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Lao People’s Democratic Republic: Selected Issues and Statistical Appendix

Author(s):
International Monetary Fund
Published Date:
March 2002
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III. The Trade System and Trade Policy Commitments18

1. Since the launching of the New Economic Mechanism (NEM) in 1986, there has been a substantial liberalization of trade. Prior to this, most trade relations took place in nonconvertible currencies with COMECON member countries, principally the Soviet Union and Vietnam, and were centrally controlled by government. In the decade from 1987 to 1997, with the opening up of the economy under the NEM, the trade system was progressively liberalized, and trade in convertible currencies expanded steadily, most notably with Thailand, China, Japan, Vietnam, and several European countries. Though the tariff structure was simplified and rates were reduced in the mid-1990s, the trade regime remains nontransparent with a plethora of nontariff barriers, including quantitative restrictions (QRs). Offsetting this, however, are the long and porous borders, and the significant informal sector. Over the last year some nontariff barriers, which were raised in response to the Asia crisis, have been relaxed and several steps were taken to simplify and liberalize the trade regime. Looking ahead, a further substantial reduction in tariffs and nontariff barriers will result from trade policy commitments under the Association of South East Asian Nations (ASEAN) Free Trade Area (AFTA), which accounts for a very large volume of trade, and accession to the WTO.

A. The Trade System

Tariffs

2. From the mid-1980s, in line with the NEM, the government began to liberalize the trade system, including through rationalization of the tariff structure and some reductions in widespread nontariff barriers. By the mid-1990s, the tariff system was partly simplified with 12 tariff rates, ranging from 5–30 percent on agricultural and fishery goods, 5–80 percent on manufacturing items, 20–80 percent on luxury food imports, and 10–100 percent on luxury nonfood products. A system of discretionary reference prices continued to be used to assess tariff charges, while tariff exemptions remained significant.

3. In 1995, in line with IMF recommendations, the maximum import tariff was reduced from 150 percent to 40 percent. Today, the tariff structure comprises six ad valorem rates (5, 10, 15, 20, 30, and 40 percent). The lowest rates apply to imports of raw materials, including agricultural inputs, capital equipment, and certain essential consumer goods (including food items). The highest rates apply to luxury consumer goods, including motor vehicles, certain beverages, tobacco, and perfume (Table 1). Some import-substitution activities, such as beer production and motorcycle assembly, receive substantial protection. Also, inputs imported for the production of exports enter duty free, while imports financed by foreign direct investment pay only 1 percent. The median tariff is 5 percent; the simple average tariff is 9.5 percent; and the import-weighted average tariff is 14.7 percent, reflecting the high share of imports of “nonessential” consumer goods.

Import Tariff Rates by Sector and Product Category(As at end 2000)
SectorProductRate (in percent)
AgricultureSeeds5
Fertilizer5
Other5–40
LivestockFeed5
Other5–30
ManufacturingRaw materials5–10
Packaging10–20
Energy5–20
Machinery and equipment5–20
Trucks5–30
Cars40
Beer and alcohol30–40
Other10–20
Consumer goodsLuxury—Food10–30
Luxury—Nonfood10–40
Source: Ministry of Finance, Customs Department.
Source: Ministry of Finance, Customs Department.

4. On the export side, export duties are levied on selected products. Specific rates are applied to exports of logs and sawn wood, while ad valorem rates range from 2 percent on ferrous metals, 3 percent on plywood, 5 percent on livestock and coffee, to 20 percent on electricity and 30 percent on semi-finished wood products.

Nontariff barriers

5. In the second half of the 1980s, the government also began to decentralize some of its responsibilities for trading in strategic goods to national and provincial trading companies and introduced a national trade balance plan. Under this system, these trading companies were allowed to transact in specified products free of all applicable taxes and charges in return for individually negotiated tax payments. Although private traders were permitted to trade in all commodities not on the strategic or restricted lists, they were required to submit their trading plans to the State Committee for Foreign Economic Relations and Trade. The State Committee would use these plans to formulate a national “import-export equilibration plan,” within the framework of the five-year National Socio-Economic Development Plan (NSEDP), with a view to limiting the trade deficit.

6. In the last decade, the trade system has been simplified and liberalized, both on the import and export side, but a national “import-export equilibration plan” is still in operation, and nontariff barriers remain the biggest obstacle to trade. Some of these nontariff barriers were temporarily made more restrictive during the recent economic crisis.

7. Imports: Most imports, including inputs for domestic production and re-export, and medicinal imports are not subject to restrictions, and licenses are issued automatically. Importers of ordinary consumer goods are required to submit an annual business plan to the provincial trade office, and imports are permitted to the extent that, at an aggregate level, imports are consistent with the annual “import-export equilibration plan”. In practice, this means that importers must demonstrate that at least an equivalent amount of foreign exchange can be generated or saved through exports, domestic production, or domestic investment. Most “luxury” consumer goods, including alcohol, cigarettes, and perfumes, are also subject to a variety of explicit and implicit controls. Some goods are banned on national security, public health, and cultural socio-economic and environmental grounds.19 Others, including petroleum products, construction steel, cement, rice, vehicles, electricity, minerals, tobacco, and timber products, remain controlled by the state.20 Certain imports are subject to “special” control for health, safety, and security reasons, including food products, live animals and plants, fertilizers, cultural goods, communication products, medicines, chemicals, minerals, sporting guns, and sport products.

8. Since this system is cumbersome to operate, in practice it was administered liberally. However, with the outbreak of the Asian crisis and the sharp decline in exports and capital inflows, the authorities tightened the administrative operation of the system. The return of macroeconomic stability has enabled some of these controls to be relaxed.

