Laos could face a trade loss of $102 million under the special tariff scheme if the country graduates from the UN’s Least Developed Country (LDC) status in 2024, a recent study found.
A research paper conducted in the context of the International Trade Centre project and funded by the EU highlighted the projections of trade and tariffs as well as the predictable impacts on exports.
Over the decades, Laos has significantly benefited from the Generalised System of Preferences (GSP), which allows Lao exporters to pay less or no duty on their exports to other countries.
Upon graduation from LDC status, Laos will no longer be eligible to export under the unilateral preferential tariff schemes that 24 markets around the globe have in place for countries in this category.
Laos has exported goods worth almost $4.3 billion on average over the period 2014-2018. The study projected that the tiny country may expand its exports to $8.6 billion by 2024 in a hypothetical situation where it continues to benefit from LDC preferences.
The study said: “Moving to the next best alternative regime would result in a total trade loss amounting to $102 million, which could be compensated thanks to targeted trade promotion aiming to unlock Laos’ unrealised export potential of $3.2 billion.”
One of the main challenges for Laos is that the country suffers from a trade deficit since it imports more than it exports. Tariff increases in important markets may lead to trade losses that could in turn call for the conclusion of additional Free Trade Agreements.
The garment sector would be heavily affected by the removal of the GSP as Laos exports large volumes of clothing to European markets.
Some of Laos’ largest trade partners are the EU, the UK, Japan and Canada, with Lao businesses benefitting from exporting to these markets under the special trade privilege scheme.
The EU, the UK and Canada are also the only markets where the expected trade loss accounts for more than a tenth of Laos’ projected exports to these markets.
The paper suggests three ways in which Lao exporters could mitigate the trade losses – first, attaining the EU Generalised System of Preferences Plus (GSP+) rather than the standard GSP could reduce the trade loss by 70 per cent.
Secondly, targeted trade promotion to remove market frictions will assist sectors that currently do not exhaust their export potential in certain markets – this is the case for rice exports to the EU and food exports to Japan.
Laos may invest in trade promotion and advisory to help companies overcome the frictions that currently prevent them from unleashing market opportunities.
Third, export diversification could help focus resources on alternative products and markets that offer room to increase exports and thereby compensate for graduation-induced losses.