The myth of the 'vassal state': China’s influence in Laos is waning

31 July 2023

Since the revival of its influence in Southeast Asia in the early 1990s, China has become an important economic investor and development partner for the region. This is especially true for Laos and Cambodia. China has retained its position as ASEAN’s largest trading partner since 2009 while ASEAN became China’s largest trading partner in 2021. For Laos, Beijing constitutes the largest source of foreign direct investment outside of ASEAN. As such, it is viewed as the most influential economic power in Southeast Asia, according to the recent State of Southeast Asia Survey Report by the ISEAS-Yusof Ishak Institute.

Due to Laos’ limited developmental options, the country has benefited significantly from China’s investment, particularly through the Belt and Road Initiative (BRI). The scale of China’s investment in Laos — especially in infrastructure such as the China-Laos railway, hydropower dams, and special economic zones (SEZ) — has increased China’s influence in both tangible and intangible ways. This growing dependence on China has led observers to sometimes frame Laos as a ‘vassal’ or ‘satellite’ state to China, unable to think and act independently.

However, a closer examination of Laos’ foreign policy, political priorities, and trade, away from the lenses of major power rivalries, reveals that Laos can be even-handed and independent when it comes to international relations and is able to strike a balance between its neighbours and other major powers. There are also indications that Laos has sought to diversify its foreign relationships beyond China, including in development assistance. The State of Southeast Asia 2023 Survey Report indicates that China’s influence in Laos may be significant but it is nevertheless slowly waning. An increasingly assertive China and the deepening of US-China rivalry have placed greater pressure upon Laos to move towards neutrality and to increase its reliance on ASEAN member states, or middle powers such as the EU, Australia, Japan, and South Korea. In fact, it appears that Laos is much more neutral on China than media reports and academic analyses often claim.

Changing perceptions toward China

A five-year analysis of the State of Southeast Asia Survey reports from 2019 to 2023 shows that while China continues to enjoy a certain degree of influence in Laos, its economic power has been perceived to be declining, with the exception of 2020-2021. The most significant decline was recorded for 2022-2023: China’s economic influence in Laos plunged from 86.4 per cent to 20.6 per cent, while its political-strategic influence in Laos decreased from 75 per cent to 30.8 per cent in the same period. A growing number of Laos respondents have also indicated worry about China’s growing economic influence while an increasing number of respondents welcome the US’ growing economic influence (from 0 per cent in 2022 to 50 per cent in 2023).

Statistics have shown that although China has a significant degree of influence over Laos, it is certainly not controlling the country.

With regard to leadership in maintaining the rules-based order and upholding international law, Laos respondents’ confidence in China has consistently decreased over the past four years from 26.1 per cent in 2020 to 5.6 per cent in 2023. In the period 2022-2023, the EU became Laos’ top option, while confidence in Australia increased following Russia’s invasion of Ukraine. Greater confidence is also recorded for New Zealand and the UK. China’s ‘no-limits’ partnership with Russia, along with ASEAN countries’ concern about its more aggressive stance in the South China Sea may have contributed to the declining confidence. If ASEAN had to align itself with one of the two strategic rivals, the US or China, an overwhelming majority of Laos respondents from 2020-2022 chose China over the US. However, in 2023, 58.1 per cent of respondents chose the US, while only 41.1 per cent of respondents chose China.

These findings reveal that while China continues to have some degree of influence over Laos politically and economically, its influence has declined, particularly between 2022 and 2023. China’s COVID restrictions on borders and suspension of Laos’ exports have affected Laos’ businesses and farmers. As such, there is a growing sentiment among respondents to prefer middle powers, particularly the EU and Australia, to play a greater leadership role. Confidence in ASEAN has also increased with regard to its economic role in the region following the Regional Comprehensive Economic Partnership (RCEP) coming into effect in January 2022 and the diversification of production sites from China to Southeast Asia as a result of the intensifying US-China rivalry. Further, economic growth in neighbouring countries including Thailand and Vietnam has resulted in an increase in their trade and investment with Laos.

A balancing act between development and dependence

Nonetheless, trade and investment relations between Laos and China have been growing steadily. The two-way trade volume between the two countries was estimated to be USD 4.15 billion in 2021, increasing by approximately 20 per cent yearly. China accounts for more than 80 per cent of Laos’ agricultural exports, resulting in a trade surplus for Laos. China is also the main source of infrastructure financing in Laos. There have been at least 815 projects funded by China (mostly under the BRI) to an amount of over USD 16 billion since 1989.

