May 04, 2015

In Laos, a Strategic Opening the United States Cannot Miss

By Phuong Nguyen, Center for Strategic and International Studies (CSIS), April 2, 2015

A remarkable yet little-noticed development in the U.S. rebalance to the Asia Pacific has been Washington’s overtures to Laos, a country long isolated and often overlooked by U.S. officials. Shifts in geopolitical and regional economic trends in recent years have led the Lao government, which traditionally turned to Beijing or Hanoi for support, to explore opportunities to engage new partners and tap into the United States’ renewed attention to the region.

While recent changes in U.S.-Lao relations are hopeful, much remains to be done to consolidate U.S. interests in a country that has become more crucial in the battle for hearts and minds in Southeast Asia.

Until recently, China seemed set to establish a dominant position in Laos. In 2013, it displaced Thailand and Vietnam to become Laos’s biggest foreign investor, with Chinese companies holding large economic concessions ranging from energy and mining to agriculture and manufacturing. The Lao economy has expanded at an average rate of 8 percent in recent years, but maintaining this level of growth requires the government to attract annual foreign investment of at least $1.7 billion. Chinese companies invested over $1.3 billion in Laos in 2013 alone, the major portion of which funded land-based projects.

While its economic footprint has afforded China added leverage with Laos’s top leaders, an overdependence on Chinese investment in northern Laos has caused friction between local populations and authorities over land and environmental issues.

More importantly, China has overplayed its hand. Beijing insists on pushing through a railway project in Laos, which would be connected to the planned China-ASEAN railway running from Kunming to Singapore, at financing terms that are unviable for Laos. On top of that, the railway will provide few tangible benefits for Laos. This has caused concern among not just officials in Vientiane but also Laos’s neighbors. In particular, Vietnam, which has been battling Chinese assertiveness in the South China Sea, has found it increasingly difficult to match China’s growing footprint in Laos. Hanoi worries that Chinese influence in its next-door neighbor, if left unchecked, could have geopolitical ramifications down the road.

As a result, Vientiane, at the encouragement of Hanoi, has begun to seriously explore its options in cooperating with partners such as Japan, South Korea, and the United States. Laos has emerged as a critical ground in Japanese prime minister Shinzo Abe’s efforts to boost his country’s regional leadership profile. Tokyo and Vientiane in 2013 agreed to expand their bilateral security ties, while Japanese companies, including Toyota and Nikon, have tapped into Laos’s manufacturing potential and its location at the center of the East-West Economic Corridor, an ambitious Japanese-backed project that runs through Vietnam, Laos, Thailand, and Myanmar.

This shift is happening as Laos prepares for a leadership transition in 2016 that is expected to see 5 out of 11 Politburo members of the ruling Lao People’s Revolutionary Party retire, including a few known to be extremely close to China. Although the old guard is ambivalent about the West, the rising cadre of Lao leaders is much more exposed and open to engaging with the outside world. This changing attitude is coupled with a desire by Vientiane to turn Laos from an impoverished, landlocked economy to one that is land-linked with larger regional economic players in the context of greater economic integration within ASEAN.

These factors mean that the United States now has a strategic opportunity to build a new type of relationship with Laos. While the United States and Laos have worked to address longstanding war legacy issues such as unexploded ordnance left over from the Vietnam War, U.S. economic and investment ties with Laos have been lackluster. While companies from France, Japan, and South Korea have been playing catch-up with their Chinese, Thai, and Vietnamese counterparts, the United States is nowhere to be seen in the list of top foreign investors in Laos.

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