loss of government revenue. Trade policy, can also affect micro-level development. It is “countra-poor” instead of “pro-poor” particularly if the business environment does not help either SMEs - the small producers, commercial farmers and importers of consumer goods - or facilitate the inputs needed for export production. In many cases, Lao trade management practices have discouraged entrepreneurs from investing or expanding their production.

65 Fane and Khamlusa (2005) reported that Form D was used in 2004 and 2005 for export values of US$ 1.7 million and $ 2.9 million respectively - only 0.4 percent and 0.7 percent of the total merchandise exports. Also, as reported by Fane and Khamlusa (2003), Form D was first used in 2003 for an import value of only US$130,037, or about 0.02 percent of total merchandise imports.

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The ease of doing business:

Businesses must go through cumbersome procedures to obtain licenses and approvals. These procedures are the first constraints on doing business in the Lao PDR. Businesses are in fact in the “ask-grant” situation in all the processes of getting approvals from government agencies. The complex procedures and time-consuming paperwork either for the required approvals or in order to obtain preferences are the most nuisance for many businesses. The Lao PDR was ranked 147th of 155 global economies - the lowest in Asia and the Pacific - in terms of the ease of doing business. The Lao PDR appears much less attractive to potential investors than do other developing countries in the region. It takes on average 198 days - nearly 4 times as long as the East Asian and Pacific averages - to complete all the procedures for “starting a business” and the number of procedures required in “dealing with licenses” are 24 compared with the regional average of only 17. The hurdles in doing business in the Lao PDR are are more related to time delays rather than financial burdens. (World Bank, 2005) Table 30: Cross-country comparisons on procedures and license requirements

Starting a Business Dealing with Licenses Region No. of

procedures required

Time (days)

Cost (% of capita

income)

No. of Procedures

required

Time (days)

Cost (% of capita

income) East Asia & Pacific 8 51 41.7 17 153 141.5 Lao PDR 9 198 15.1 24 208 224.5 Cambodia 10 86 276.1 28 247 606.7 Vietnam 11 50 50.6 14 143 64.1 Indonesia 12 151 101.7 19 224 364.9 Philippines 11 48 20.3 23 197 121 Thailand 8 33 6.1 9 147 17.3 China 13 48 13.6 30 363 126

Source: World Bank, “Doing Business 2005”.66

Lao businesses are not at much more of a disadvantage than neighbouring countries in terms of taxes (see table 20 below). However, since the Lao tax system is largely at the discretion of tax officers, businesses could be treated unfairly. All the small taxpayers - 95 percent of business registrations - pay fixed taxes at negotiated rates.

66 Note:

- The numbers of procedures required for “Starting a Business” are only those legal procedures which are non-industry-specific.

- “Dealing with Licenses” is concerned with sector-specific procedures; a procedure is any interaction of the company’s employees or managers with external parties. The number of procedures in “Dealing with Licenses” represents the number of procedures required for a phase of doing business that a business in a specific sector undergoes. (The model is a business in the construction industry to build a standardised warehouse). These include obtaining all necessary licenses and permits, completing all required notifications and inspections and submitting the relevant documents to the authorities; also records procedures for obtaining utility connections, such as electricity, telephone, water and sewerage.

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Table 31: Cross-country comparison on tax payments

Tax Payments

Payments (number)

Time (hours)

Total tax payable (% gross profit)

East Asia & Pacific

28 251 31.2

Lao PDR 31 180 24.7 Cambodia 27 97 31.1 Vietnam 44 1,050 31.5 Indonesia 52 560 38.8 Philippines 62 94 46.4 Thailand 44 52 29.2 China 34 584 46.9

Source: World Bank, 2005”

Other factors - for example requirements for registering property and access to credit- also make the Lao PDR a much less attractive option for foreign investors. Table 32: Cross-country comparison on the ease of registering property

Registering Property Region Procedures

(number) Time

(days) Cost (% of

property value) East Asia & Pacific 4 60 5 Lao PDR 9 135 4.2 Cambodia 7 56 4.7 Vietnam 5 67 1.2 Indonesia 7 42 11 Philippines 8 33 5.7 Thailand 2 2 6.3 China 3 32 3.1

Source: World Bank, 2005 Table 33: Cross-country comparison on the ease of getting credit

Region Legal Rights Index

Credit Information Index

Public registry coverage (% adults)

Private bureau coverage (% adults)

East Asia & Pacific

5.3 2 1.7 12.7

Lao PDR 2 0 0 0 Cambodia 0 0 0 0 Vietnam 3 3 1.1 0 Indonesia 5 3 0 0.1 Philippines 3 2 0 3.7 Thailand 5 4 0 18.4 China 2 3 0.4 0

Source: World Bank, 2005

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State operating commercial banks (SOCBs) monopolise the banking system. Access to finance through the local banks is hampered by difficulties in re-possession, sale of collateral and by the SOCB’s large percentage of non-performing loans. Weakness in the banking system results in low credit availablity for private enterprises.67 Lao foreign trade procedures are still cumbersome. The Lao PDR is lagging behind its neighbours in simplifying and facilitating foreign trade. Table 34: Cross-country comparison on the ease of cross-border trade

Exports Imports Region No. of documents

No. signatures

Time (days)

No. of documents

No. signatures

Time (days)

East Asia & Pacific

6 7 25 10 8 27

Lao PDR 12 17 66 16 28 78 Cambodia 8 10 43 12 18 55 Vietnam 6 12 35 9 15 36 Indonesia 7 3 25 10 6 30 Philippines 6 5 19 8 7 22 Thailand 9 10 23 14 10 25 China 6 7 20 11 8 24

Source: World Bank, 2005

The private sector has complained mostly about the bureaucracy which hinders business and about the vague laws and regulations. Another complaint is the low competency of government agencies in overseeing and administering the rapid growth of business activities. Vague laws and discretionary authorities of government officials leave room for corruption. Too many licenses and approvals mean poor monitoring since the government capacity is limited. Officials authorised to approve applications have great power while the businesses only care about time delays and foregone profits. Regulations and an administration favouring state-owned or state-shared enterprises give rise to unfair competition. Large investments at the expense of small local enterprises discourage entrepreneurship. If there is no level playing field for private actors, the use of local skills and local products will be much lower. The private sector - especially the SMEs - provides employment and creates backward economic linkages. Small businesses - those employing fewer than 10 workers - constitute 60 - 70 percent of the total Lao manufacturing output. Thus the importance of private sector development should be recognised and encouraged by removing the special privileges given to state-owned enterprises and foreign investment projects.

67 ITC, 2005 Executive Forum on National Export Strategies. “Export of Services: Hype or High Potential? Implications for Strategy-Makers”: Oudet Souvannavong (President of “Lao Hotel and Restaurant Association), “Developing Private Sector Services with the Help of National Chambers and Industry and Business Organisations in Laos”.

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2. 8. Challenges facing the Lao PDR and Policy Implications:

In general, Lao trade policy is moving in the right direction. Trade liberalisation consists of (i) lowering the tariff barriers under the ASEAN-AFTA and other trade agreements as part of the commitments to regional integration, (ii) reducing all the non-tariff barriers and (iii) amending all the laws and regulations to comply with the WTO rules. However, sometimes the policies and their implementation fail to create a uniform approach to (i) opening up trade to more participants, (ii) giving equal treatment to all business sectors, and (ii) establishing a sound competitive environment. Inconsistency between different policies and between policy and actual implementation is a threat to the determination of improving the country’s image in the global economy and enhancing the trust of international partners. The challenges for the Lao PDR are alarming and cannot be ignored. More reforms in trade policy and other related policy are crucial so that the country can exploit the current opportunities in international trade and be well-prepared for the fiercer competition in the near future. Policy recommendations:

Foreign trade liberalisation is inevitable under the current commitments. WTO membership would give the Lao PDR greater opportunities but would also give domestic producers more competition. Policy must create a level playing field for all. Any bias or discriminatory treatments would only create temporary benefits for some while harming the competitive foundation of the economy.

The gradual erosion of the value of current preferential access regimes along with the advancement of MFN-based liberalisation is inevitable. The implication is that reliance on preferential access to certain markets is not sustainable. Actions to improve the competitiveness and productivity of national firms and farmers should be emphasized.

Under-utilisation of AFTA concessions and AISP preferences has been reported in both Lao imports and exports as a result of either the documentary procedures or administrative inefficiency. Administration reforms and improving the capacity of trade facilitating agencies are critical.

The consistency in policies and practices across sectors and provinces must be guaranteed. This requires greater harmonisation among provincial authorities and the leading role of the central government in supervising the policy implementation at provincial and lower levels.

Enforcement of laws and regulations needs to be strengthened, especially in the provinces. Stringent policy implementation and reduction of exceptions given on case-by-case basis would help improve revenue collection.

There is a lack of information and a low level of both human resources and infrastructure: The Impact of EHP between China and the Lao PDR may not have a demonstrative effect on cross-border trade, because of the informal nature of the current trade flows, the lack of information and the low

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awareness of trade and customs officers at provincial and district levels. There is even less awareness among traders and producers. This lack means that Lao farmers who could increase production for export may lose markets in Southern China to competitors from Myanmar, Thailand, and Vietnam. This highlights the need to speed up reforms in both administration and institutions, and to invest more in capacity building.

To ensure the full implementation of the trading partners with regard to trade concessions and trade facilitation, coordination between the line agencies and these countries would address the current problems. Also the need to collate and disseminate commercial information to the government trade agencies and the private sector is of equal importance.

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Part III: Transit trade

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Introduction Since the Lao PDR is landlocked, geographic constraints have impeded any dynamic economic growth. Business is often seen as being less attractive and of higher-cost compared to that offered by the neighbouring countries. However, the Lao PDR can benefit from its geographic position if the country is connected to all the major regional transit routes. The Lao PDR would be at the crossroads of all the regional trade and transport routes. Transit trade, thus, should not be overlooked in the overall Lao trade picture. Transit trade is not a new phenomenon. The Lao PDR has long been an intermeditary between Thai and Vietnamese traders and between Thailand and China, and even between other southern neighbours like Malaysia, Singapore and Vietnam, and China in the north. The ever-increasing demand for mobility, transport and tourism means that the Lao PDR not only benefits from land transit transport, but also air transport and to some extent river transport. Over-flight fees collected from foreign aeroplanes contribute a important part of foreign currency to government revenues. The GMS framework and its numerous infrastructure projects are giving the Lao PDR the once-in-a-lifetime opportunity to be land-linked and more accessible. The flows of goods into and out of the country will increase as soon as other barriers like customs and document procedures are simplified or removed. The scope of this part includes an analysis of the advantages and disadvantages of for the Lao PDR in offering a transit route to regional trade; the transit agreement framework and implementation scenario; the Lao transportation sector; constraints and recommendations for trade facilitation; a fairly detailed account of transit trade, a closer look at both the provincial and forms of trade; and lastly a qualitative analysis of the impacts of transit trade - how to maximize its contributions to government revenues and to local livelihoods.

3. 1. Geographic location and transportation:

The Lao PDR is landlocked sharing a 505 km border with China to the north, a 435 km border with Cambodia to the south, a 2,069 km border with Vietnam to the east, a 1,835 km border with Thailand to the west, and a 236 km border with Myanmar r) to the northwest (UN website: http://www.un.int/lao/_in_brief.htm). The country stretches 1,700 km from north to south, with an east-west width of over 500 km at the widest and only 140 km at the narrowest point. The Lao PDR covers a total of 236,800 sq km. Three-quarters of the total are mountains and plateaux. Landlocked developing countries face a range of special constraints that inhibit their full participation in the globalisation process (ESCAP, 2003). For a land-locked country, three dimensions of trade facilitation need to be tackled: the physical isolation from foreign markets, the efficiency of logistical services and the availability of infrastructure and border crossings. The physical isolation has inhibited a direct connection between the small Lao economy and the world market creating little incentive for big merchants to come to

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trade. However, with today’s technology, the distances between major markets in the Lao PDR and the gateway ports in Thailand and Vietnam are no longer significant - they are less than 700 km away - or only a day’s travel by truck (DTIS, 2004). In a 2005 interview a freight forwarder said that the transport time to Thai ports could be reduced to about 12 - 15 hours if there were no delays in customs procedures. Both land borders and river crossings are important for the transportation of goods. The number of international land border gates has increased to thirteen comprising seven with Thailand, five with Vietnam, and one with China. (In addition, there are three international airports for air freight). Types of transport Land and water are the two main types of transport in the Lao PDR. The transport situation is summarised in the following tables: Table 35: Freight transport 2000-2004

Year Total By land By water By air tons tons % of

total tons % of

total tons % of

total 2000 2308 1635 70.83 672 29.11 1.5 0.06 2001 2283 1543 67.57 739 32.36 1.4 0.06 2002 2750 1946 70.74 770 27.99 1.9 0.07 2003 3068 2174 70.85 893 29.10 1.5 0.05 2004 4043 3102 76.72 939 23.24 1.5 0.04

Source: NSC Statistics 1975-2005 Table 36: Freight traffic 2000-2004

Year Total (million tons

km)

By land (million tons

km)

By water (million tons

km)

By air (million tons

km) 2000 221.6 162.2 58.9 0.6 2001 235.5 171.1 64.0 0.4 2002 266.8 163.4 69.6 0.6 2003 298.6 242.3 55.5 0.9 2004 378.6 328.3 49.6 0.7

Source: NSC Statistics 1975-2005 Land transport: About two thirds of all freight is transported by land, even though around two thirds of the population still live more than 6 km from the nearest road and more than 25 percent of all district centres do not have year-round road access (UNESCAP, 2003). And one third of rural households are without any road access at all (LECS 3, 2002-03). There are around 32,000 km of roads – about a quarter are national roads. About 52 percent of national roads and 14 percent of all roads are paved (UNESCAP, 2003).

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However, the maintenance of these roads is still a challenge as there is a lack of financial resources. Table 37: Length of the roads in the Lao PDR 1990-2004 1990 1995 2000 2001 2002 2003 2004 Total length of the roads

13,971 18,363 25,090 25,090 32,625 31,204 31,209

Tarred roads 3,346 2,446 3,897 3,897 4,592 4,491 4,497Gravelled roads 4,775 5,138 5,315 5,315 9,661 10,097 10,097Earthen roads 5,850 10,779 15,878 15,878 18,372 16,615 16,615

Units: km Source: Ministry of Communication, Transport, Post and Communication. Reported in NSC, 2005 “Statistics of Lao PDR 1975-2005” Table 38: Lao PDR’s road network in 2003

Road class National Provincial Rural Total

Paved 3,771.14 197.56 428.52 4,497.22Gravel 2,243.76 3,038.39 4,815.14 10,097.29Earth 1,125.88 3,239.79 11,249.79 16,615.46Total 7,140.78 6,475.74 16,493.45 31,209.96

Unit: kms Source: MCTPC report 2004. In recent years the national roads have improved a great deal as a result of aid programs and loans from international donors. The arterial roads were rehabilitated and improved first. National Road (NR) 13 is the backbone of the road system running north to south from the Chinese to the Cambodian border. Critical east-west links with Thailand and Vietnam have also been developed. The national road network now must be extended into the provincial and rural areas to ensure that the social and economic benefits of road developments are available to all. The freight traffic between Vientiane and the southern provinces has increased significantly since the improvement of NR 13. Road No 9 from Muong Phin to Dong Ha in Vietnam is being upgraded as part of the GMS East-West Economic Corridor program. This will facilitate trade and give the poor majority access to markets, employment opportunities, education and health care and hopefylly.help to reduce poverty.

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Box 9: The GMS and regional integration Source: News from VOA, 13 January 2006.

The Asian Development Bank and the GMS countries have agreed on 29 projects to develop infrastructure to link the six GMS members to facilitate internal communications and transportation. Two of these projects are through the Lao PDR. They have also agreed to expand their cooperation in developing a sustainable eco-tourism industry in the region during 2006 - 2015, with the aim of reducing poverty. Road No 3 linking Southern China to Northern Thailand via the Lao PDR - through Luang Namtha and Bokeo provinces - is under construction while Road No 9 - part of the East-West Corridor - linking Thailand and Vietnam via Savannakhet, has been completed apart from the second Friendship Bridge over the Mekong River (to be completed by the end of 2006) linking Savannakhet and Mukdahan.