Among China’s infrastructure investments in Laos, the China-Laos railway is one of the most significant and controversial projects, considering its hefty price tag of USD 6 billion. As a result of Laos’ significant reliance on China’s infrastructure financing, its total debt exposure to China (the largest single bilateral lender) is estimated to be approximately USD 12.2 billion or 64.8 per cent of its GDP, causing some observers to accuse China of ‘debt trap’ diplomacy.

In the past two years, the impact of the COVID-19 pandemic, inflation, and the rapid depreciation of the local currency, the Lao Kip, have further exacerbated the rising debt, so that Laos’ debt repayment has become more expensive and the country is at risk of defaulting. As a result, the public has expressed fear that the country’s sovereignty could be implicated in case land or national assets would have to be compromised to repay debts.

However, despite the growing debt, infrastructure loans are generally still viewed as necessary to expedite Laos’ economic development and trade. The China-Laos railway for example could be Laos’ best bet to boost its connectivity to turn its unfavourable land-locked status into a land-linked status with the second largest economy in the world. It is expected to boost the country’s GDP by USD 81.63 million, the cost of freight would reduce by more than 30 per cent, and tourism from China should increase by at least 20 per cent. Apart from enhancing its connectivity with China, the railway with its dry port is expected to be linked to the Greater Mekong Subregion, which could turn Laos into an important logistics hub within continental Southeast Asia. This will not just boost its economic performance but is also expected to increase people’s confidence in the Lao People’s Revolutionary Party.

Another controversial development in Laos is the growing number of hydropower dams built under the BRI which have the potential to make Laos the ‘battery of Southeast Asia’. While sustainable energy is sought after by the region, concerns persist over safety, environmental damage, and livelihood — including the potential negative effects on downstream states such as Cambodia, Thailand, and Vietnam — as well as China’s increasing control over Laos’ energy resources. The China Southern Power Grid Company has a majority share under the Électricité du Laos Transmission Company Ltd and can effectively control the electricity export of Laos under a 25-year concession agreement.

As such, while China brings about clear economic benefits, there are also rising concerns and pushback against Beijing’s growing presence and influence in Laos. Some scholars have noted that if Laos’ dependence on China increases, it could lead to China interfering in the domestic affairs of Laos. This has also been indicated as Laos’ top concern in the State of Southeast Asia Survey. However, there are also views that Laos’ interest in China goes beyond economic considerations. Danielle Tan has noted that Laos’ reliance on its external environment, especially China, could be a deliberate strategy to put regional powers in competition with one another in order for the country to avoid being drawn into the orbit of just one of them (China, Vietnam or Thailand), and to enhance its bargaining powers with investors. As such, playing Vietnam against China, for example, helps promote Laos’ autonomy and independence. Similarly, Chinese investors help to reduce Laos’ economic reliance on Thailand.

Seeking greater autonomy through diversification

Given Laos’ growing economic links with China, relations between the two countries would be expected to expand. However, an increasingly assertive China and the deepening of the US-China rivalry will place greater pressure upon Laos to move towards neutrality or to increase its reliance on ASEAN and its member states, or middle powers such as the EU, Australia, Japan, and South Korea.

Statistics have shown that although China has a significant degree of influence over Laos, it is certainly not controlling the country. The State of Southeast Asia survey findings also reveal that the prevailing attitude in Laos with regard to major powers’ regional influence has been shifting away from China, particularly in the past year.

Greater autonomy will certainly bode well as Laos assumes the ASEAN Chairmanship next year. Laos already successfully relied on a more neutral stance in its Chairmanship in 2016, when it was able to strike a middle ground between China and Vietnam in regard to the South China Sea paragraph in the Joint Communiqué. Being even-handed with diversified relations will certainly allow Laos to deepen relations with all major powers to its advantage, including tapping into the myriad of infrastructure funds offered by ASEAN’s dialogue partners such as the US, Japan, India, and the EU. More importantly, Laos is expected to exercise its leadership by ensuring ASEAN’s centrality, unity, and neutrality in the face of intensifying major power rivalries in the region, and it needs to start with itself.

DISCLAIMER: All views expressed are those of the writer and do not necessarily represent that of the 9DASHLINE.com platform.

Author biography

Joanne Lin is Co-coordinator of the ASEAN Studies Centre at ISEAS – Yusof Ishak Institute, and Lead Researcher (Political-Security) at the Centre. Image credit: Flickr/David McKelvey (cropped).

This article is an adapted version of ISEAS Perspective 2023/55 “Changing Perceptions in Laos Toward China” previously published by the ISEAS-Yusof Ishak Institute.