9. QRs are applied to imports of fuel and lubricants, fertilizer, construction steel, cement, motor vehicles, including motorcycles, and most quota levels were raised over the last year.21 Restraints on the imports of motor vehicles and motorcycles are applied for environmental reasons. Prior authorization for the importation of each individual private motor vehicle has been abolished, and the government is considering replacing the quota on motor vehicles with a fiscal measure. The quantity of fuel is determined bi-annually. Imports of cement and steel bars for construction are not subject to formal quotas, but reasonable amounts are decided by the Ministry of Industry and Handicrafts. Finally, although no quotas have been applied in recent years, the right to apply quotas on rice is reserved to support the minimum farm-gate price set by government.

10. Exports: Registration requirements for exports have been substantially liberalized. Previously the requirements were the same as applied to imports. Exports were assessed against the objectives of the NSEDP, and licenses issued by the municipal and provincial trade offices of the MCT, in consultation with the line Ministry Over time, the monopoly of state and provincial enterprises on the export of “strategic” goods in fulfillment of national trade agreements with the nonconvertible currency area was ended.22 Also, the licensing requirement was abolished and documentary requirements simplified for the export of garments and products on the AFTA inclusion list (see below). Since March 2001, licenses are issued automatically for all exports of companies registered under the Business Law, except for mining products, timber, and semi-processed wood.

11. Certain exports are banned for national security, health, and safety reasons, including guns, archaeological and cultural artifacts, drugs and related products, and wild animals. The right to control rice exports is reserved for food security purposes, and exports of logs are banned on conservation grounds, ostensibly to encourage the domestic wood-processing sector.

B. Trade Policy Commitments

12. The Lao P.D.R. was admitted to ASEAN on July 23, 1997. As a member, the Lao P.D.R. has committed to implement all ASEAN Agreements and Protocols, including the Agreement on a Common Effective Preferential Tariff (CEPT), and the establishment of the ASEAN Free Trade Area (AFTA). Under these agreements Lao P.D.R. is committed—over a ten-year period which began January 1, 1998—to a gradual reduction of customs tariffs on imports from other ASEAN member countries to a range of 0–5 percent, and the elimination of nontariff barriers. The implementation of AFTA will mark a very significant change in the trade regime as 70 percent of the country’s formal imports originate from ASEAN members.

Reduction in tariffs

13. Under the CEPT scheme to gradually reduce tariffs, the structure of the whole Lao tariff schedule, comprising 3,551 items, was classified into the following four product lists:

  • a. Inclusion List (IL): The IL comprises all items on which tariffs are to be reduced to the CEPT range of 0–5 percent by 2008. Tariffs above 20 percent will be reduced to 20 percent within 5 years, and subsequently to the 0–5 percent range in the remaining 5 years. Tariffs of 20 percent and under will be reduced to the 0–5 percent range within 7 years. At the start of 2001, the IL comprised 1,673 items not explicitly included in the three exclusion lists below, including 426 items just transferred, totaling 47 percent of tariff lines and roughly 30 percent of total import value. By the start of 2005, all the goods on the temporary exclusion list will be transferred to the IL and the maximum tariff on these items will be 20 percent and 87 percent of the IL will have tariffs of 0–5 percent.

  • b. Temporary Exclusion List (TEL): The TEL comprises items, which are to be gradually moved to the IL. As explained above, at the start of 2001, 426 items were moved out of the TEL to the IL so that the TEL comprised 1,716 items. According to the schedule issued in late 2000 under which all remaining items will be moved to the IL in equal annual installments, in the four years to the start of 2005, after which the TEL will become redundant.

  • c. General Exception List (GEL): The GEL comprises all goods that are excluded from reductions in tariffs and elimination of nontariff barriers for cultural, security, health, or environmental reasons. The GEL includes alcoholic beverages and motor vehicles. The number of items in the GEL was reduced to 74 items at the start of 2001, from 90 at end-2000, and the 16 items were transferred to the TEL.

  • d. Sensitive List (SL): The SL comprises 88 items, primarily unprocessed agricultural products, including rice, and tobacco products. Though the number of items on the SL is to remain unchanged through 2018, tariffs on items in the SL will be gradually reduced to the 0–5 percent range between 2005–15. There are no items on the highly sensitive list.

Elimination of QRs and other nontariff barriers

14. In addition to tariff reductions, the Government is committed to eliminate QRs. For imports: (i) with an ASEAN content of at least 40 percent; (ii) with an AFTA tariff of 20 percent or less; and iii) on the IL of both source and designator country, QRs must be removed at the time the item is transferred to the IL23. Thus QRs would be removed for all items on the IL by the start of 2005. The authorities have undertaken to extend this QR removal on AFTA imports to a multilateral basis from mid 2001. Other nontariff barriers on such products need to be removed within five years from when the above three conditions are met.

Prepared by Eric Sidgwick. Based on the Lao P.D.R. Memorandum of Foreign Trade Regime, March 2001, submitted to the WTO, and Ministry of Finance, Lao P.D.R., The C.E.P.T Product Lists for the year 2001, December 2000.

Weapons, right-hand drive vehicles, animal parts, addictive drugs, certain medicines, cultural items, specified agricultural products and dangerous goods. See Notification No. 870/MCT; September 19, 1996.

Imports of gold and silver require authorization from the Bank of the Lao P.D.R.

Regulation No. 462/MCT; December 8, 1993. Controls on imports of motorcycles over 250cc are set out in Notification No. 1552/MCTPC (Ministry of Communication, Transport, Post, and Construction).

Coffee, rice, tobacco, logs, wood products (such as timber, sawn wood, pressed wood, rattan), other forestry products (such as benzoin and sticklac), and minerals, for which the state had an export monopoly.

Under AFTA, QRs are formally defined as quotas, licenses, or other measures with equivalent effect, including administrative measures and requirements, which restrict trade.

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