March 1, 2009｜Mongolia
Professor/Dean, Faculty of Business, Aoyama Gakuin University
The momentum in Mongolia for the conclusion of fully-fledged FTAs began around 2003. At that time, the United States government, under the Agreement on Textiles and Clothing (the Multifibre Arrangement) of the WTO, established an import quota framework for textiles and clothing produced in Mongolia. Owing to that, clothing manufactured in Mongolia, so long as it was within the scope of the quota framework, could be purchased as a certainty by the United States, regardless of the price and quality (at that time it was said that for clothing produced in Mongolia in comparison with that produced in China, the labor costs were approximately 5–10% higher). Because the Agreement on Textiles and Clothing expired without fail at the end of 2004, however, what was viewed as most potent as a new measure to ensure the continued existence of its largest and sole industry—the textile and clothing industry, which had supported employment domestically until that time—was the conclusion of an FTA with the United States. The Mongolian government for its part thought that if it could conclude FTAs with industrialized countries such as the United States and Japan, having the condition that “duties and other restrictive regulations of commerce are eliminated” (Article 24 of the WTO agreement GATT), then it would be able to sustain the country’s exports of textiles and clothing (cashmere) and domestic employment also.
At the same time, China was also given a similar import quota framework by the United States. Some among China’s garment manufacturers, in the form of joint management with Mongolian firms, built plants locally in Mongolia and exported products to the United States as Mongolian products. ROK garment manufacturers also built plants under joint management in Mongolia and exported products to the United States as Mongolian products (even at present, in 2009, several Mongolian local enterprises are continuing the OEM (Original Equipment Manufacturer) supply of garments to United States major retail chains).
However, (then) President Bush, even after 2004 when the Agreement on Textiles and Clothing was to expire, consolidated a policy to ensure the continued existence for several years of the import quota for Mongolian-produced textiles and clothing, on the grounds of support for a developing nation, and the WTO even officially recognized this. Through this, the momentum on the Mongolian side for the conclusion of an FTA with the United States had temporarily been dampened.
Meanwhile, a new opportunity presented itself for the Mongolian economy. This was the global surge in prices for mineral resources. According to the data for 2007, the share of the minerals sector within Mongolia’s GDP was approximately 30%, and that within the total value of exports was close to 80%. Quite simply it would be no exaggeration to say that Mongolia in the second half of the 2000s had developed, supported by mineral resources (the export of copper ore).
As the international prices for mineral resources are unstable, however, the Mongolian economy, which depends solely on the production and export of mineral resources, remains “fragile.” In order to head toward a stable, sustainable economy, which subsequently outgrows itself, new industries in addition to mineral resources must be fostered, and within the Mongolian government also (the former Ministry of Industry and Trade) this had been acknowledged from the outset. In reality, though, the profit from the windfall (which the local newspaper, the “UB [Ulaanbaatar] Post”, termed “windfall copper revenues” on 9 April 2009) obtained with the surge in prices for mineral resources (and caught up in electoral pledges) has not been allocated to the nurturing of new industries. There is also the opinion of those in the know that “For Mongolian society, with its long era of a planned economy as a sister-state of the Soviet Union, the concept of ‘saving’ is a tenuous one”.
Consequently, the Mongolian government, fixing its gaze on the formation of FTAs, has once again started negotiations with the respective nations concerned. Currently receiving priority are the negotiations with the United States government, and the fourth round of bilateral negotiations, based on the Trade and Investment Framework Agreement (concluded in 2004), has just ended.
Furthermore, the United States government three years ago proposed support for the development of a Mongolian domestic railway network together with grant assistance of US$25 million, called the Millennium Challenge Account, and the Mongolian government accepted it. While it appeared to be proceeding smoothly, of late the Mongolian government side appears to have taken the decision to renounce that acceptance. This is for reasons such as that the agreement of the current Russian government is needed in addition to that of the Mongolian government, owing to the Mongolian domestic railway network being presently operated as a joint venture based on the railway agreement concluded between the then Soviet Union and Mongolia in 1947. Officials say that as compensation the Russian government gave financial assistance to the Mongolian side equivalent to US$25 million.
In this case, in addition to a glimpse being offered of the geopolitical ulterior motives and rivalry of the United States and Russia, which have made Mongolia their stage, we are made to acknowledge anew that the neighboring country of Russia is even today deeply involved in Mongolia’s domestic transportation infrastructure.