Box 10: The East West Economic Corridor and prospects for transit trade

The East West Corridor will open up new vistas for all three countries - Vietnam, the Lao PDR and Thailand. Central Vietnam has several ports - Vinh, Quy Nhon and Da Nang - as well as the planned deep-sea ports at Dung Quat, Chan May and Lien Chieu. When completed, these ports will be gateways to a huge hinterland. Northeast Thailand has potential for agricultural development and the production of consumer goods. Central Lao PDR is rich in agricultural, forestry, mineral and hydropower resources. Central Vietnam has land suitable for industrial crops, and forest, marine and mineral resources.

Projections for commodity flows along the East West Corridor see volumes roughly doubling between 2000 and 2010 and doubling again in the following decade.

Nearly half the 350,000 population living in the Route 9 project area are very poor. The road will provide them with better access to markets, job opportunities, education and health care.

Source: The Asian Development Bank’s website

The road from Savannakhet to the Vietnamese port of Danang has been completed. The “one-stop” customs inspection was first implemented at the Lao-Vietnam border gate - Dansavan-Lao Bao. Despite the substantial improvement in infrastructure, transport via Vietnam is still considered less favourable than that via Thailand, because of the distance, the limited infrastructure, operational difficulties, and some hindrances in documentation procedures. Water transport The Lao waterways provide an alternative mode of transport. Freight traffic in the form of bulk commodities is moved along the Mekong River. The Mekong River, the longest river in South East Asia, flows for 1,865 km (one third of its total length of 4,800 km) through the Lao PDR from north to south. The river is

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not navigable for its entire length because of waterfalls, shoals and the seasonal variations in water level. Nevertheless the Mekong is still an important means of transport, particularly for those mountainous areas inaccessible by road. Three stretches of the river: (i) from Houaxay (in Bokeo province) to Luang Prabang, (ii) from Luang Prabang to Vientiane, and (iii) from Vientiane to Savannakhet, are busy domestic trading routes. Since the Mekong River also flows through neighbouring countries, river transport and cross-border trade would increase extensively if trans-border cooperation were in place. The Quadripartite Agreement on Commercial Navigation in the Upper Mekong region68 - signed in April 2000 - is aimed at allowing the free passage of boats of the four countries along the 886.1 km stretch of river from the Chinese port of Simao and the Lao port of Luang Prabang. In March 2001 the four countries agreed on six common technical rules and regulations. And in June of the same year commercial navigation on the Lancang and Mekong Rivers was officially inaugurated in Jinghong, China. Under the Navigation Channel Improvement Project, along with other navigation regulations, shoals in the area are targeted for removal so that ships can sail safely in any season.

Since the implementation of the Agreement on Commercial Navigation on Lancang/Mekong Rivers, river traffic in the north of the country - where the majority of the population lives close to the Mekong and at some distance from NR 13 - is rapidly increasing.

Before the improvement of the road linking the two cities of Vientiane and Savannakhet, river transport was widely used particularly during the wet season. Even now the transport of bulk commodities on the Mekong River on this section is still significant - 52 - 71 percent of the total volume between Vientiane and Savannakhet is carried on boats. The stretch of river between Savannakhet and Pakse is un-navigable in the dry season because it is too shallow. And even during the wet season, it carries the least amount of traffic. Very little is transported on the Mekong River’s tributaries - from 0.5 to 3.5 tons on the Nam Ou River, and from 0.5 to 3.5 tons on the SeKong River. Only a small amount is transported on the other tributaries and this is transported usually within a fifty km radius from their junctions with the Mekong River. In 1999, 602,000 tons or 25,872 thousand tons/km in total were transported domestically by river cargo vessels, compared with 681,000 tons or 21,013 thousand tons/km in 2000; and 495 thousand tons or 25,032 thousand tons.km in 2001.

68 This agreement is between China, the Lao PDR, Myanmar and Thailand

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3. 2. Transport and Transit Agreements:

3. 2. 1. ASEAN arrangements for transport and transit:

From the very early stages the ASEAN Framework Agreement on Economic Cooperation recognised the importance of cooperation in transportation. The 1992 Singapore Declaration pledged “to further enhance regional cooperation […] to provide a safe, efficient and innovative transportation and communications infrastructure network”. At the centre of the ASEAN Plan of Action in Transport and Communications (1994 - 96, revised in 1996 - 98) is the development of multimodal transport and trade facilitation with the objective of reducing time and cost of marketing and distribution of goods. Liberalisation of transport services is an important ASEAN objective consistent with and supportive of the ASEAN Leaders’ commitment, recorded in the Bali Concord of October 2003, to the development of ASEAN as a single market and production base. Specifically, it furthers the goal of instituting new mechanisms and measures to strengthen the implementation of its existing economic initiatives (including the 1995 AFAS) and supports the goals and strategies enunciated in the Transport Sectoral Action Plan of 2005-2010. In 1998, ASEAN Transport Ministers agreed to a timetable for the implementation of the ASEAN Framework Agreement on the Facilitation of Goods in Transit. This Agreement has three major objectives:

• to facilitate the transport of goods in transit within AFTA and reduce unnecessary delays,

• to simplify and harmonise transit goods related regulations, and • to establish an integrated regional transport system.

To realise these objectives, ASEAN member countries agreed to each others’ right (i) of transit transport; and (ii) to load and discharge third countries’ goods destined for or coming from others. Most importantly, transit transport should not be subject to any unnecessary delays or restrictions and should be exempt from customs duties, taxes and other charges except charges for specific services rendered in connection with such transport. Goods carried in sealed road vehicles, vehicle combinations or containers shall not be subjected to examination at customs offices en route, except for the prevention of smuggling and fraud.

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Table 39: Status of Protocols - ASEAN Agreement on the Facilitation of Goods in Transit 1998

Protocol 1 Designation of Transit Transport Routes and Facilities

Protocol 2 Designation of Frontier Posts Types and Quantity of Road Vehicles Concluded on 15th

September, 1999, Hanoi, Vietnam

Protocol 3

Technical Requirements of Vehicles Concluded on 15th September, 1999, Hanoi Vietnam.

Protocol 4

ASEAN Scheme of Compulsory Motor Vehicle Third-Party Liability Insurance

Concluded on 8th , April, 2001 in Kuala Lumpur, Malaysia.

Protocol 5

Protocol 6 Railways Border and Interchange Stations Protocol 7 Customs Transit System

Concluded on 27th October, 2000, Phnom Penh, Cambodia.

Protocol 8 Sanitary and Phytosanitary Measures

Protocol 9 Dangerous Goods Concluded 20th September, 2002 in Jakarta, Indonesia.

Source: ASEAN Secretariat Website http://www.aseansec.org/7377.htm

3. 2. 2. GMS Transport and Transit Agreement:

The GMS cooperation framework recognises that regional and trans-border transport issues play a crucial role in facilitating trade.

The GMS Cross-Border Transport Agreement (GMS Agreement) is a multilateral instrument for the facilitation of cross-border transport of goods and people and is a formal agreement between the Governments of Cambodia, China, the Lao PDR, Myanmar, Thailand and Vietnam on the Facilitation of Cross-Border Transport of Goods and People. The agreement came into force at the end of 2004. This means that those articles not requiring annexes or protocols can now be implemented.69 As of February 2005, there were still 5 annexes and 2 protocols under negotiation.

Formulated under the auspices of ADB technical assistance, the GMS Agreement provides a practical approach - in the short to medium term - for streamlining regulations and reducing nonphysical barriers in the GMS. It incorporates the principles of bilateral or multilateral action, and flexibility in recognition of differences in procedures in each of the GMS countries.

69 There are currently 17 annexes and 3 protocols that will be negotiated and finalised by the GMS countries during 2003 - 2005. An annex is an attachment to the Agreement that contains technical details, and forms an integral part of the Agreement, and will be equally binding. A protocol is an attachment to the Agreement that contains time or site- specific variable elements. It forms an integral part of the Agreement and is equally binding.

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The GMS Agreement includes references to existing international conventions and also takes into account, and is consistent with, similar initiatives being undertaken by ASEAN. Thus, it is supplementary to and a catalyst for the 1998 ASEAN Framework Agreement on the Facilitation of Goods in Transit.

The GMS Agreement is a compact and comprehensive multilateral instrument, which covers in a single document all the relevant aspects of cross-border transport facilitation. These include

• single-stop/single-window customs inspection • cross-border movement of persons (i.e., visas for persons engaged in

transport operations) • transit traffic regimes, including exemptions from physical customs inspection,

bond deposit, escort, and phyto-sanitary and veterinary inspection • requirements that road vehicles will have to meet to be eligible for cross-

border traffic • exchange of commercial traffic rights • infrastructure, including road and bridge design standards, road signs and

signals

The GMS Agreement will apply to selected and mutually agreed upon routes and points of entry and exit in the signatory countries. Table 40: List of Annexes and Protocols of the GMS Cross-Border Transport Agreement

Annex 1 Carriage of Dangerous Goods Annex 2 Registration of Vehicles in International Traffic Annex 3 Carriage of Perishable Goods Annex 4 Facilitation of Frontier Crossing Formalities Annex 5 Cross-Border Movement of People Annex 6 Transit and Inland Clearance Customs Regime Annex 7 Road Traffic Regulation and Signage Annex 8 Temporary Importation of Motor Vehicles

Criteria for Licensing of Transport Operators for Cross-Border Transport Operations Annex 9

Annex 10 Conditions of Transport Annex 11 Road and Bridge Design and Construction Standards and Specifications Annex 12 Border Crossing and Transit Facilities and Services Annex 13a Multimodal Carrier Liability Regime Annex 13b Criteria for Licensing of Multimodal Transport Operators for Cross-Border

Transport Operators Annex 14 Container Customs Regime Annex 15 Commodity Classification Regime Annex 16 Criteria for Driving Licenses Protocol 1 Designation of Corridors, Routes, and Points of Entry and Exit (Border

Crossings) Protocol 2 Road User Charges for Transit Traffic Protocol 3 Frequency and Capacity of Services (Quotas) and Issuance of Permits

Source: ADB website

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Table 41: Negotiation process of Annexes and Protocols under the GMS Cross-Border Transport Agreement

Source: Asian Development Bank, website.

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Table 42: Milestones of the GMS Cross-border Transport Agreement

DATE AND VENUE MILESTONES

5 July 2005 Kunming, People's Republic of China

• Signing of Stage 3a Annexes and Protocol

Annex 3: Carriage of Perishable Goods Annex 5: Cross-Border Movement of People Annex 10: Conditions of Transport Protocol 2: Charges Concerning Transit Traffic

16 December 2004 Vientiane, Lao PDR

• Signing of Stage 2 Annexes and Protocol

Annex 1: Carriage of Dangerous Goods Annex 9: Criteria for Licensing of Transport Operators for Cross-Border Transport Operations Annex 13b: Criteria for Licensing of Multimodal Transport Operators for Cross-Border Transport Operations Annex 16: Criteria for Driving Licenses

30 April 2004 Phnom Penh, Cambodia

• Signing of Stage 1 Annexes and Protocols

Annex 2: Registration of Vehicles in International Traffic Annex 4: Facilitation of Frontier Crossing Formalities Annex 7: Road Traffic Regulation and Signage Annex 11: Road and Bridge Design and Construction Standards and Specifications Annex 12: Border Crossing and Transit Facilities and Services Annex 13a: Multimodal Carrier Liability Regime Annex 15: Commodity Classification System Protocol 1: Designation of Corridors, Routes, and Points of Entry and Exit (Border Crossings)

• Establishment of the Joint Committee of the GMS Cross-Border Transport Agreement

19 September 2003 Dali, PRC

• Accession of Myanmar • Memorandum of Understanding for the Accession of the Union of

Myanmar

• Accession of the PRC 3 November 2002 Beijing, PRC

• Memorandum of Understanding for the Accession of PRC 3 November 2002 Phnom Penh, Cambodia

• Accession of Cambodia 29 November 2001 Yangon, Myanmar

• Signing of the GMS Cross-Border Transport Agreement 26 November 1999 Vientiane, Lao PDR

Source: Asian Development Bank, http://www.adb.org/GMS/Cross-Border/milestones.asp

As of July 2005, three annexes (Annex 6, Annex 8 and Annex 14) and one protocol (Protocol 3) are still under negotiation.

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3. 2. 3. Bilateral agreement with Thailand

Until November 1999, transit trade between the Lao PDR and Thailand was regulated under the 1978 Agreement on Transit Trade which stated that the cross-border carriage of goods could be by only those road hauliers designated and licensed by each country. In fact, of the five operators licensed for transit cargo, four were Thai companies and one was a Thai-Lao joint venture. The new transit agreement, the original GMS Agreement70, was reached in 1999 replacing the 1978 Agreement. Although not yet fully implemented (UNESCAP, 2003), this agreement benefits Lao exporters by eliminating the need for trans-shipment in Nongkhai or Mukdahan and by reducing the transit time - for the physical transfer and the paperwork - by one or two hours. It should also reduce any damage to and theft of cargo during the trans-shipment as the new agreement removes the need for customs checks for properly sealed cargo, as well as for the unofficial payments made to Lao and Thai customs officials. It also allows certified trucks from each country to deliver or pick up cargo from the other. Thai trucks will be able to go into any province in the Lao PDR, but a ceiling on the total number of operators remains in force (UNESCAP, 2003). One important element of the agreement was that the regulation framework changed to allow for more competition in transport and transit services bringing about a significant reduction in costs and a modest reduction in shipping time for exports. According to the MCPTC, by March 2005, there were 11 registered companies with 671 vehicles trans-shipping between Thailand and the Lao PDR. And transportation costs have decreased by 20 - 30 percent71. Moreover, the hours of the Friendship Bridge customs office have been extended from only 10 hours a day (from 8:00 to 18:00) to 16 hours (from 6:00 to 22:00). However, the Thai monopoly of transport services still exists. Lao exporters have no choice but to hire a Thai company to transport their goods through Thailand. And there are only five Thai companies actually operating in trans-shipping cargoes between Thailand and Vietnam72. The obstacles are due to the cumbersome Thai regulations and procedures, and also to the failure of the Lao transport companies (specifically their trucks and drivers) to meet Thai standards and requirements.

70 Agreement between and among the Governments of the Lao PDR, Thailand, Vietnam for Facilitation of Cross-Border Transport of Goods and People, dated 26 November 1999. 71 Minutes of the meeting between the Lao and Thai transportation ministries in Chiang Mai, 2-3 March 2005 72 These five licensed operators are:

- Express Transport Organisation (ETO), - Ubonsahantham, - Regional Container Line (RCL), - TL Enterprise, and - Asian Transporting Company (AGL).

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Transiting via Vietnam ports is an alternative. Some roads to Vietnam and to the Vietnamese ports have just been completed or substantially improved. And the transit agreement with Vietnam allows Lao trucks to enter Vietnam and vice versa. However, the border crossing charge at US$153 is a bit higher in Vietnam than the US$131 in Thailand (Banomyvong, R., 2003).

3. 2. 4. Bilateral agreement with Vietnam

On 18 Jan 2000, the Lao PDR and Vietnam reached a new transit agreement amending the 1994 Agreement. Under the 1991 agreement all transit traffic through Vietnam had to go through 8 designated points. There were no restrictions on the choice of Vietnamese ports - Danang, Haiphong, Ho Chi Minh or Vinh - for landing transit cargo bound for the Lao PDR. An agreement on the use of Vung Ang (near Vinh) to handle Lao transit cargo, was signed by the two governments in 2001. Transit quotas governing the transport of goods through Vietnam were removed in 1994, Transit permits through Vietnam are needed only for certain restricted items - dangerous goods or ammunition. Vietnamese vehicles are permitted to enter the Lao PDR provided that an international transport permit is granted to that vehicle by a Vietnamese authority, and vice versa. The Vietnamese authorities issued such permits to 3,211 trucks in 2001 and to 2,326 trucks in 2002 (UNESCAP, 2003).

3. 3. Cross-border transportation

Thai operators dominate in cross-border transportation since they have wide networks, high-standard vehicle fleets and provide a reliable service. Until recently, the Thai government limited the number of transit clearance agents and trucking companies allowed to carry goods in cross-border transit. In 2003, only 5 forwarders or trucking companies were authorized for cross-border transit to the Lao PDR. The 2004 revision of the Lao-Thai transit agreement removed this restriction, and led to a dramatic drop in the inclusive freight rates from the Lao PDR to Thai seaports. In contrast, domestic goods transportation is largely restricted to local operators. This policy is a means for the Lao government to protect its own transport sector. The 2004 revision of the Lao-Thai transit agreement stipulated that carriage of domestic cargo and trans-shipment of goods within the country may only be carried out by domestic operators. Most transit trade is still in the form of import for re-export. Transit goods are first imported and unloaded at a warehouse. After buy-sell contracts are settled, the goods are removed, re-loaded onto Lao trucks and transported to the border, where they are transferred to the importers’ trucks. The transportation of transit goods from Thailand to the warehouse is often carried out by Thai trucks. The transportation of these goods from the warehouse to the other border is usually by Lao trucks. This is a provincial regulation to ensure certain benefits for Lao trucks and transport operators. However, in the case of Bolikhamxay, Vietnamese exporters transport their goods to the border with Thailand - Paksan international checkpoint.

