Written by Mekong Institute

This thesis studies the impacts of real exchange rates on bilateral trade balance between Lao People’s Democratic Republic (Lao PDR) and its major trading partners. The main objectives of this thesis are: (1) to study general trade balance between Lao PDR and each of its major trading partners (Thailand, China, and Vietnam). (2) to compile policies and information related to exchange rates applied in Lao PDR, and (3) to investigate the impacts of the exchange rate devaluation on trade balance of Lao PDR with its trading partners, and evidencing the J-curve phenomenon, if observed, on the country.

A descriptive analysis was performed using the annual import-export data from 2001 to 2012 (IMF, ITC) and the yearly exchange rate data between 1990 and 2012 (IMF). A quantitative analysis was also performed using data on quarterly imports and exports, exchange rates, and real GDP data from the 1993Q1 to 2012Q4 (IMF), calculated by using the Auto-Regressive Distributed Lag (ARDL) approach.

The descriptive analysis found that Lao PDR has been running a trade deficit. The country’s main exports are copper, wood, ores, and electricit y; while its main imports are fuels, vehicles, machinery, metals, and electrical equipments. The principal exporter to Lao PDR is Thailand, to which Lao PDR exports mainly copper. China imports mainly ores and Vietnam wood from Lao PDR. The quantitative analysis reveals that on the one hand, when the real GDP of Lao PDR increases, the country’s trades balance decreases. On the other hand, when the real GDP of trading partner trading partners increase, Lao’s trade balance could actually increase.

Moreover, the analysis of impacts of the increase in the real exchange rate shows that countries respond to this phenomenon differently: whereas the J-curve phenomenon is observed in the trade balance between Laos and Thailand, it is not the case for the trade balances between this country and China, and Vietnam.