Akshay Mediwala, University of Southern California
Laos’ debt serviceability struggles have persisted throughout 2025 and have been facilitated by increasing reliance on the Chinese government. Crucially, the Lao government’s inability to meet its debt obligations induced by its energy sector stems from a primary culprit: Chinese financing that previously drove the nation’s hydropower and economic growth in the 2010s. Consequently, this crisis has informed key decisions in the U.S.-China Trade War due to Laos’ position as a Belt and Road Initiative (BRI) asset and may foretell Laos’ position on the Eastern stage—and its relationship with other world powers—in the coming decades.
The Lao Debt Crisis
Debt rollover, particularly in the Lao energy sector, has become increasingly unsustainable as Laos continues to invest in a sector of its economy that cannot recuperate losses. Beginning in the 2010s, Laos proclaimed itself the ‘Battery of Southeast Asia’, a slogan that intended to highlight its central position and key role as an energy producer on the Indochinese Peninsula. This approach necessitated expensive hydropower projects, resulting in a demand for international financial support. Beginning in 2012, China offered vast amounts of capital to Laos, described by economic experts as a nation with “weak institutions and limited ability to productively absorb [China’s] investment.” This over-investment caused unsustainable losses and cascaded into Laos’ decision to allocate half of its government revenue to service Chinese debt in In parallel, Laos’ power grid firm, Électricité du Laos (EDL), held a “take-or-pay” contract with a Chinese state-owned power company that recently resulted in China commandeering Laos’ national energy grid for the next quarter century due to the aforementioned losses and energy overcapacity.
The Mekong River Basin and hydropower dams in Laos
The financial struggles of Laos overshadow the decades of productive hydropower growth that occurred after the Laotian Civil War ended in 1975. By leveraging natural features such as the Mekong River and its tributaries, as well as its sophisticated dam infrastructure, Laotian hydropower functioned as a force of economic development and stoked the government’s objective to power Southeast Asia. Energy buyers under long-term agreements, like Thailand, were critical in the financial success of these projects. After 2010, Laotian authorities began disregarding international due diligence standards in favor of developing large-scale energy projects to meet the growing demands of its export partners.
By this point, China—looking to expand its Belt & Road Initiative goals—had backed many Lao energy projects, and it continues to with the purpose of escalating its influence in the region. Because of China’s historically expansive agenda in the region, much of the Lao power grid was created with Chinese firms, financing, and technology. Between 2009 to 2023, Laos’ installed capacity—or its maximum power output—increased fourteen-fold with Chinese backing. In addition, China has collectively invested over $23 billion in Lao energy projects, which eclipses the $16 billion GDP that Laos reported in 2025. Adding to the myriad Chinese projects in the region, China has funded a high-speed train system which helps Laos transform into a land- linked nation with China. The International Monetary Fund (IMF) reports that much of China’s backing across various projects has manifested as debt for Laos, given that public and publicly guaranteed debt equated to 76% of the GDP in 2020 and ballooned to an unsustainable proportion of 118.3% of the GDP in 2025. In commenting on Laos’ amassing debt to China and the latter’s over-investment in the energy sector, Emeritus Professor Carlyle Thayer at the University of New South Wales argues that “[Laos’ debt is] irrecoverable and not solvable.” Because of the debt crisis, inflation in Laos has soared, hindering Laos’ competitiveness in the global trade market. Concerns around Laos’ debt crisis amplified in 2020 when credit rating agency Moody’s warned of a “material probability of default [for Laos] in the near term.” Laos, which is becoming increasingly linked to China, would like to avoid the same fate as Sri Lanka, which owed more than $8B in debt to state-controlled Chinese firms—Sri Lanka settled a portion of this debt by handing control of the 15,000-acre Hambantota Port to China Merchants Port Holdings Company in a century-long deal. As China expands its Belt and Road Initiative aggressively throughout Southeast Asia, Laos must remain wary of the risks associated with excessive borrowing.
Relevance to the US
In 2023, Laos exported $8.7B worth of goods, with its top export, electricity, bringing in about $2.5B. The United States was Laos’ fourth largest market, importing $306M worth of goods, concentrated in telecommunications equipment, non-wool textiles, and coffee. This trade relationship was previously strengthened by the United States-Laos Bilateral Trade Agreement (BTA) of 2005, which established preferential tariff rates between both nations on various products. In light of the economic history between the United States and Laos, their relationship—and American interest in funding foreign aid matters—has been deteriorating under the current Trump administration. As of April 2025, the U.S. held a 58% tariff on Laotian imports (later lowered to 40% in July 2025). The purpose of these tariffs was to undermine the billions of dollars worth of Chinese investments in the region. Because of Laos’ deep economic ties to China, it is a key target for the Trump administration’s tariffs.
Chinese investments in Laos have averaged over $1 billion since 2015.
Conclusion
China’s overinvestment in the Lao energy sector has led to a debt crisis that has ballooned to 118.3% of the Laotian GDP. China, which now controls the Lao national power grid until 2045, only grows its influence in the region as it seeks to expand its Belt and Road Initiative. Consequently, Laos has become involved in the U.S.-China trade war and has experienced backfire from U.S. President Donald Trump, who imposed a 40% tariff on the landlocked nation, further eroding the U.S.-Laos relationship. The consequences of the Southeast Asian nation’s shifting influences and domestic crises are ultimately endured by the people of Laos—only time will tell if Laos’ government can grapple with its obligations.