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From interviews with provincial trade and customs officers in Bolikhamxay and Savannakhet, it is known that direct transit trade and transactions between traders from the two other countries have begun. Some infrequent arrangements of direct transit trade, without unloading or trans-shipping goods, have been authorized.

3. 4. Transportation Costs, Logistics and Trade Facilitation

Solving the problem of being landlocked: Transit to seaports At present, the three main transit corridors from the Lao PDR through Thailand are via:

Thanaleng (Vientiane) and Nong Khai Savannakhet and Mukdahan, and Pakse (Champasak) and Chong Mek (Arnold, 2003, page 24)

Ninety percent of Lao transit trade value goes across the Mekong River by the Friendship Bridge to Nongkhai in Thailand and thence to Bangkok by a 642 km four-lane good highway. Cargo transported to and from the provinces of Khammouane, Savannakhet and Saravanh crosses the Mekong by barge73 and then goes by a two-lane road through Ubon Ratchathani to Laem Chabang. The distance to Bangkok is 663 km, slightly longer than the first route. The third route is used by cargo transported to and from the southern region, especially Champasak. It crosses the Mekong on a recently opened bridge and from there follows a four-lane road approximately 747 km to Bangkok. Lao trucks entering Thailand must pay for:

a laisser passer issued by the Lao police, authorization from DCTPC, customs duties, document clearance and stamp, and a border pass.

On the Thai side of the border, the trucks must pay for document clearance and insurance74’ Lao domestic transport costs are high. The transport cost from Vientiane to Thanaleng is US$50 (Arnold, 2003) because of both the short distance and the restrictions on transportation businesses in the Lao PDR. (Foreign operators are not allowed to open transportation businesses (JICA, 2005)).

73 The international bridge connecting Savannakhet and Mukdahan is under construction and expected to be completed by the end of 2006. The road from Ubon has also been widened. 74 Third party liability coverage is required for vehicles operating in the GMS countries. Insurance for vehicles transiting other countries is purchased at the time of crossing the border.

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Thai companies dominate the supply of transportation services both in and out of the country. Lao businesses often complain that the Thai transport companies charge too much. This results from the limited number of transit transport companies approved by Thai authorities (JICA, 2005)’ The high freight cost is borne by the Lao PDR itself. The freight cost to the Thai port of Bangkok is US$950 per standard 6 foot container. In spite of a reduction of about 30 percent - from US$1,200 to $950 - as a result of the transit agreement with Thailand it is still a vast burden on producers. And it is 40 percent higher than the transport price between Los Angeles and Beijing. The Lao PDR is unable to export its goods at competitive prices bcause of the high transportation cost. One explanation for these unreasonable charges by transport companies is the lack of competition - Thai transport companies still dominate. If Lao transport companies were able to enter this business and offer a direct shipping service from the factories to Thai ports, a market price for transport would be established and this would be considerably lower than the current price - 50 percent lower, according to Mr. Prachit Sayavong, Managing Director of Societé Mixte de Transport Co Ltd75. Constraints of the logistics sector and Recommendations: Lao transport companies face a number of constraints - the most important being the lack of capital. Rural based companies are unable to build warehouses and do not have trucks in a condition good enough to be allowed to operate in foreign countries (Thailand, in most cases). To overcome these problems, Lao companies need access to loans to upgrade their vehicles. However, they are unable to borrow a large amount of money from either domestic or foreign banks while their profits cannot cover the costs of new trucks or warehouses. Moreover, another constraint to the development of Lao companies is local companies are not given the privilege of purchasing trucks at one percent tax. “Large investment companies are allowed to import trucks at one percent tax,” said Mr. Prachith. To reduce the transportation costs, warehouses and trucks meeting standards are necessary. If Lao businesses had a warehouse they would be able to organize the goods properly. If local Lao companies or the Lao Transport Association had their own warehouses, they would be able to stock and arrange goods for Thai trucks to ensure that they would not return empty. Thai trucks, which can not stay for longer than two nights, currently often return empty, thus, Lao transport customers are charged a two-way trip for one-way transportation. 76

Truck availability helps reduce transport costs: Trucks in good condition that can operate safely in Thailand will break the dependence on Thailand. If Lao trucks were able to get to Thai destinations then both countries’ fees for checking could be reduced to about 30 percent of the total current fees. 75 Source: Update magazine, 2005 (Lao). “The Way to Reduce Transportation Costs”, by Anoulack Khammalavong, Vol. 4, Issue No. 8, 2005. 76 Also note by John Arnold, 2003, p. 25 that most Thai trucks carrying imported goods for The Lao PDR to Thanaleng go back to Thailand empty. The problem of empty backhauls is due to the imbalance of Lao foreign trade, which is compounded by the imbalance of flows from Bangkok to the Northeast of Thailand, which is again compounded by restrictions in the Thai trucking market.

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An inland container depot (ICD) for the temporary import of containers into the Lao PDR can be established but this rarely happens because of the cost of transporting the empty container to Thanaleng. An ICD can be used for certain fragile and high value goods. Most Lao importers prefer to un-pack the container at the port of Bangkok and trans-ship the goods by 10-wheel trucks. In order to encourage greater use of containers, it is necessary to reduce the cost of the “bond” levied by shipping lines for their movement into the Lao PDR. Another possibility is the development of a repositioning facility from where boxes could be dispatched for loading into export containers or for the return of empty import containers. These ICD facilities could be incorporated into the border enclaves and facilitate the implementation of the new transit trade treaty. This would also encourage competition in the provision of trucking services and permit the unhindered flow of sealed containers between the Lao PDR and gateway ports. The ICDs would have facilities for storage and dispatch of empties, and for packing or unpacking of containers, and systems for inventory control and box tracking. They would accommodate both land and ocean containers. The ICDs would serve containers moving under through-bills-of-lading as well as those moving under separate land transport waybills. These facilities could evolve into dry ports, which would allow shipping lines to issue ocean bills of lading for cargo received at or delivered to the enclave. These would allow for less costly container transport by providing competition and creating opportunities for reducing empty backhauls. If effective, the ICDs should reduce the cost of container movements by up to 50 percent. They would also permit better scheduling of these movements to ensure a tight connection with vessel sailings (Arnold, 2003). Breakdown of transportation cost: A comparison (Banomyong, 2003) of border-crossing charges (per TEU77) at the Lao-Thai and Lao-Vietnamese borders showed the difference between the charges imposed by Vietnamese and Thai authorities. The total cost of transportation from Vientiane to Bangkok port is US$950 - $980 per TEU (20-foot container)78, for a distance of 670 km - about US$1.50 per km, considered high in the region. Lao trucks still do not go further than the bordering province (i.e. Nongkhai), or usually they stop at the border and the goods are transferred to a Thai truck to continue to the ports. 79

77 TEU: stands for “Twenty-foot Equivalent Unit” 78 2005 prices taken from a number of sources: DITS (2005), Khammalavong (2005) and interviews with some transport companies in Vientiane. 79 This was still the case up to September, 2005 according to an interview with Lao Freight Forwarder and confirmed by other exporting enterprises.

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Table 43: High cost in previous years, Transport cost for export and import via Thailand

Source: Arnold, J, 2003. ”Logistics Development and Trade Facilitation in Lao PDR” The World Bank Note: The transport cost Vientiane – Bangkok was between US$ 950 - $980 per TEU in 2005 (inclusive of customs fees and charges, but not tax or duty), a reduction from the price in previous years.

3. 5. Transit trade through the Lao PDR:

Table 44: Estimate of Transit Trade by MOC, as of July 2005. (US$) Year Border trade

(Imp+Exp) Re-export Transit trade Duty free

(import) 2001-02 674,615 88,727,686 34,617,113 26,560,5002002-03 3,120,956 77,187,654 37,235,1852003-04 3,765,681 15,178,48183,390,381 First quarter of the fiscal year 2004-05

643,292 21,387,441 413,285

Source: MOC, 2005

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Table 45: Transit trade by Province 2003–2004

Province Transit trade 2003 - 2004

Percentage

Vientiane Capital 1,242,269 1.49% Phonsaly 676,229 0.81% Luang Namtha 8,491,677 10.18% Bokeo 1,945,327 2.33% Bolikhamxay 15,000,000 17.99% Khammouan 287,232 0.34% Savannakhet 53,414,651 64.05% Champasak 2,332,996 2.80% Total 83,390,381 100.00%

Source: MOC, 2005. The origin and destination of transit goods through the Lao PDR are:

Thailand - Vietnam: Goods from Thailand to Vietnam can transit the Lao PDR in a number of ways. The busiest route is through Savannakhet. The road is good. - Road No 9 has been upgraded and the two borders are just 237 km apart. And the second international bridge across the Mekong between Mukdahan and Savannakhet is under construction and should be completed by end of 2006. Road No 8 through Bolikhamxay makes another convenient route carrying a large amount of transit goods. Champasak and Saravanh are also important routes.

China - Thailand: Goods from China transit through Luang Namtha,

Oudomxay or Bokeo to Thailand or vice versa.

China - Vietnam: Chinese goods usually enter the Lao PDR in Phongsaly and thence to Oudomxay, and on to Vietnam in a number of ways, namely Phongsaly and Xieng Khouang, or even further to the centre and south of the Lao PDR.

Summary of provincial transit trade Savannakhet In the past direct transit trade between Vietnam and Thailand was relatively small - there was a lack of mutual trust and business networking. This can be explained by history, cultural differences, different ideologies, and influences from powerful countries and conflicts in the region during the Cold War. As a result, some Lao business people often acted as middlemen coordinating and facilitating trade between the two countries. Re-export is an important form of trade in the Lao PDR, and involves transactions with both Thailand and Vietnam80. The goods from these countries are ordered by Lao trading companies, unloaded at storehouses and sold

80 Customs officers on both sides of the border report that approximately 70 percent of the total imports from either Thailand or Vietnam are re-exported to Vietnam and Thailand respectively (NERI, 2005)

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in the Lao PDR. Buyers from the third country are responsible for the transport to their country (DAN, 2004). Customs and trade officers in Savannakhet state that imports from Thailand - destined for sale to Vietnamese traders - must be put in local warehouses and Thai trucks are always used. Lao trucks - although Vietnamese trucks are also involved in this stage81 - provide the onward transportation to the Vietnamese border. This is partly because of the provincial regulations and the Lao middlemen. Direct transport and, to some extent, direct trade between Vietnam and Thailand are still limited due to differences in languages and cultures - the Lao PDR is considered close to both Thai and Vietnamese cultures. Most of the transit trade is from Thailand - around 80 percent of the total - and 60 percent of these goods move into Vietnam. Forty percent of goods from Vietnam are destined for Thailand. Thai goods traded to Vietnam through Savannakhet include electrical appliances - air conditioners, fridges, television sets, speakers, CD/DVD players rice cookers, hair driers, and irons - and construction materials - sinks and toilets branded “Cotto”- and both various quantities of basic consumption like snacks, milk, food preparation ingredients (sauces, dressings and MSG), sugar and M150 (a popular energy drink) Vietnam also exports a large amount of garlic and soybeans to Thailand. Some goes first to the Lao PDR for some simple processing - cleaning, selecting and packing - before sale to Thai traders. The Vietnamese garlic imports are mostly formal - imported by trading companies - while the re-exports to Thailand are both formal and informal - the Thai customs fee is high. Vietnamese clothes to Thailand also transit Savannakhet, although the distribution channels from the Lao PDR to Thailand are mainly informal (both legal and illegal) (DAN, 2004). A large quantity of plastic and stainless steel products are also imported to Savannakhet from Vietnam. These are not only for domestic supply but some are re-sold to Thailand, as they are cheaper than the high-quality Thai products. Interestingly, the research team saw these same high-quality Thai products on sale on the Vietnamese side of the border at Lao-Bao where most goods are Thai and some are Chinese and Vietnamese. Lao products are rarely seen. The NERI research team found both formal and informal trading occurs at the border gates. Informal trade is by small-scale traders carrying goods across the border and selling them in the Dansavan or local markets. The Savannakhet Department of Transport reported the 2004 border trade at the Dansavan-Lao Bao international checkpoint was as follows:

81 Vietnamese trucks can come to collect the Lao exports destined for Vietnam and also to distribute imports from Vietnam.

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• Imports from Vietnam: the total vehicle entries to the Lao PDR were 16,418 trucks - 3,898 carried goods of a total of 52,639.219 tons and 12,520 were empty.

• Exports to Vietnam: the total vehicle exits from the Lao PDR were 16,925 trucks - 16,785 carried goods of a total of 249,918.71 tons and 140 were empty. (Statistics by CPTC Department, Savannakhet. 8 March 2005):

Table 46: Statistics of vehicles entering and exiting Savannakhet

Type of vehicle Number of Number of vehicles vehicles exiting

Tankers 168 Passenger vehicles 29 23 Goods vehicles 174 1099 Total 203 1290 Grand total 1483

Source: Department of Finance, Customs Office, Savannakhet. May 2005. Table 47: Imports for re-export, Savannakhet province 2002-2004) By Checkpoints Year Weight (kg) Value in US$ Value in Kip Tariff (Kip)

2002-03 51,310,139.40 17,741,448.00 187,310,879,909.00 10,819,563,560Dansavan-Lao Bao 2003-04 17,446,658.00 8,869,875.00 93,627,624,118.00 5,255,649,976.00

2002-03 20,225,218.42 40,155,838.39 414,979,029,000.40 12,638,231,390Kanthaboury-Mukdahan 2003-04 29,145,577.32 35,776,829.96 389,216,355,931.80 14,419,615,818.00

2002-03 71,535,357.82 57,897,286.39 602,289,908,909.40 23,457,794,950Total Imports for re-export 2003-04 46,592,235.32 44,646,704.96 482,843,980,049.80 19,675,265,793.90Source: Dept of Finance, Customs Office, Savannakhet. Bolikhamxay: Provincial statistics show that 50 percent of provincial trade is with Vietnam and only a small amount of Lao goods are traded. A large proportion is transit trade from Thailand. This trade is mostly pepper, while that through Savannakhet is garlic and soybeans. In the reverse direction, the Thai goods traded to Vietnam through the province are electrical appliances - air conditioners, rice cookers, hair driers, etc. Bolikhamxay is a busy trade route between Vietnam and Thailand because Road No. 8 has been upgraded and is convenient. Moreover, the province has a long border with Vietnam, and it is not too far from Vientiane Capital.

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Table 48: Bolikhamxay transit trade 2004–2005

Description 2004 2005 Thailand - Vietnam 10,444,413.00 11,208,002.90 Fruits 43,315.00 Electronics 5,920,395.00 5,482,901.00 Vehicles and spare parts 1,304,121.00 1,719,301.50 Processed food 1,718,500.00 1,470,730.00 Animals and domestic animals 1,315,509.20 2,199,973.30 Consumption goods 172,387.80 221,389.40 Fertilizer 4,210.00 Shed light curtain 3,750.00 Animal food 5,000.00 7,422.70 Tangible products 51,210.00 Coconut shells 500.00 3,900.00 Orchids 8,000.00 Vietnam - Thailand 1,522,304.70 110,014.00 Processed food 1,345,375.20 85,830.00 Tractors 49,735.00 20,370.00 Bird's nest fern 22,194.50 3,814.00 Silks 105,000.00 Malaysia-China 3,814,850.98 8,123,019.81 Animal and parts of animals 3,814,850.98 8,123,019.81 China - Thailand 96,016.86 27,302.00 Tobacco leaves 60,166.86 11,102.00 Wood for weaving 35,850.00 16,200.00

Note: Value in current US$ Source: Bolikhamxay Provincial Department of Trade, 2005. Luang Namtha:

In 2004 transit trade - by land and by river - in Luang Namtha was estimated at US$99,669. Import-export companies wishing to participate in transit trade must obtain contracts with the Customs. The contracts must state all the terms and conditions including details of the value of the goods to be traded through the Lao PDR, and (a negotiated) rate of tariff duties (or what could be considered as a “transit fee”!) to be paid. Transit trade between Thailand and China is subject to a fee of 3 - 7 percent of the value depending on the products. A seven percent fee is imposed on foodstuffs82.

• Goods from China via the Lao PDR: The agricultural products from China to Myanmar and Thailand are dried garlic (large sized), apples and pears. Chinese electronic products form the majority of the trade In terms of value with 5 – 6 boatloads a day. These include TVs, CDs, matches and many others marked “Made in Thailand” (Pathong customs official).

• Goods from Thailand to China: The main agricultural goods are rubber, rambutans and longans.

82 Information obtained from trade officials in Luang Namtha during the field visit of the research team in July 2005.

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Table 49: Trend of transit trade in Luang Namtha 2001-2005

Transit Trade 2001 2002 2003 2004 2005 est.

China to Thailand

1,581,730

5,976,678

7,515,939

6,604,725

7,925,670

Thailand to China

2,954,265

1,687,654

2,196,568

1,637,573

1,965,087

Others

4,950

1,228,905

491,367

283,775

340,530

4,535,995

7,664,332

9,712,507

8,242,298

9,890,757 Total Note: Value in current US$ Source: Department of Commerce, Luang Namtha province. Table 50: Luang Namtha transit trade (26/9/2004-25/6/2005)

Products Value (US$) Grand total 7,833,366.00 From China -Thailand 3,959,694.00 Foods 35,565.00 Materials, clothes 75,592.00 Intermediate products 447,080.00 Liquor, cosmetics, cigarettes and other

506,462.00

Electronic equipment 2,538,868.00 Other 356,127.00 From Thailand - China 898,672.00 Dried corn 12,000.00 Foodstuffs 51,400.00 Textiles, clothes 88,770.00 Orchids 20,000.00 Fuel (diesel) 25,920.00 Liquor, cosmetics, cigarettes and other

398,776.00

Other 301,806.00 Myanmar - China Foodstuffs China - Vietnam 2,975,000.00 Dried tobacco 2,975,000.00

Source: Luang Namtha Department of Commerce. Oudomxay: Most goods entering the province are transit goods with an estimated annual value of 500 to 600 million kip83. Chinese goods ranging from foodstuffs, daily consumer goods, to electrical and electronic products, enter the province for re-shipment to China via Bokeo Province.

83 Trade officials in Oudomxay

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Khammouane: Large quantities of garlic transit from Vietnam via Laksao - mostly destined for Thailand (MAF, 2002). The average transit fee is about 10 percent of the trade value on import and 1.1 percent on export. So, in total, transit goods are charged about 2.2 percent of their value (see table below). Table 51: Transit trade in Khammouane by products 2004-2005

Product

Planned for 2004-05

Actual (first 9

months)

Import fee Export fee From

To Estimated value (last 3

months of the year)

Foodstuff 2,155,464.00

1,122,818.80

8,951.95

8,951.95

Thailand and Malaysia Vietnam

2,802.10

Clothes, daily consumption goods

203,317.00

139,884.00

3,209.26

3,209.26 Thailand Vietnam

264.31

Vietnam Thailand Singapore Vietnam Liquor and Tobacco

471,374.00

1,826,423.00

21,922.98

21,922.98 Singapore Vietnam

612.79

Vietnam Thailand Thailand Vietnam

Electricity 68,945.00 - - - Thailand Vietnam

89.63

Construction equipment -

11,193.00 111.93 111.93 Thailand Vietnam -

Agricultural equipment -

90,000.00 - - Thailand Vietnam

-

Vehicle spare parts

410,870.00

115,153.00

1,701.44

1,701.44 Thailand Vietnam

534.13

Total

3,309,970.00

3,305,471.80

35,897.56

35,897.56

- 4,302.96 -

Champasak:

Pakse is ideally situated for export and transit trade, as it has Road No 13 and Road No 16 to the border post with Thailand at WangTao and roads No 15, 16 and 18 to Vietnam. The newly constructed bridge in Pakse has given transportation and trade with Thailand an enormous boost. The pattern of transit trade between Vietnam and Thailand is similar to that in Savannakhet province. Transit trade through Champasak was only about 3 percent of the 2003 - 2004 total since the route via Savannakhet was more attractive and convenient. Summary of transit trade by product: Agricultural products: Chinese agricultural products - garlic, apples, pears and tropical fruits such as rambutan and dried longan, as well as rubber transit the Lao PDR to Thailand, and some goods go from Thailand to China. Garlic and semi-processed cotton are traded from Vietnam to Thailand via the Lao PDR (MAF 2003). This trade has long been profitable and is both informal and

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formal. Although the Lao PDR imported a large volume of garlic from Vietnam, the formal Lao exports of garlic to Thailand were very small - just about 10 percent of the inflow (COMTRADE, 2005). Table 52: Garlic Imports and Exports in 2003

Total garlic exports 2003

Exports to Thailand

Total garlic imports 2003

Imports from Vietnam

$379,843 $360,878 $3,961,000 $3,961,000

Source: Comtrade, 2005. Lao goods also transit neighbouring countries and re-enter the Lao PDR. An example is garlic - produced in Muang Sing (in Luang Namtha) - and exported to China via the Pangthong border post (the local checkpoint).The same garlic may re-enter the Lao PDR via Boten in transit to Thailand (MAF, 2002). Tamarind - another example - goes out by border trade from Kenthao district in Xayaboury province to Thailand, is re-imported, arrives in the main markets of Vientiane and is partly re-distributed to smaller markets in the south and the north of Vientiane. This illustrates that transport is cheaper over the better roads in Thailand. Electronic products and Electrical appliances: In some provinces electronic products are the main transit goods and probably form the bulk of the re-export transit trade. Such is the case in Luang Namtha, where they are the main transit trade from China to Thailand. In 2003 - 2004 their total value was US$86,295,857 (MOC statistics) however there are no individual provincial records. Electrical products are the main transit goods from Thailand to Vietnam via Savannakhet. Products going for sale in Vietnam range from electric cookers, rice cookers, blenders, hair driers, and irons to products of higher value like CD/VCD/DVD players, TVs, loudspeakers and air conditioners. Motorbikes and motorbike spare parts: Trade between Vietnam and the Lao PDR has long been under the barter trade agreement (goods for goods exchange). The main goods imported by Vietnam were motorbikes under CKD, IKD and SKD84. Now the import of motorbikes to Vietnam has been restricted except for those from the Lao PDR. These Lao imports were important in Vietnam between 1997 and 1999 and made up 80 - 90 percent of Lao exports to Vietnam. However, since 2000, due to changes in the trade policies of both countries, the import of motorbikes to Vietnam has stopped.

84 CKD, IKD and SKD: “Complete Knock-Down”, “Incomplete Knock-Down” and “Semi Knock-Down” products.

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Table 53: Re-exports to motorbikes to Vietnam 1994-1999

Year No. of motorbikes Value (‘000 US$) % 1994 76386 116217 97 1995 37000 56200 93 1996 43000 42700 61 1997 25400 31700 51 1998 97400 120400 83 3 months of 1999

24923 25185 96

Source: Lao-Vietnam Cooperation Committee, Ministry of Planning and Investment. According to an official in the Lao-Vietnam Cooperation Office, motorbikes are imported from Thailand and re-exported to Vietnam (because of the close trade and business relations between the Lao PDR and Thailand). These exports in fact do not go through Lao territory, but are mostly directly transported by sea to Vietnamese ports from Thai ports. However, the Lao PDR benefits by about US$30 per motorbike. AFTA implementation will make trade in car and motorbikes components possible between Thailand and Vietnam. These will transit the Lao PDR.

3. 6. Contribution of transit trade to human development:

3. 6. 1. Contribution of transit trade to the government revenue: Customs duty: The Agreements on Facilitating Transit and Transport of GMS and ASEAN require signatories to exempt all transit goods from all duties and tariffs. Collection of fees and charges is, however, acceptable only when those fees and charges are based on the services rendered. The Lao Customs Law states that transit goods through the Lao PDR are exempted from all duties or taxes. Fees and charges are collected for administration services and the infrastructure used. However, in practice, Lao transit trade is still subject to fees based on trade values rather than on the services used. Fee collection on goods imported for re-export is regulated by Notification No. 462/MOF, issued by the Ministry of Finance, dated 14 March 2003. The fees imposed on goods imported for re-export are as follow:

• Products that have a normal tariff rate (MFN) from 5 - 10 percent of the import value are charged 2 percent of the import values.

• Products that have tariff rates from 10 - 20 percent are charged 4 percent • Products that have tariff rates from 20 - 40 percent are charged 6 percent

Clearly, Lao trade policy specifically that on import tariff rates, affects the transit trade flows through the country. Fees collected on transited goods are dependent on the value of the goods and the level of the domestic protection for those products.

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The same regulation states that products imported for re-export are subject to neither turnover tax nor excise tax but to profit tax. On each import of products for re-export there must be a contract with either the customs department in Vientiane capital or the province and a refundable amount of money must be paid first. However, in the provinces, transit goods are still categorized as temporary imports for re-export and are still subject to fees based on the trade value rather than on the services used. Transportation fees and charges: Traffic on the national roads remains relatively light with volumes of 250 - 1000 vehicles or less per day (DTIS, 2004). All transportation in the Lao PDR is by road as there are no railroads (see tables 35 and 36). According to MTCPC statistics there currently are 6,333 goods vehicles in the Lao PDR. On average a Lao goods vehicle carries 371 tons per year, and travels about 39,000 km. A total of more than 2 million tons a year (2,351,000 tons of goods in 2004) are transported over 200 million km in the country (248,434,000 km in 2004), Most road maintenance is financed through a fuel levy, heavy vehicle surcharges, international transit fees, and other road user charges collected as part of the Road Maintenance Fund. Fees collected on transit transport are regulated by the Presidential Decree No. 02 issued in 2003. At the border posts with China in Luang Namtha province, the fees collected comprise: an immigration fee, of about 3,000 - 10,000 kip per person; a car fee: 15,000 to 40,000 kip per car (varies whether the driver wishes to enter only the border district or to go further) and 30,000 kip per lorry. Road user charges are collected on domestic transport at the toll stations along the national roads, and at border checkpoints on international transport. Previously the toll stations were quite sparse and widely scattered, and the fees were not high, ranging from 1,000 kip (for tricycles) to 20,000 kip (for an 8-wheel lorry). However, the fees collected on vehicles crossing the country’s borders are an unvarying US$5 per vehicle85.

85 This information was provided by the Department of Transport in Bolikhamxay province.

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Table 54: Fee collection on vehicles crossing Lao border

Vehicle Type Weight fee Toll fee (Kip/vehicle/crossing) (Kip/vehicle/crossing)

Tricycle 1,000.00 Car, jeep, and truck 2,000.00 Light truck (lighter than 7 ton) 5,000.00 Medium truck (7.1 - 15 ton) 5,000.00 10,000.00 Heavy truck (15.1 tons and over) 7,000.00 15,000.00 Lorry (8 wheel) 10,000.00 20,000.00 Bus (less than 7 seats) 3,000.00 Bus (8-35 seats) 5,000.00 Bus (36 seats and over) 10,000.00 Road roller and other trucks 20,000.00 for road construction Big cart/tractor 2,000.00 Small cart/tractor 1,000.00

Source: the President's decree on fees and other service charges No. 02, 27/11/2002. In Savannakhet province where the completion of Road No. 9 has led to an increase in traffic and trade the total fee collected on international crossings in 2003-2004 was about 287 million kip and 537 million kip in 2004-2005. If we assume the provincial distribution of transit trade and the provincial cross-border traffic are the same then the total revenue from transit traffic in 2003 - 04 and 2004 - 05 would be 448 million and 838 million kip respectively (Since transit trade in Savannakhet province accounted for 64 percent of the transit trade in the whole of the country in 2003 - 04 it can be assumed that the fees collected from vehicles crossing border in Savannakhet also accounted for about 64 percent of the total fee collection in the same year.) Over-flight fee collection: Charges for over-flights and related services are accepted by international laws and regulations. The International Civil Aviation Organization (ICAO) states that “where air navigation services are provided for international use, the providers may require the users to pay their share of the costs.''86 Further, it notes that “providers may require all users to pay their share of the costs of provided them regardless of whether or not utilization takes place over the territory of the provider state.''87 Table 44 shows the charges.

86 Statements by the Council to Contracting States on Charges for Airports and Air Navigation Services, Paragraph 32 (Doc. 9082/5) 87 ibid paragraph 42 of Doc. 9082/5

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Table 55: Lao over-flight charges:

Type of aircraft by weight (tons)

Fee per over flight (US$)

1 - 7 50 7.1 - 20 100 20.1 - 50 140 50.1 - 100 210 100.1 -150 230 150.1 - 200 260 200.1 - 250 300 250.1 - 300 320 300.1 and over 360

Source: President’s decree on fee and other service charges, No. 02 dated 27 November, 2002. Over-flight fees contribute to Lao government revenues. In 2004 - 2005, over- flights contributed 230 billion kip of the 600 billion kip of non-tax revenue and 3,510 billion kip of total revenue collection. When compared to other 2004 - 2005 revenues, this is higher than timber royalties (200 billion kip), higher than hydropower royalties (81.5 billion kip) and equivalent to half of the import duties (455.3 billion kip) (NGPES, 2004). 3. 6. 2. Direct contributions of transit trade to local livelihoods, income opportunities and human development Transit trade is, in fact, quite new in the Lao PDR, and despite the transit agreements is still largely in the form of imports for re-export. The trade officer in Bolikhamxay expressed his worries over the loss of incomes and jobs for local people, as under the import for re-export arrangements, Lao people benefited from acting as middlemen in finding customers, negotiating prices and providing transportation services. With the increase of direct transit trade the role of middlemen will decrease thus decreasing the direct benefits to the people from the transit routes. At present, Lao people benefit from providing services usually by Lao trucks for the transport of goods from the warehouse to the border. There is a provincial regulation to ensure certain benefits for Lao trucks and transport operators. However, in the case of Bolikhamxay, Vietnamese exporters will transport their goods to the other side of the Thai border - Paksan international checkpoint. Implementation of the transit agreements will inevitably eliminate the monopoly of Lao transportation providers.

However, there is the hope that an increase in the transport traffic, and the movement of people through the Lao PDR will contribute to other business expansion along the transit routes. However observations show the continuing presence of many foreign people in the provision of all kinds of transit services. The NERI report states that near the Lao Bao border, the presence of Vietnamese seasonal migrants is obvious and a number of Vietnamese people run small

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businesses in Savannakhet province, but almost no Lao people work on the Vietnamese side. Local tourism and catering businesses also benefit from the increasing flows of transit trade and traffic. However, if the services in the Lao PDR lag behind those on the other sides of the borders, then the country will lose out to the neighbours. Improved roads mean faster transit times. Now it takes only around 3 - 4 hours to cross from Thailand to Vietnam by Route No.9. This worries some local businesses and authorities in Savannakhet who fear that income from hotels, restaurants and other services used by Thai and Vietnamese tourists and traders will drop if it is no longer necessary from them to break their journey in the Lao PDR. The flows of goods and people, both tourists and traders, through the Lao PDR will impact on the local people both positively and negatively. The local people would benefit from improved business skills, a better understanding of business practices and more trading information. On the other hand, the movement of people also impacts on health and culture. There is the possibility of an increased vulnerability to HIV/AIDS, STDs and the erosion of national identity and culture.

3. 7. Policy recommendations:

Ensuring benefits from transit trade: With the completion of the GMS North-South and East-West Economic Corridors transit trade is expected to increase. However, this also means there will be a choice of routes. The Lao PDR could benefit from the expected increase in the trade volume between China and Thailand using Road No 3 in the north of the country. But the North - South route between China and Thailand will also transit through Myanmar, thus, the Lao PDR must ensure that fees imposed on transit goods are competitive with those of the neighbours. In fact, at present, while the GMS agreement aims to ensure duty exemptions for transit goods, the Lao PDR still maintains a 2 - 6 percent tariff thus running the risk of losing future income from the high and stable flows of transport and transit trade. Adjustments to the fee collection should be considered and implemented without delay. The government needs to develop policies to take advantage of these transit activities and, at the same time, bring informal trade back into the formal sector. This can be accomplished by reducing import duties, simplifying trade documentation, eliminating import and export quotas and introducing “One-Stop Shop” approvals for cargo clearance. The Lao PDR can stimulate economic activity by encouraging the use of these routes by providing traffic services. These include not only the basic services for trucks but also facilities for storage, consolidation, distribution, financing and other trade services. It is also necessary to develop a cost recovery mechanism for maintenance of the transit routes. Their success will depend on proper maintenance to avoid excessive operating costs. This will require regular maintenance as well as periodic overlays. Given the shortage of resources available for road maintenance and the expectation that these vehicles will be heavily-laden, it is appropriate to collect a road toll. This

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could be done at the entry and exit points together with inspections of Gross Vehicle Weight and driver documentation. The tolls should be set at a level that will cover the long-term maintenance costs but would not divert traffic during the initial years of operation when traffic volumes are low. Ensuring transit trade creates income opportunities for local people and contributes to human development: • Establishing an economic zone along the border with attractive incentives for

investors using local labour and local resources. The advantage of the area along the transit routes is low cost of transportation, which would offset the Lao disadvantage of economy of scale. • Increasing investment in education and training to local people in order to

meet the skill requirements of investors and be able to compete with foreign workers is important in the long term. • Other policies related to foreign investment and SMEs should be viewed in

line with consideration of creating flexibility and more favourable conditions for local business and for investment utilising local resources.

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United Nations Development Programme (UNDP) 2003 “Making Global Market Work for People”

UNDP, 2003 “Investment, Energy and Environment Sectors – Ensuing the Human Development in the WTO Negotiations” Conference Proceedings, Kuala Lumpur, August 2003

UN Statistics Division, 2005 UN Commodity Trade Statistics Database, UN COMTRADE.

Van den Berg, M. and Luebeck, D., 2004 “Market Assessment – Muang Sing and Nalae District”, GTZ Muang Sing

World Bank, (WB) 2004. Lao PDR Economic Monitor – November 2004. WB 2005 Lao PDR Economic Monitor – Spring Summer 2005. WB 2005 “Doing Business 2005” World Trade Organisation (WTO). Website: http://www.wto.org

112

Appendix I: Trade Statistics Table 56: Lao commodity exports by HS groups, 2003 (mirror data)

HS code Description

Lao Exports in 2003, combined mirror data

Animals and animal products $2,647,460 01-05 Vegetable products $22,984,484 06-14 Animal fat and Vegetable oil $4,237 15 Processed food, Beverage and Tobacco $2,379,665 16-24 Oil and Mineral products $5,836,023 25-27 Chemical products and industrial related $1,753,118 28-38 Plastic and Rubber products $3,857,529 39-40 Skins and furs and their products $2,214,635 41-43 Wood and wood products $149,469,293 44-46 Pulp of wood and paper $137,652 47-49 Textiles and Apparel $151,617,871 50-63 Shoes, hats, umbrellas, etc. $6,380,968 64-67 Stone, ceramic and glass products $18,306 68-70 Jewellery and precious metal products $2,170,344 71

Base metals and their products $6,133,593 72-83

Electrical and mechanical machines $6,093,451 84-85 Transport equipment $2,080,570 86-89

Optical, photographic, cenematographic, measuring, checking, precision, medical or surgical instruments and apparatus; clocks and watches; musical instruments, parts and accessories of such articles and parts thereof $229,423 90-92 weapons and ammunition and parts thereof $0 93

Miscellaneous articles $857,579 94-96 Art, Antique $22,837 97

Other $3,691,038 98-99 $370,580,076 Total

$97,360,000 Electricity (not reported in either HS or SITC) $467,940,076 Total trade in commodities

Note: HS 2002 classification. Source: COMTRADE, 2005. Electricity data from MOC

113

114

Table 57: Lao commodity imports by HS groups, 2003 (mirror data)

HS code Description Lao Imports in 2003, Combine Mirror Data

01-05 Live Animal $8,769,413 06-14 Vegetable Products $20,996,137 15 Fats and Oils $2,292,922 16-24 Prepared Foodstuffs $76,527,933 25-27 Mineral Products $108,928,731 28-38 Chemicals $40,465,722 39-40 Plastics $24,497,650 41-43 Hides and Leather $855,845 44-46 Wood and Wood articles $852,637 47-49 Pulp and paper $8,973,601 50-63 Textiles and apparel $80,385,413 64-67 Footwear $2,839,658 68-70 Stone/Cement/Ceramics $19,886,339 71 Gems $6,106,306

72-83 Base metal and Metal articles $49,667,553

84-85 Machinery and Electrical Appliances $147,200,664 86-89 Vehicles $90,724,948

90-92 Optical, precision & musical instruments $6,646,562 93 Arms $22,976

94-96 Miscellaneous Manufactured articles $5,510,457 97 Antiques and works of art $5,478 99 & Other Other (includes the "not correlated categories" $24,651,330 Total $726,808,275

Note: HS 2002 classification. Source: COMTRADE, 2005.

Table 58: Lao exports data by production groups (national data) 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 Wood and wood products

62,271,712 71,270,000 80,193,611 74,725,357 67,053,370 71,443,411 72,129,382

Rattan & bamboo

3,074,349 2,896,835 970,656 1,970,591

Minerals (*) 767,000 5,993,248 4,890,667 3,903,928 11,376,464 6,332,793 45,342,508 Gold 35,126,442 61,102,735 83,010,893 NTFPs 2,548,709 4,163,165 6,617,544 8,223,654 5,722,816 3,368,684 3,907,743 Live animals 4,062,409 3,107,908 Coffee 31,164,000 29,030,000 15,303,833 9,773,937 10,915,964 13,021,172 9,599,327 Other agricultural products (**)

11,234,100 5,092,457 5,706,247 7,661,796 2,258,278 13,156,006 19,645,326

Handicrafts 3,008,000 5,100,199 3,850,480 2,736,675 12,492,600 1,987,010 2,756,635 Garments 80,500,000 94,370,000 100,139,447 99,937,863 87,115,268 99,134,385 107,582,471 Other industrial goods

22,464,155 1,955,533 16,871,067 17,054,591 7,166,805 10,777,159 11,388,150

Electricity 57,102,000 107,000,000 91,312,939 92,694,000 97,360,000 86,295,857 94,629,997 Others 2,832,608 4,274,603 2,667,723 553,682 Total 271,059,676 323,974,602 324,885,835 322,618,759 352,624,287 374,320,000 455,624,613

Note: (*) This data includes gold for the years before 2002/03. (**) This data includes live animals for the years before 2003/04. Source: MOC. Unit: US$.

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Table 59: Lao imports data by production groups (national data)

Major imports 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05

Agricultural tools and inputs

22,562,000 25,000,000 18,066,577 8,801,632 16,819,120 10,677,703 10,804,229

Office supplies & sports equipment

6,392,200 6,827,000 2,027,131 4,423,992 3,959,489 630,362 1,371,505

Foodstuffs 35,948,015 19,744,000 16,919,515 16,339,630 22,692,166 18,556,761 20,707,259

Apparel & other consumer goods

48,875,000 17,430,340 10,432,795 13,254,406 13,523,229 15,931,224 21,113,915

Electrical appliances

61,022,841 7,200,000 2,794,732 3,223,917 3,690,201 3,887,532 7,404,860

Construction materials

86,007,257 30,831,000 29,894,211 28,090,341 21,357,510 24,598,959 22,897,206

Fuel and gas 69,534,974 77,190,000 98,831,196 79,605,822 107,000,000 101,009,639 148,000,000

Pharmaceutical products

32,868,165 3,480,000 4,200,657 2,679,247 1,845,718 3,226,324 3,345,189

Vehicles and spare parts

111,560,000 21,210,000 19,334,063 18,678,147 28,542,193 35,800,000 20,107,079

Luxury goods 6,722,632 3,100,000 741,540 1,534,235 4,163,545 4,829,000 6,222,753

Import of electricity 15,549,442 8,000,000 4,108,656 6,788,270 7,552,440 9,745,360 19,900,550

Garment raw materials

86,900,000 80,173,33 73,685,033 55,596,961 83,272,883 72,228,949

Informal Trade 45,000,000 76,404,240 80,224,452 21,338,065 19,503,068 4,690,000

Other raw materials

80 43,036,907 33,156,885 145,471,319

Other products 4,649,000 18,092,553 14,099,427 12,000,000 3,682,600 6,405,763

Sub - total 356,561,340 382,021,199 351,428,553 296,952,469 368,508,300 510,670,576

Capital goods under FDI, ODA & loan Projects

184,000,000 146,250,000 182,154,549 191,017,517 193,291,701 175,349,492

Total Imports of the Lao PDR

497,042,526 540,561,340 528,271,199 533,583,102 551,119,387 561,800,000 686,020,068

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Appendix II: Tariff rates Table 60: Simple average import tariff rates of the Lao PDR

MFN rate (%)

CEPT 2004

CEPT 2005

CEPT 2006

CEPT 2007

CEPT 2008

SECTION I: LIVE ANIMALS; ANIMAL PRODUCTS 14.30 13.59 12.41 11.47 10.65 9.93

SECTION II: VEGETABLE PRODUCTS 13.27 6.72 4.65 2.87 2.00 0.80

SECTION III: ANIMAL AND VEGETABLE FATS AND OILS AND THEIR CLEAVAGE PRODUCTS; PREPARED EDIBLE FATS;ANIMAL OR VEGETABLE WAXES 10.36 5.49 3.90 2.53 1.33 0.30

SECTION IV: PREPARED FOODSTUFFS; BEVERAGES, SPIRITS AND VINEGAR; TOBACCO AND MANUFACTURED TOBACCO SUBSTITUTES 21.92 17.97 16.36 14.97 13.60 12.28

SECTION V: MINERAL PRODUCTS 6.36 5.12 4.26 3.38 2.50 1.89

SECTION VI: PRODUCTS OF THE CHEMICAL OR ALLIED INDUSTRIES 10.17 6.57 5.72 4.67 3.40 2.73

SECTION VII: PLASTICS AND ARTICLES THEREOF; RUBBER AND ARTICLES THEREOF 8.39 6.64 4.37 3.14 2.24 1.42

SECTION VIII: RAW HIDES AND SKINS, LEATHER, FURSKINS AND ARTICLES THEREOF; SADDLERY AND HARNESS; TRAVEL GOODS, HANDBAGS AND SIMILAR CONTAINERS; ARTICLES OF ANIMAL GUT (OTHER THAN SILK-WORM GUT) 16.66 11.84 7.87 5.84 4.04 3.04

SECTION IX: WOOD AND ARTICLES OF WOOD; WOOD CHARCOAL; CORK AND ARTICLES OF CORK; MANUFACTURES OF STRAW, OF ESPARTO OR OF OTHER PLAITING MATERIALS; BASKETWARE AND WICKERWORK 20.43 11.78 8.06 4.75 2.75 0.98 SECTION X: PULP OF WOOD OR OF OTHER FIBROUS CELLULOSIC MATERIAL; RECOVERED (WASTE AND SCRAP) PAPER OR PAPERBOARD;PAPER AND PAPERBOARD AND ARTICLES THEREOF 6.03 5.86 3.91 2.93 1.81 0.74

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118

SECTION XI: TEXTILES AND TEXTILE ARTICLES 11.07 5.05 2.80 2.14 1.36 0.74 SECTION XII: FOOTWEAR, HEADGEAR, UMBRELLAS, PARASOLS, WALKING-STICKS, SHOOTING-STICKS, WHIPS, RIDING-CROPS AND PARTS THEREOF; PREPARED FEATHERS AND ARTICLES MADE THEREWITH; ARTIFICIAL FLOWERS; ARTICLES OF HUMAN HAIR 14.91 8.63 5.61 3.48 2.11 1.19 SECTION XIII: ARTICLES OF STONE, PLASTER, CEMENT, ASBESTOS, MICA OR SIMILAR MATERIALS; CERAMIC PRODUCTS; GLASS AND GLASSWARE 6.06 4.81 3.32 2.24 1.19 0.21 SECTION XIV: NATURAL OR CULTURED PEARLS, PRECIOUS OR SEMI-PRECIOUS STONES, PRECIOUS METALS, METALS CLAD WITH PRECIOUS METAL, AND ARTICLES THEREOF; IMITATION JEWELLERY; COIN 5.00 3.64 3.00 2.17 1.53 0.60 SECTION XV: BASE METALS AND ARTICLES OF BASE METAL 8.21 5.44 4.29 3.05 1.99 1.18 SECTION XVI: MACHINERY AND MECHANICAL APPLIANCES; ELECTRICAL EQUIPMENT; PARTS THEREOF; SOUND RECORDERS AND REPRODUCERS, TELEVISION IMAGE, AND SOUND RECORDERS AND REPRODUCERS, AND PARTS AND ACCESSORIES OF SUCH ARTICLES 7.32 6.02 4.01 2.75 1.55 0.41 SECTION XVII: VEHICLES, AIRCRAFT, VESSELS AND ASSOCIATED TRANSPORT EQUIPMENT 12.77 9.01 7.21 5.86 4.55 3.67 SECTION XVIII: OPTICAL, PHOTOGRAPHIC, CINEMATOGRAPHIC, MEASURING, CHECKING, PRECISION, MEDICAL OR SURGICAL INSTRUMENTS AND APPARATUS; CLOCKS AND WATCHES; MUSICAL INSTRUMENTS; PARTS AND ACCESSORIES THEREOF 8.68 6.08 4.48 2.75 1.01 0.01 SECTION XIX: ARMS AND AMMUNITION; PARTS AND ACCESSORIES THEREOF 30.00 30.00 30.00 30.00 30.00 30.00 SECTION XX: MISCELLANEOUS MANUFACTURED ARTICLES 12.84 7.89 5.73 3.75 2.33 1.61 SECTION XXI: WORKS OF ART, COLLECTORS' PIECES AND ANTIQUES 5.00 4.67 3.50 3.00 2.33 1.67

Source: Authors’ calculation from the data at HS 8-digit provided by Customs Department, MOF, 2005.

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Appendix III: Trade Preferences

Agreementsor Preferences

Time frame Partner(s) Preferences received (by Lao PDR)

Obligations

ASEAN - AFTA

2010/2015 (with exceptions)

ASEAN All sectors. Final goal: free trade.

Open market by 2015

AISP From 2002 Thailand, Malaysia, Brunei, the Philippines, Indonesia

Only some products, mainly natural resources.

No

ASEAN-China FTA

2010/2015 (with exceptions)

China All sectors. With exclusions.

Open market by 2015

Early Harvest Program (ACFTA)

2005 China Some agricultural products (HS 01-08)

Bilateral

GSP granted by EU

Since 1992, renewed by period.

EU “Everything But Arms”

No

BTA with the US

Came into effect in 2004

US Normal trade relations: MFN tariffs

Open market for trade in goods and services, and FDI in agreed sectors and timeline.

Preferences granted by China

Since 2004 China GSP for some products.

No

Preferences granted by Thailand

Since 2002 Thailand AISP and zero tariffs for Nine Agricultural Products

No

Bilateral agreement with Vietnam

Since 1999. Renewed and extension on coverage.

Vietnam A number of tariff lines, many fall under zero tariffs.

Reduced tariffs for some Vietnamese goods.

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AISP status

Effectivity and tariff level

Brunei (from Jan. 1, 2002) at 0% tariff rate

Indonesia (from Jan. 1, 2002) at 0%-5% tariff rate

Malaysia (from Jan. 1, 2002) at 0% tariff rate

Philippines - at 0% tariff rate

Thailand (from Jan. 1, 2004)

Singapore (duty-free)

Cambodia 8 25 89 2 309 Lao PDR 14 0 (requesting) 12 2 300 Myanmar 79 228 282 69 460 Vietnam 1 50 170 12 34

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ASEAN-China Free Trade Area: Tariff Reduction and Elimination (ARTICLE 3 in the Agreement) 1. The tariff reduction or elimination programme of the Parties shall require the applied MFN tariff rates on listed tariff lines to be gradually reduced and where applicable, eliminated, in accordance with this Article. 2. The tariff lines which are subject to the tariff reduction or elimination programme ubder this Agreement shall include all tariff lines not covered by the Early Harvest Programme under Article 6 of the Framework Agreement, and such tariff lines shall be categorised for tariff reduction and elimination as follows:

(a) Normal Track: Tariff lines placed in the Normal Track by each Party on its own accord shall have their respective applied MFN tariff rates gradually reduced and eliminated in accordance with the modalities set out in Annex 1 of this Agreement with the objective of achieving the targets prescribed in the thresholds therein.

(b) Sensitive Track: Tariff lines placed in the Sensitive Track by each Party on its

own accord shall have their respective applied MFN tariff rates reduced or eliminated in accordance with the modalities set out in Annex 2 of this Agreement.

MODALITY FOR TARIFF REDUCTION AND ELIMINATION FOR TARIFF LINES PLACED IN THE NORMAL TRACK (Annex 1 to the ACFTA)

1. Tariff lines placed by each Party in the Normal Track on its own accord shall have their respective applied MFN tariff rates gradually reduced and eliminated according to the following Schedules:

(i) ASEAN 6 and China

ACFTA Preferential Tariff Rate (Not later than 1 January) X = Applied MFN

Tariff Rate 2005* 2007 2009 2010

X > 20% 20 12 5 0

15% < x < 20% 15 8 5 0

10% < x < 15% 10 8 5 0

5% < x < 10% 5 5 0 0

X < 5% Standstill 0 0 * The first date of implementation shall be 1 July 2005.

(ii) Viet Nam

ACFTA Preferential Tariff Rate (Not later than 1 January) X = Applied MFN

Tariff Rate 2005* 2006 2007 2008 2009 2011 2013 2015

X > 60% 60 50 40 30 25 15 10 0

45% < X < 60% 40 35 35 30 25 15 10 0

35% < X < 45% 35 30 30 25 20 15 5 0

30% < X < 35% 30 25 25 20 17 10 5 0

25% < X < 30% 25 20 20 15 15 10 5 0

122

20% < X < 25% 20 20 15 15 15 10 0-5 0

15% < X < 20% 15 15 10 10 10 5 0-5 0

10% < X < 15% 10 10 10 10 8 5 0-5 0

7% < X < 10% 7 7 7 7 5 5 0-5 0

5% < X < 7% 5 5 5 5 5 5 0-5 0

X < 5% Standstill 0 * The first date of implementation shall be 1 July 2005.

(iii) Cambodia, Lao PDR and Myanmar

ACFTA Preferential Tariff Rate (Not later than 1 January) X = Applied MFN

Tariff Rate 2005* 2006 2007 2008 2009 2011 2013 2015

X > 60% 60 50 40 30 25 15 10 0

45% < X < 60% 40 35 35 30 25 15 10 0

35% < X < 45% 35 35 30 30 20 15 5 0

30% < X < 35% 30 25 25 20 20 10 5 0

25% < X < 30% 25 25 25 20 20 10 5 0

20% < X < 25% 20 20 15 15 15 10 0-5 0

15% < X < 20% 15 15 15 15 15 5 0-5 0

10% < X < 15% 10 10 10 10 8 5 0-5 0

7% < X < 10% 7** 7** 7** 7** 7** 5 0-5 0

5% < X < 7% 5 5 5 5 5 5 0-5 0

X < 5% Standstill 0

* The first date of implementation shall be 1 July 2005. ** Myanmar shall be allowed to maintain ACFTA Rates at no more than 7.5% until 2010.

2. If a Party places a tariff line in the Normal Track, that Party shall enjoy the tariff concessions other Parties have made for that tariff line as specified in and applied pursuant to the relevant Schedules either in Annex 1 or Annex 2 together with the undertakings and conditions set out therein. This right shall be enjoyed for so long as that Party adheres to its own commitments for tariff reduction and elimination for that tariff line.

3. The tariff rates specified in the relevant Schedules in paragraph 1 only set out the level of the applicable ACFTA preferential tariff rates to be applied by each Party for the tariff lines concerned in the specified year of implementation and shall not prevent any Party from unilaterally accelerating its tariff reduction or elimination at any time if it so wishes. 4. Tariff lines in the Normal Track, which are subject to specific tariff rates, shall have such tariffs reduced to zero, in equal proportions in accordance with the timeframes provided in the Schedules set out in paragraph 1 of this Annex. 5. For all tariff lines placed in the Normal Track where the applied MFN tariff rates are at 0%, they shall remain at 0%. Where they have been reduced to 0%, they shall remain at 0%. No Party shall be

ermitted to increase the tariff rates for any tariff line, except as otherwise provided by the Agreement. p 6. As an integral part of its commitments to reduce and/or eliminate the applied MFN tariff rates in accordance with the relevant Schedules in paragraph 1, each Party hereby commits to undertake further tariff reduction and/or elimination in accordance with the following thresholds:

123

(a) ASEAN 6 and China

(i) Each Party shall reduce to 0-5% not later than 1 July 2005 the tariff rates for at least 40% of its tariff lines placed in the Normal Track.

(ii) Each Party shall reduce to 0-5% not later than 1 January 2007 the tariff rates for at least 60% of its tariff lines placed in the Normal Track.

(iii) Each Party shall eliminate all its tariffs for tariff lines placed in the Normal Track not later than 1 January 2010, with flexibility to have tariffs on some tariff lines, not exceeding 150 tariff lines, eliminated not later than 1 January 2012.

(iv) Each Party shall eliminate all its tariffs for tariff lines placed in the Normal Track not later than 1 January 2012.

(b) Newer ASEAN Member States

(i) Each Party shall reduce to 0-5% not later than 1 January 2009 for Viet Nam; 1 January 2010 for Lao PDR and Myanmar; and 1 January 2012 for Cambodia the tariff rates for at least 50% of its tariff lines placed in the Normal Track.

(ii) Cambodia, Lao PDR and Myanmar shall eliminate their respective tariffs not later than 1 January 2013 on 40% of its tariff lines placed in the Normal Track.

(iii) For Viet Nam, the percentage of Normal Track tariff lines to have their tariffs eliminated not later than 1 January 2013 shall be determined not later than 31 December 2004.

(iv) Each Party shall eliminate all its tariffs for tariff lines placed in the Normal Track not later than 1 January 2015, with flexibility to have tariffs on some tariff lines, not exceeding 250 tariff lines, eliminated not later than 1 January 2018.

(v) Each Party shall eliminate all its tariffs for tariff lines placed in the Normal Track not later than 1 January 2018. 7. The tariff lines listed by the Parties in Appendix 1 shall have their respective ACFTA tariffs eliminated not later than 1 January 2012 for ASEAN 6 and China, and 1 January 2018 for CLMV.

MODALITY FOR TARIFF REDUCTION/ELIMINATION FOR TARIFF LINES PLACED IN THE

SENSITIVE TRACK (Annex 2 to the ACFTA Agreement)

1. The number of tariff lines which each Party can place in the Sensitive Track shall be subject to a maximum ceiling of:

(i) ASEAN 6 and China:

400 tariff lines at the HS 6-digit level and 10% of the total import value, based on 2001 trade statistics;

(ii) Cambodia, Lao PDR and Myanmar:

500 tariff lines at the HS 6-digit level; and

(iii) Viet Nam:

500 tariff lines at the HS 6-digit level, and the ceiling of import value shall be determined not later than 31 December 2004.

2. Tariff lines placed by each Party in the Sensitive Track shall be further classified into Sensitive List and Highly Sensitive List. However, tariff lines placed by each Party in the Highly Sensitive List shall be subject to the following ceilings:

(i) ASEAN 6 and China:

not more than 40% of the total number of tariff lines in the Sensitive Track or 100 tariff lines at the HS 6-digit level, whichever is lower;

124

(ii) Cambodia, Lao PDR and Myanmar:

not more than 40% of the total number of tariff lines in the Sensitive Track or 150 tariff

lines at the HS 6-digit level, whichever is lower; and (iii) Viet Nam:

shall be determined not later than 31 December 2004. 3. The Parties shall reduce and, where applicable, eliminate the applied MFN tariff rates of tariff lines placed in the Sensitive Track according to the following Schedules:

(i) ASEAN 6 and China shall reduce the applied MFN tariff rates of tariff lines placed in their respective Sensitive Lists to 20% not later than 1 January 2012. These tariff rates shall be subsequently reduced to 0-5% not later than 1 January 2018.

(ii) Cambodia, Lao PDR and Myanmar shall reduce the applied MFN tariff rates of tariff lines

placed in their respective Sensitive Lists to 20% not later than 1 January 2015. These tariff rates shall be subsequently reduced to 0-5% not later than 1 January 2020.

Viet Nam shall reduce the applied MFN tariff rates of tariff lines placed in its Sensitive Lists not later than 1 January 2015 to a rate to be determined not later than 31 December 2004. These tariff rates shall be subsequently reduced to 0-5% not later than 1 January 2020.

(iii) The Parties shall reduce the applied MFN tariff rates of tariff lines placed in their

respective Highly Sensitive Lists to not more than 50% not later than 1 January 2015 for ASEAN 6 and China, and 1 January 2018 for the newer ASEAN Member States.

4. Tariff lines in the Sensitive Track, which are subject to specific tariff rates, shall have such tariffs reduced in accordance with the timeframes provided in paragraph 3 of this Annex. The proportion of tariff reduction for these tariff lines shall be equal to the average margin of tariff reduction of the tariff lines with ad-valorem tariff rates under the Sensitive Track, which are subject to tariff reduction in the same year. 5. Notwithstanding the Schedules in paragraph 3, any Party may unilaterally accelerate the tariff reduction and/or elimination for its tariff lines placed in the Sensitive Track at any time if it so wishes. Nothing in this Agreement shall prevent any Party from unilaterally transferring any tariff line from the Sensitive Track into the Normal Track at any time if it so wishes. 6. The reciprocal tariff rate treatment of tariff lines placed by a Party in the Sensitive Track shall be governed by the following conditions:

(i) the tariff rate for a tariff line placed by a Party in the Sensitive Track must be at 10% or below in order for that Party to enjoy reciprocity;

(ii) the reciprocal tariff rate to be applied to a tariff line placed by a Party in the Sensitive

Track shall be either the tariff rate of that Party’s tariff line, or the Normal Track tariff rate of the same tariff line of the other Party or Parties from whom reciprocity is sought, whichever is higher; and

(iii) the reciprocal tariff rate to be applied to a tariff line placed by a Party in the Sensitive

Track shall in no case exceed the applied MFN rate of the same tariff line of the Party or Parties from whom reciprocity is sought.

7. The treatment of tariff lines of the Parties subject to in-quota and out-quota rates, including the modalities for tariff reduction/elimination, shall be discussed and mutually agreed by the Parties not later than 31 March 2005. The discussions shall include, but not be limited to, the in-quota and out-quota rates. 8. The tariff lines listed by each Party in the Sensitive List and Highly Sensitive List under the Sensitive Track are respectively set out in Appendix 1 and Appendix 2 of this Annex.

125

Table 61: Summary of agricultural products given preferential tariff by China and those excluded from the Early Harvest Program, implemented from 1 July 2005.

Agricultural products of HS code from 01 to 08: 0101 Live horses, asses, mules

and hinnies. 0101.90.20 Horses, other than pure-bred breeding

and race horses.

0102 Live bovine animals Live swine 0103 Live swine 0103.92 - weighing 50 kg or more

0104 Live sheep and goats 0105.19.20 0105.19.30 0105.19.40 0105.19.50

Ducklings (not breeding), goslings, guinea fowls.

1015.92 1015.93

0105 Live poultry

1015.99

Others, weighing more than 185 g.

01.Live animal

0106 Other live animals: mammals, reptiles, birds, and others.

Meat of bovine, Meat of bovine, 0201 fresh or chilled

0202 frozen

Meat of sheep, goats Meat of swine, 0204 Fresh, chilled or frozen

0203 Fresh, chilled or frozen Meat and edible offal of poultry,

fresh, chilled or frozen

0205 Meat of horses 0207

0206 Edible offal 0210 Meat & editable offal, salted, dried or

smoked, editable flours & meals of meat or offal

0208 Other meat & editable offal, fresh, chilled or frozen

02. Meat and edible meat offal

0209 Pig fat and poultry fat 03. Fish 03 All, except 0301.91.90 0301.91.90 Live fish: trout (other than ornamental

fish, eels, carp, others

04. Dairy produce; bird’s eggs; honey; editable products of animal origin

04 All, except 0407 0407 Bird’s eggs, in shell, fresh, preserved or cooked.

All, except 0504

05. Products of animal origin not elsewhere specified

05

Include: hair, bones, ivory, corals, …

0504. Guts, bladders and stomachs of animals (other than fish)

06. Live trees & plants; bulbs, roots; cut flowers and ornamental foliage

06 All none

126

Potatoes, 0701. fresh or chilled

Tomatoes, 0702. fresh or chilled

Onions, shallots, garlic, leeks and other alliaceous vegetables,

0703.

fresh or chilled.

Cabbages, cauliflowers, and similar edible brassicas,

0704.

fresh or chilled

Lettuce & chicory, 0705. fresh or chilled

Similar edible roots of carrots and turnips,

Carrots and turnips 0706.90

Fresh or chilled

0706. 10

Fresh or chilled Leguminous vegetables, shelled or unshelled, fresh or chilled.

Beans,

Peas & other, except 0708.20 shelled or unshelled,

0708.

0708.20

fresh or chilled Other vegetables, fresh or chilled.

0709.30 Aubergines (egg-plants)

Globe artichokes, asparagus, celery, truffles, spinach.

0709.51 Mushrooms of the genus Agaricus

Except 0709.30/51/60/90. 0709.60 Fruits of the genus (chillies, other giant chillies)

0709.

0709.90 Other Vegetables (uncooked or cooked by steaming or boiling in water), frozen.

0710.22 Beans

0710.10 Potatoes, 0710.29 Other leguminous vegetables 0710.21 Peas, 0710.40 Sweet corn 0710.30 Spinach 0710.80 Other vegetables

0710.

0710.90 Mixture of vegetables Vegetables provisionally preserved, not for immediate consumption.

0711.20 Olives, 0711.30 Capers,

0711.40 Cucumbers & gherkins

0711.51/59 Mushrooms and truffles

Other vegetables and mixture of vegetables.

0711

0711.90

Include: sweet corn, chillies, onions Dried vegetable (whole, cut, sliced, in powder), but not for further prepared.

Onions, Mushrooms, Wood ears,

07. Editable vegetables and certain roots and tubers

0712.

Jelly fungi, Bamboo shoots, Garlic

127

Dried leguminous vegetables, shelled, whether not skinned or split.

0713.31

Peas, chickpeas, lentils, broad beans, and others.

0713.32

0713.33

0713.

0713.39

Beans (dried)

0714. Manioc (cassava); sweet potatoes; water chestnut

Coconuts, Brazil nuts and cashew nuts,

Other nuts, 0801.

fresh or dried, whether or not shelled or peeled.

0802.

fresh or dried, whether or not shelled or peeled

Bananas 0803. fresh or dried

0804.10 Dates, figs, avocados, 0804.30 Pineapples, guavas, mangoes and mangosteens

0804.20 fresh or dried 0804.50 fresh or dried 0804.40 0805.20 Citrus fruit, fresh or dried: 0805.10 Oranges, lemons and limes, others,

Mandarins, clementines, wilkings and similar citrus hybrids; grapefruit.

0805.50 fresh or dried 0805.40

0805.90 0806. Grapes, fresh or dried 0807. Melons (incl. watermelons) and

papaws (papayas), fresh

Apples, pears and quinces, 0808.

fresh

0809. Apricots, cherries, peaches (include nectarines), plums and sloes, fresh

0810. Other fruit, fresh 0811. Fruit and nuts, frozen,

uncooked or cooked by steaming or boiling in water, whether or not containing added sugar or other sweetening matter

0812. Fruit and nuts, provisionally preserved, but unsuitable for immediate consumption.

0813.10 Fruit, dried, other than that of headings 0801 to 0806:

0813.40 Fruit, dried, other than that of headings 0801 to 0806:

0813.20 Apricots, Prunes, Apples. Other fruit; Mixtures of nuts or dried fruits of this Chapter.

0813.30 0813.50

0813.50

08. Ediable fruit and nuts; peels of citrus fruit or melons

0814. Peels of citrus fruit or melons, fresh, frozen, dried, or provisionally preserved.

Source: Accumulated by authors from the Agreement’s document and Annexes of the ASEAN-China Free Trade Agreement. ASEAN Secretariat website.

Table 62: Tariff reduction schedule of the Early Harvest Program. The table includes those products which are not excluded in the case of the Lao PDR but are still in the EHP of other countries. HEADING SUB-HEADING AD VALOREM RATES (%)

NO. DESCRIPTION 2004 2005 2006

The Lao PDR either enjoys concessions or is EXCLUDED NO.

01.01 0101.10 - Pure-bred breeding animals 0 0 0 0101.901 - - - Horses 0 0 0 0101.909 - - - Other 10 5 0

01.02 0102.10 - Pure-bred breeding animals 0 0 0 0102.90 - Other 5 0 0

01.03 0103.10 - - - Pure-bred breeding animals 0 0 0 0103.91 - - Weighing lees than 50 kg 5 0 0 0103.92 - - Weighing 50 kg or more 5 0 0 EXCLUDED

01.04 0104.101 - - - Pure-bred breeding animals 0 0 0 0104.109 - - - Other 10 5 0 0104.201 - - - Pure-bred breeding animals 0 0 0 0104.209 - - - Other 10 5 0

01.05 0105.111 - - - Pure-bred breeding animals 0 0 0 0105.119 - - - Other 10 5 0 0105.121 - - - Pure-bred breeding animals 0 0 0 0105.129 - - - Other 10 5 0 0105.191 - - - Pure-bred breeding animals 0 0 0 0105.199 - - - Other 10 5 0 0105.921 - - - Pure-bred breeding animals 0 0 0 EXCLUDED 0105.929 - - - Other 10 5 0 EXCLUDED 0105.931 - - - Pure-bred breeding animals 0 0 0 EXCLUDED 0105.939 - - - Other 10 5 0 EXCLUDED 0105.991 - - - Pure-bred breeding animals 0 0 0 EXCLUDED 0105.999 - - - Other 10 5 0 EXCLUDED

01.06 0106.111 - - - For draught, consumption of meat, milk or eggs, imported for breeding 0 0 0 EXCLUDED 0106.112 - - - Imported by public institutes, not conducted for profit and intended for perpetual exhibition of a public character 0 0 0 EXCLUDED 0106.119 - - - Other 10 5 0 EXCLUDED 0106.121 - - - For draught, consumption of meat, milk or eggs, imported for breeding 0 0 0 EXCLUDED 0106.122 - - - Imported by public institutes, not conducted for profit and intended for perpetual exhibition of a public character 0 0 0 EXCLUDED 0106.129 - - - Other 10 5 0 EXCLUDED

128

0106.191 - - - For draught, consumption of meat, milk or eggs, imported for breeding 0 0 0 EXCLUDED 0106.192 - - - Imported by public institutes, not conducted for profit and intended for perpetual exhibition of a public character 0 0 0 EXCLUDED 0106.199 - - - Other 10 5 0 EXCLUDED 0106.201 - - - For draught, consumption of meat, milk or eggs, imported for breeding 0 0 0 EXCLUDED 0106.202 - - - Imported by public institutes, not conducted for profit and intended for perpetual exhibition of a public character 0 0 0 EXCLUDED 0106.209 - - - Other 10 5 0 EXCLUDED 0106.311 - - - For draught, consumption of meat, milk or eggs, imported for breeding 0 0 0 EXCLUDED 0106.312 - - - Imported by public institutes, not conducted for profit and intended for perpetual exhibition of a public character 0 0 0 EXCLUDED 0106.319 - - - Other 10 5 0 EXCLUDED 0106.321 - - - For draught, consumption of meat, milk or eggs, imported for breeding 0 0 0 EXCLUDED 0106.322 - - - Imported by public institutes, not conducted for profit and intended for perpetual exhibition of a public character 0 0 0 EXCLUDED 0106.329 - - - Other 10 5 0 EXCLUDED 0106.391 - - - For draught, consumption of meat, milk or eggs, imported for breeding 0 0 0 EXCLUDED 0106.392 - - - Imported by public institutes, not conducted for profit and intended for perpetual exhibition of a public character 0 0 0 EXCLUDED 0106.399 - - - Other 10 5 0 EXCLUDED

0106.901 - - - For draught, consumption of meat, milk or eggs, imported for breeding , including bees 0 0 0 EXCLUDED

0106.902 - - - Imported by public institutes, not conducted for profit and intended for perpetual exhibition of a public character 0 0 0 EXCLUDED 0106.909 - - - Other 10 5 0 EXCLUDED

02.01 0201.10 - Carcasses and half-carcasses 10 5 0 0201.20 - Other cuts with bone in 10 5 0 0201.30 - Boneless 10 5 0

02.02 0202.10 - Carcasses and half-carcasses 10 5 0 EXCLUDED 0202.20 - Other cuts with bone in 10 5 0 EXCLUDED 0202.30 - Boneless 10 5 0 EXCLUDED

02.03 0203.11 - - Carcasses and half-carcasses 10 5 0 EXCLUDED 0203.12 - - Hams, shoulders and cuts thereof, with bone in 10 5 0 EXCLUDED 0203.19 - - Other 10 5 0 EXCLUDED 0203.21 - - Carcasses and half-carcasses 10 5 0 EXCLUDED 0203.22 - - Hams, shoulders and cuts thereof, with bone in 10 5 0 EXCLUDED 0203.29 - - Other 10 5 0

02.04 0204.10 - Carcasses and half-carcasses of lamb, fresh or chilled 10 5 0

129

0204.21 - - Carcasses and half-carcasses 10 5 0 0204.22 - - Other cuts with bone in 10 5 0 0204.23 - - Boneless 10 5 0 0204.30 - Carcasses and half-carcasses of lamb, frozen 10 5 0 0204.41 - - Carcasses and half-carcasses 10 5 0 0204.42 - - Other cuts with bone in 10 5 0 0204.43 - - Boneless 10 5 0 0204.50 - Meat of goats 10 5 0

02.05 0205.00 Meat of horses, asses, mules or hinnies, fresh, chilled or frozen. 10 5 0 02.06 0206.10 - Of bovine animals, fresh or chilled 10 5 0

0206.21 - - Tongues 10 5 0 0206.22 - - Livers 10 5 0 0206.29 - - Other 10 5 0 0206.30 - Of swine, fresh or chilled 10 5 0 0206.41 - - Livers 10 5 0 0206.49 - - Other 10 5 0 0206.80 - Other, fresh or chilled 10 5 0 0206.90 - Other, frozen 10 5 0

02.07 0207.11 - - Not cut in pieces, fresh or chilled 10 5 0 EXCLUDED 0207.12 - - Not cut in pieces, frozen 10 5 0 EXCLUDED 0207.13 - - Cuts and offal, fresh or chilled 10 5 0 EXCLUDED 0207.14 - - Cuts and offal, frozen 10 5 0 EXCLUDED 0207.24 - - Not cut in pieces, fresh or chilled 10 5 0 EXCLUDED 0207.25 - - Not cut in pieces, frozen 10 5 0 EXCLUDED 0207.26 - - Cuts and offal, fresh or chilled 10 5 0 EXCLUDED 0207.27 - - Cuts and offal, frozen 10 5 0 EXCLUDED 0207.32 - - Not cut in pieces, fresh or chilled 10 5 0 EXCLUDED 0207.33 - - Not cut in pieces, frozen 10 5 0 EXCLUDED 0207.34 - - Fatty livers, fresh or chilled 10 5 0 EXCLUDED 0207.35 - - Other, fresh or chilled 10 5 0 EXCLUDED 0207.36 - - Other, frozen 10 5 0 EXCLUDED

02.08 0208.10 - Of rabbits or hares 10 5 0 0208.20 - Frogs' legs 10 5 0 0208.30 - Of primates 10 5 0 0208.40 - Of whales, dolphins and porpoises (mammals of the order Cetacea); of manatees and dugongs (mammals of the order Sirenia) 10 5 0 0208.50 - Of reptiles (including snakes and turtles) 10 5 0 0208.90 - Other 10 5 0

130

02.09 0209.00 Pig fat, free of lean meat, and poultry fat, not rendered or otherwise extracted, fresh, chilled, frozen, salted, in brine, dried or smoked 10 5 0 02.10 0210.11 - - Hams, shoulders and cuts thereof, with bone in 10 5 0 EXCLUDED

0210.12 - - Bellies (streaky) and cuts thereof 10 5 0 EXCLUDED 0210.19 - - Other 10 5 0 EXCLUDED 0210.20 - Meat of bovine animals 10 5 0 EXCLUDED 0210.91 - - Of primates 10 5 0 EXCLUDED 0210.92 - - Of whales, dolphins and porpoises (mammals of the order Cetacea); of manatees and dugongs (mammals of the order Sirenia) 10 5 0 EXCLUDED 0210.93 - - Of reptiles (including snakes and turtles) 10 5 0 EXCLUDED 0210.99 - - Other 10 5 0 EXCLUDED

03.01 0301.10 - Ornamental fish 10 5 0

0301.91 - - Trout (Salmo trutta, Oncorhynchus mykiss, Oncorhynchus clarki, Oncorhynchus aguabonita,

Oncorhynchus gilae, Oncorhynchus apache and Oncorhynchus chrysogaster) 10 5 0 EXCLUDED 0301.92 - - Eels (Anguilla spp.) 10 5 0 0301.93 - - Carp 10 5 0 0301.99 - - Other 10 5 0

0302.11 - - Trout (Salmo trutta, Oncorhynchus mykiss, Oncorhynchus clarki, Oncorhynchus aguabonita, 03.02

Oncorhynchus gilae, Oncorhynchus apache and Oncorhynchus chrysogaster) 5 0 0

0302.12 - - Pacific salmon (Oncorhynchus nerka, Oncorhynchus gorbuscha, Oncorhynchus keta,

Oncorhynchus tschawytscha, Oncorhynchus kisutch, Oncorhynchus masou and

Oncorhynchus rhodurus), Atlantic salmon (Salmo salar) and Danube salmon (Hucho hucho) 5 0 0

0302.19 - - Other 5 0 0

0302.21 - - Halibut (Reinhardtius hippoglossoides, Hippoglossus hippoglossus, Hippoglossus stenolepis) 5 0 0

0302.22 - - Plaice (Pleuronectes platessa) 10 5 0 0302.23 - - Sole (Solea spp.) 5 0 0 0302.29 - - Other 5 0 0 0302.31 - - Albacore or longfinned tunas (Thunnus alalunga) 5 0 0 0302.32 - - Yellowfin tunas (Thunnus albacares) 5 0 0 0302.33 - - Skipjack or stripe-bellied bonito 5 0 0 0302.34 - - Bigeye tunas (Thunnus obesus) 5 0 0 0302.35 - - Bluefin tunas (Thunnus thynnus) 5 0 0 0302.36 - - Southern bluefin tunas (Thunnus maccoyii) 5 0 0

131

0302.39 - - Other 5 0 0 0302.40 - Herrings (Clupea harengus, Clupea pallasii), excluding livers and roes 5 0 0

0302.50 - Cod (Gadus morhua, Gadus ogac, Gadus macrocephalus), excluding livers and roes 5 0 0

0302.61 - - Sardines (Sardina pilchardus, Sardinops spp.), sardinella (Sardinella spp.), brisling or sprats (Sprattus sprattus) 5 0 0 0302.62 - - Haddock (Melanogrammus aeglefinus) 5 0 0 0302.63 - - Coalfish (Pollachius virens) 10 5 0 0302.64 - - Mackerel (Scomber scombrus, Scomber australasicus, Scomber japonicus) 5 0 0 0302.65 - - Dogfish and other sharks 10 5 0 0302.66 - - Eels (Anguilla spp.) 5 0 0 0302.69 - - Other 5 0 0 0302.70 - Livers and roes 5 0 0

03.03 0303.11 - - Sockeye salmon (red salmon) (Oncorhynchus nerka) 5 0 0 0303.19 - - Other 5 0 0 0303.21 - - Trout (Salmo trutta, Oncorhynchus mykiss, Oncorhynchus clarki, Oncorhynchus

aguabonita, Oncorhynchus gilae, Oncorhynchus apache and Oncorhynchus chrysogaster) 5 0 0

0303.22 - - Atlantic salmon (Salmo salar) and Danube salmon (Hucho hucho) 5 0 0 0303.29 - - Other 5 0 0

0303.31 - - Halibut (Reinhardtius hippoglossoides, Hippoglossus hippoglossus, Hippoglossus stenolepis) 5 0 0

0303.32 - - Plaice (Pleuronectes platessa) 10 5 0 0303.33 - - Sole (Solea spp.) 5 0 0 0303.39 - - Other 5 0 0 0303.41 - - Albacore or longfinned tunas (Thunnus alalunga) 5 0 0 0303.42 - - Yellowfin tunas (Thunnus albacares) 5 0 0 0303.43 - - Skipjack or stripe-bellied bonito 5 0 0 0303.44 - - Bigeye tunas (Thunnus obesus) 5 0 0 0303.45 - - Bluefin tunas (Thunnus thynnus) 5 0 0 0303.46 - - Southern bluefin tunas (Thunnus maccoyii) 5 0 0 0303.49 - - Other 5 0 0 0303.50 - Herrings (Clupea harengus, Clupea pallasii), excluding livers and roes 5 0 0

0303.60 - Cod (Gadus morhua, Gadus ogac, Gadus macrocephalus), excluding livers and roes 5 0 0

0303.71 - - Sardines (Sardina pilchardus,Sardinops spp.), sardinella (Sardinella spp.), brisling or sprats (Sprattus sprattus) 5 0 0 0303.72 - - Haddock (Melanogrammus aeglefinus) 5 0 0

132

0303.73 - - Coalfish (Pollachius virens) 5 0 0 0303.74 - - Mackerel (Scomber scombrus, Scomber australasicus, Scomber japonicus) 5 0 0 0303.75 - - Dogfish and other sharks 5 0 0 0303.76 - - Eels (Anguilla spp.) 5 0 0 0303.77 - - Sea bass (Dicentrarchus labrax, Dicentrarchus punctatus) 5 0 0 0303.78 - - Hake (Merluccius spp., Urophycis spp.) 10 5 0 0303.79 - - Other 5 0 0 0303.80 - Livers and roes 5 0 0

03.04 0304.10 - Fresh or chilled 5 0 0 0304.20 - Frozen fillets 5 0 0 0304.90 - Other 5 0 0

03.05 0305.10 - Flours, meals and pellets of fish, fit for human consumption 5 0 0 0305.20 - Livers and roes of fish, dried, smoked, salted or in brine 5 0 0 0305.30 - Fish fillets, dried, salted or in brine, but not smoked 5 0 0

0305.41 -- Pacific salmon (Oncorhynchus nerka, Oncorhynchus gorbuscha, Oncorhynchus keta,

Oncorhynchus tschawytscha, Oncorhynchus kisutch, Oncorhynchus masou and

Oncorhynchus rhodurus), Atlantic salmon (Salmo salar) and Danube salmon(Hucho hucho) 5 0 0

0305.42 - - Herrings (Glupea harengus, Glupea pallasii) 5 0 0 0305.49 - - Other 5 0 0 0305.51 - - Cod (Gadus morhua, Gadus ogac, Gadus macrocephalus) 5 0 0 0305.591 - - - Sharks' fins 10 5 0 0305.599 - - - Other 5 0 0 0305.61 - - Herrings (Clupea harengus, Clupea pallasii) 5 0 0 0305.62 - - Cod (Gadus morhua, Gadus ogac, Gadus macrocephalus) 5 0 0 0305.63 - - Anchovies (Engraulis spp.) 5 0 0 0305.69 - - Other 5 0 0

03.06 0306.11 - - Rock lobster and other sea crawfish (Palinurus spp., Panulirus spp., Jasus spp.) 5 0 0 0306.12 - - Lobsters (Homarus spp.) 5 0 0 0306.13 - - Shrimps and prawns 5 0 0 0306.14 - - Crabs 5 0 0

0306.19 - - Other, including flours, meals and pellets of crustaceans, fit for human consumption 5 0 0

0306.21 - - Rock lobster and other sea crawfish (Palinurus spp., Panulirus spp., Jasus spp.) 5 0 0 0306.22 - - Lobsters (Homarus spp.) 5 0 0 0306.23 - - Shrimps and prawns 5 0 0 0306.24 - - Crabs 5 0 0

133

0306.29 - - Other, including flours, meals and pellets of crustaceans, fit for human consumption 5 0 0

03.07 0307.10 - Oysters 5 0 0 0307.21 - - Live, fresh or chilled 5 0 0 0307.29 - - Other 5 0 0 0307.31 - - Live, fresh or chilled 5 0 0 0307.39 - - Other 5 0 0 0307.41 - - Live, fresh or chilled 5 0 0 0307.49 - - Other 5 0 0 0307.51 - - Live, fresh or chilled 5 0 0 0307.59 - - Other 5 0 0 0307.60 - Snails, other than sea snails 5 0 0 0307.91 - - Live, fresh or chilled 5 0 0 - - For awabi 10 5 0 0307.99 - - Other 5 0 0 - - For awabi 10 5 0

04.01 0401.10 - Of a fat content, by weight, not exceeding 1% 10 5 0 0401.20 - Of a fat content, by weight, exceeding 1% but not exceeding 6% 10 5 0 0401.30 - Of a fat content, by weight, exceeding 6% 10 5 0

0402.10 - In powder, granules or other solid forms, of a fat content, by weight, not exceeding 1.5% 5 0 0 04.02

0402.211 - - - Fit for infant feeding according to conditions specified by the Director General of Customs 5 0 0

0402.219 - - - Other 5 0 0 - - - For powder milk of a fat content, by weight ,exceeding 1.5% 10 5 0 0402.29 - - Other 5 0 0 - - For powder milk of a fat content, by weight ,exceeding 1.5% 10 5 0 0402.91 - - Not containing added sugar or other sweetening matter 10 5 0 0402.99 - - Other 10 5 0

04.03 0403.10 - Yogurt 5 0 0 - For In liquid, including condensed form 10 5 0 0403.90 - Other 5 0 0 - For In liquid, including condensed form 10 5 0 - For sour milk and power butter milk 10 5 0

04.04 0404.101 - - - In liquid, including condensed form 10 5 0 0404.109 - - - Other 5 0 0 - - - For containing added sugar or other sweetening matter 10 5 0 0404.901 - - - In liquid, including condensed form 10 5 0

134

0404.909 - - - Other 5 0 0 - - - For containing added sugar or other sweetening matter 10 5 0

04.05 0405.10 - Butter 10 5 0 0405.20 - Dairy spreads 10 5 0 0405.901 - - - Butterfat 5 0 0 0405.909 - - - Other 10 5 0

04.06 0406.10 - Fresh (unripened or uncured) cheese, including whey cheese, and curd 10 5 0 0406.20 - Grated or powdered cheese, of all kinds 10 5 0 0406.30 - Processed cheese, not grated or powdered 10 5 0 0406.40 - Blue-veined cheese 10 5 0 0406.90 - Other cheese 10 5 0

04.07 0407.001 - - - Hatching eggs 0 0 0 EXCLUDED 0407.009 - - - Other 10 5 0 EXCLUDED

04.08 0408.11 - - Dried 10 5 0 0408.19 - - Other 10 5 0 0408.91 - - Dried 10 5 0 0408.99 - - Other 10 5 0

04.09 0409.00 Natural honey 10 5 0 04.10 0410.001 - - - Salanganes' nests 10 5 0

0410.009 - - - Other 10 5 0 05.01 0501.00 Human hair, unworked, whether or not washed or scoured; waste of human hair. 0 0 0 05.02 0502.10 - Pigs', hogs' or boars' bristles and hair and waste thereof 0 0 0

0502.90 - Other 0 0 0 05.03 0503.00 Horsehair and horsehair waste, whether or not put up as a layer with or

without supporting material. 0 0 0 05.04 0504.00 Guts, bladders and stomachs of animals (other than fish), whole and pieces

thereof, fresh, chilled, frozen, salted, in brine, dried or smoked. 10 5 0 EXCLUDED 05.05 0505.10 - Feathers of a kind used for stuffing; down 5 0 0

0505.90 - Other 5 0 0 05.06 0506.10 - Ossein and bones treated with acid 0 0 0

0506.90 - Other 0 0 0 05.07 0507.10 - Ivory; ivory powder and waste 10 5 0

0507.90 - Other 10 5 0 05.08 0508.00 Coral and similar materials, unworked or simply prepared but not otherwise worked;

shells of molluscs, crustaceans or echinoderms and cuttle-bone, unworked or simply prepared but not cut to shape, powder and waste thereof. 10 5 0

05.09 0509.00 Natural sponges of animal origin. 10 5 0

135

0510.00 Ambertris, castoreum, civet and musk: cantharides: bile, whether or not dried. Glands and 05.10

other animal products used in the preparation of pharmaceutical products , fresh , chilled .

Frozen or otherwise provisiorally preserved. 10 5 0 05.11 0511.10 - Bovine semen 0 0 0

0511.911 - - - Fish bladders 0 0 0 0511.919 - - - Other 0 0 0 0511.991 - - - Domestic animal semen for artificial insemination 0 0 0 0511.999 - - - Other 0 0 0

06.01 0601.10 - Bulbs, tubers, tuberous roots, corms, crowns and rhizomes, dormant 10 5 0 0601.20 - Bulbs, tubers, tuberous roots, corms, crowns and rhizomes,in growth or in flower; chicory plants and roots 10 5 0

06.02 0602.10 - Unrooted cuttings and slips 10 5 0 0602.20 - Trees, shrubs and bushes, grafted or not, of kinds which bear edible fruit or nuts 10 5 0 0602.30 - Rhododendrons and azaleas, grafted or not 10 5 0 0602.40 - Roses, grafted or not 10 5 0 0602.90 - Other 10 5 0

06.03 0603.10 - Fresh 10 5 0 0603.90 - Other 10 5 0

06.04 0604.10 - Mosses and lichens 10 5 0 0604.91 - - Fresh 10 5 0 0604.99 - - Other 10 5 0

07.01 0701.10 - Seed 10 5 0 0701.90 - Other 10 5 0

07.02 0702.00 Tomatoes, fresh or chilled. 10 5 0 EXCLUDED 07.03 0703.10 - Onions and shallots 10 5 0

0703.20 - Garlic 10 5 0 0703.90 - Leeks and other alliaceous vegetables 10 5 0

07.04 0704.10 - Cauliflowers and headed broccoli 10 5 0 0704.20 - Brussels sprouts 10 5 0 0704.90 - Other 10 5 0

07.05 0705.11 - - Cabbage lettuce (head lettuce) 10 5 0 0705.19 - - Other 10 5 0 0705.21 - - Witloof chicory (Cichorium intybus var. foliosum) 10 5 0 0705.29 - - Other 10 5 0

07.06 0706.10 - Carrots and turnips 10 5 0 EXCLUDED

136

0706.90 - Other 10 5 0 07.07 0707.00 Cucumbers and gherkins, fresh or chilled. 10 5 0 07.08 0708.10 - Peas (Pisum sativum) 10 5 0

0708.20 - Beans (Vigna spp., Phaseolus spp.) 10 5 0 EXCLUDED 0708.90 - Other leguminous vegetables 10 5 0

07.09 0709.10 - Globe artichokes 10 5 0 0709.20 - Asparagus 10 5 0 0709.30 - Aubergines (egg-plants) 10 5 0 EXCLUDED 0709.40 - Celery other than celeriac 10 5 0 0709.51 - - Mushrooms of the genus Agaricus 10 5 0 EXCLUDED 0709.52 - - Truffles 10 5 0 0709.59 - - Other 10 5 0 0709.60 - Fruits of the genus Capsicum or of the genus Pimenta 10 5 0 EXCLUDED 0709.70 - Spinach, New Zealand spinach and orache spinach (garden spinach) 10 5 0 0709.90 - Other 10 5 0 EXCLUDED

07.10 0710.10 - Potatoes 10 5 0 0710.21 - - Peas (Pisum sativum) 10 5 0 0710.22 - - Beans (Vigna spp., Phaseolus spp.) 10 5 0 EXCLUDED 0710.29 - - Other 10 5 0 EXCLUDED 0710.30 - Spinach, New Zealand spinach and orache spinach (garden spinach) 10 5 0 0710.40 - Sweet corn 10 5 0 EXCLUDED 0710.80 - Other vegetables 10 5 0 EXCLUDED 0710.90 - Mixtures of vegetables 10 5 0 EXCLUDED

07.11 0711.20 - Olives 10 5 0 0711.30 - Capers 10 5 0 0711.40 - Cucumbers and gherkins 10 5 0 EXCLUDED 0711.51 - - Mushrooms of the genus Agaricus 10 5 0 0711.59 - - Other 10 5 0 0711.90 - Other vegetables; mixtures of vegetable 10 5 0 EXCLUDED

07.12 0712.20 - Onions 10 5 0 EXCLUDED 0712.31 - - Mushrooms of the genus Agaricus 10 5 0 EXCLUDED 0712.32 - - Wood cars (Auricularia spp.) 10 5 0 EXCLUDED 0712.33 - - Jelly fungi (Tremella spp.) 10 5 0 EXCLUDED 0712.39 - - Other 10 5 0 EXCLUDED 0712.90 - Other vegetables; mixtures of vegetables 10 5 0 EXCLUDED

07.13 0713.10 - Peas (Pisum sativum) 10 5 0 0713.20 - Chickpeas (garbanzos) 10 5 0 0713.31 - - Beans of the species Vigna mungo (L.) Hepper or Vigna radiata (L.) Wilczek 10 5 0 EXCLUDED

137

0713.32 - - Small red (Adzuki) beans (Phaseolus or Vigna angularis) 10 5 0 0713.33 - - Kidney beans, including white pea beans (Phaseolus vulgaris) 10 5 0 0713.39 - - Other 10 5 0 0713.40 - Lentils 10 5 0 0713.50 - Broad beans (Vicia faba var. major) and horse beans (Vicia faba var. equina, Vicia faba var. minor) 10 5 0 0713.90 - Other 10 5 0 EXCLUDED

07.14 0714.10 - Manioc (cassava) 10 5 0 EXCLUDED 0714.20 - Sweet potatoes 10 5 0 EXCLUDED 0714.90 - Other 10 5 0 EXCLUDED

08.01 0801.11 - - Desiccated 10 5 0 0801.19 - - Other 10 5 0 0801.21 - - In shell 10 5 0 0801.22 - - Shelled 10 5 0 0801.31 - - In shell 10 5 0 0801.32 - - Shelled 10 5 0

08.02 0802.11 - - In shell 5 0 0 EXCLUDED 0802.12 - - Shelled 5 0 0 EXCLUDED 0802.21 - - In shell 5 0 0 EXCLUDED 0802.22 - - Shelled 5 0 0 EXCLUDED 0802.31 - - In shell 5 0 0 EXCLUDED 0802.32 - - Shelled 5 0 0 EXCLUDED 0802.40 - Chestnuts (Castanea spp.) 5 0 0 EXCLUDED 0802.50 - Pistachios 5 0 0 EXCLUDED 0802.90 - Other 5 0 0 EXCLUDED

08.03 0803.00 Bananas, including plantains, fresh or dried. 10 5 0 08.04 0804.10 - Dates 10 5 0

0804.20 - Figs 10 5 0 0804.30 - Pineapples 10 5 0 EXCLUDED 0804.40 - Avocados 10 5 0 0804.50 - Guavas, mangoes and mangosteens 10 5 0 EXCLUDED

08.05 0805.10 - Oranges 10 5 0 EXCLUDED

0805.20 - Mandarins (including tangerines and satsumas); clementines, wilkings and similar citrus hybrids 10 5 0

0805.40 - Grapefruit 10 5 0

0805.50 - Lemons (Citrus limon, Citrus limonum) and limes (Citrus aurantifolia, Citrus latifolia) 10 5 0 EXCLUDED

0805.90 - Other 10 5 0 EXCLUDED

138

139

08.06 0806.10 - Fresh 10 5 0 0806.20 - Dried 10 5 0

08.07 0807.11 - - Watermelons 10 5 0 EXCLUDED 0807.19 - - Other 10 5 0 EXCLUDED 0807.20 - Papaws (papayas) 10 5 0 EXCLUDED

08.08 0808.10 - Apples 5 0 0 0808.20 - Pears and quinces 10 5 0

08.09 0809.10 - Apricots 10 5 0 0809.20 - Cherries 10 5 0 0809.30 - Peaches, including nectarines 10 5 0 0809.40 - Plums and sloes 10 5 0

08.10 0810.10 - Strawberries 10 5 0 0810.20 - Raspberries, blackberries, mulberries and loganberries 10 5 0 0810.30 - Black, white or red currants and gooseberries 10 5 0 0810.40 - Cranberries, bilberries and other fruits of the genus Vaccinium 10 5 0 0810.50 - Kiwifruit 10 5 0 0810.60 - Durians 10 5 0 0810.90 - Other 10 5 0

08.11 0811.10 - Strawberries 10 5 0 0811.20 - Raspberries, blackberries, mulberries, loganberries, black, white or red currants and gooseberries 10 5 0 0811.90 - Other 10 5 0

08.12 0812.10 - Cherries 10 5 0 0812.90 - Other 10 5 0

08.13 0813.10 - Apricots 10 5 0 0813.20 - Prunes 10 5 0 0813.30 - Apples 10 5 0 0813.40 - Other fruit 10 5 0 EXCLUDED 0813.50 - Mixtures of nuts or dried fruits of this Chapter 10 5 0 EXCLUDED

08.14 0814.00 Peel of citrus fruit or melons (including watermelons), fresh, frozen, dried or provisionally preserved in brine, in sulphur water or in other preservative solutions. 10 5 0

27.01 2701.11 - - Anthracite 0 0 0

27.04 2704.00 Coke and semi-coke of coal, of lignite or of peat, whether or not agglomerated; retort carbon. 0 0 0

Source: Official source from the Chinese Ministry of Trade.

Appendix IV: List of agencies, organizations and people visited and interviewed

Vientiane Capital:

1. Ministry of Communication Transportation Post and Constructions Mr. Khanngeun KHAMVONGSA (Deputy Permanent Secetary)

a. Transportation Department

i. Mr. Toui PHOMMASING (Director) ii. Mr. Lieng MONTHALATH (Technical Staff)

iii. Mr. Sithone VONGKHAMXAY (Engineer of Road Transport Development Division)

iv. Mr. Sengsavang PHANDANOUVONG

b. Telecommunication Department i. Mr. Snith XAPHAKDY (Director)

c. Social and Environment Division

2. Ministry of Commerce a. International Trade Department

i. Ms. Khemmani Pholesena (Director General) ii. Ms. Banesati Thephavong (Deputy Director)

iii. Ms. Kingsadone

b. Import-export Management Department and WTO technicians i. Mr. Khemdeth

c. Certificate of Origin Division

3. Ministry of Finance a. Customs Department

i. Mr. Rick Fisher Statistics Division

i. Mr. Vilaykone (Technical Staff) International Relations Division

i. Mr. Khampoun INPENGLASABOUT (Director) ii. Mr. Sirivanh

b. Tax Department

i. Mr. Phoukham

c. State Property Department

4. Ministry of Foreign Affairs a. ASEAN Economics Cooperation Division

i. Mr. Saysana Sayakone

5. Bank of Laos Economics Research Department

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i. Kheungthong VONGSAYA (Deputy Chief)

6. Committee Planning and Investment a. Investment Department

i. Mr. Khamlien Pholesena b. Lao-Vietnam Cooperation Commission Office

7. International Monetary Fund based in Vientiane a. Soulinthone LEUANGKHAMSING (Economist/Translator)

8. National Statistics Centre 9. Japanese International Cooperation Agency

10. Asian Development Bank based in Vientiane

11. Vietnamese Trade Representative Office

a. Mr. Tran Bao Giam (Commercial Counselor)

12. Lao Freight Forwarder a. Mr. Vichit SADETTAN (Sales Manager/UPS Supervisor)

13. European Commission based in Vientiane, Laos.

a. Mr. Francesco TRANIERO (Senior Project Officer) b. Ms. Khankeo MOONVONG (Trade and Economic Program Office)

14. Lao Trade Promotion Centre a. Mr. Sathiane PHOUTHABANDID (Deputy Executive Director)

15. Phaiboun Sole Import-Export Co., Ltd. a. Ms. Daraphone RATTANAVONG (Sales and Marketing Executive)

Savannakhet

16. CTPC Department a. Mr. Sengthong VANGKEOMANY (Deputy Director)

17. Trade Department a. Mr. Pholithat THYKHAMMY (Deputy Director)

18. Customs Office

Customs office, Khanthabury International Checkpoint a. Mr. Somchith LASAVONG (Deputy)

Customs office, Dansavanh-Laobao International Checkpoint 19. Planning and Investment Department

a. Ms. Siamphone (Statistic Technical Staff) 20. DAFI (interview Development Agriculture Forestry Industry)

a. Mr. Vilong KHOTNHOTHA (Managing Director)

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21. Savanh Advance Agriculture Co., Ltd. (interview SAAC) 22. Individual Kuanjai Import-Export Co., Ltd. (private)

Bolikhamxay

23. CTPC Department 24. Trade Department 25. Customs Office

Luangnamtha:

Sing disctrict 26. Administrative office 27. Trade Department 28. Customs Office, Pangthong checkpoint

Luangnamtha 29. Administrative office 30. Trade Department

a. Mr. Phanthong PHIDTHOUMMA (General Director)

31. Customs Office, Boten office a.

32. Department of Planning and Investment a. Mr. Bounkhob PHOMMACHANH (Department Head)

Oudomxay

33. Planning and Investment Department a. Mr. Houmpheng Sithivong (Deputy Director)

34. Trade Department

35. Finance Department

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