Trade Policy and Human Development IN Mongolia

Ministry of Foreign Affairs and Trade in Mongolia United Nations Development Program in Mongolia
TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA
Way Forward After a Decade in the World Trade Organization
ULAANBAATAR 2009
CONTENTS
ACKNOWLEDGEMENTS ABBREVIATIONS OVERVIEW CHAPTER I Promoting Food Security and Rural Development: The Case of Wheat and Milk CHAPTER II Empowering People to Benefit from Trade: The Case of Meat CHAPTER III Diversifying Sources of Herders Income: The Case of Cashmere CHAPTER IV Spreading the Gains from Growth: The Case of Minerals CHAPTER V Reviving an Industrial Base of Productivity: The Case of Light Manufactures CHAPTER VI Learning from the Protectionist Bubble that Burst: The Case of Textiles and Clothing CHAPTER VII Alleviating the Burden of Geography: The Case of Transit CHAPTER VIII Seeking Partners for Prosperity: The Case of Trade Negotiations REFERENCES
CONTENTS
BOXES 1 1.1 1.2 1.3 1.4 1.5 1.6 2.1 2.2 2.3 2.4 3.1 3.2 3.3 3.4 3.5 3.6 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 5.1 5.2 5.3 5.4 5.5 6.1 6.2 6.3 6.4 7.1 7.2 7.3 8.1 8.2 8.3 8.4 Measuring the impact of WTO accession Privatization strategy Rising bread prices and hardship Causes of volatility in global food prices Atar-3 crop cultivation campaign Expanding dairy exports to Japan WTO rules on subsidies in agriculture Reducing vulnerability with better insurance Stages of HACCP What are geographical indications? Soum centres Empowering herders to improve quality and productivity Herd size and decline in quality of cashmere How would a commodity exchange for cashmere work? The economics of export taxes Insufficient trade finance The burden of papers on trade WTO and performance requirements Government policy, 2007-2015 Dutch Disease and human development Bor-Undur concentrate plant Sell globally, give locally Risky escape from poverty Targets for artisanal mining by 2015 Use of mercury in gold mining in Mongolia Ongi River Movement Decline in production WTO trade defence mechanisms The new Safeguards Law: what does it contain? On backward and forward linkages Reviving the leather industry Human development dimensions of T&C Time and other drivers of international competitiveness FTA with the United States: Yarn-forward Rules of Origin Tales of quota babies Agreements Mongolia has signed Facilitating trade Mongolias proposals in the WTO Rules of Origin Russias negotiations for accession to the WTO Elements of Japan-Indonesia EPA The US-FTA Template
CONTENTS
FIGURES
1 2 3 1.1 1.2 1.3 1.4 1.5 1.6 2.1 2.2 3.1 3.2 4.1 4.2 4.3 4.4 4.5 4.6 5.1 6.1 6.2 6.3 6.4 7.1
Share of trade partners in total trade Foreign direct investment by sector Import tariffs, VAT and special excise taxation rate, 1995-2004 Share of agriculture in total budget expenditure Wheat imports by country and year Wheat production and import Flour import value by origin Flour production and import Milk production and import Livestock quantity in Mongolia, 1961-2003 Export of meat products, 1999-2006 World production of cashmere, 2006 Competitive position of countries in wool and other animal hair Share of the minerals sector in the economy Production possibilities after a natural resource boom Production of gold Production of cathode copper, copper concentrate, and molybdenum concentrate Trends in copper prices, 2003-2008 Trends in molybdenum prices, 2003-2008 Bound and applied tariff rates for select products Clothing exports Value of US T&C imports from Mongolia, 1995-2005 Imports of second-hand garments Clothing exports and imports Proposed Asian Highway Network
TABLES
1 2 3 4 5 6 7 8 1.1 1.2 1.3 1.4 1.5
Main economic indicators Composition of exports and imports of Mongolia (%) Shift in destination of exports Shift in destination of imports Indicators of universal primary education, 2003-2006 Mortality and health indicators, 1995-2007 Trade destinations and value Summary of issues highlighted in the report Budget expenses and investments of donors in agriculture Food prices country average (in 2000 prices) Wheat production, 1960-2007 Wheat aid by the US Supply of wheat, milk and milk products
CONTENTS
2.1 2.2 2.3 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 6.1 6.2 6.3 6.4 7.1 7.2 7.3 8.1 8.2
Material indicators of herder households Comparative quality of Mongolian meat Global production and trade of meat Cashmere exports volume and share Total cashmere processing capacity World exporters and importers of fine animal hair, combed and carded in 2006 Comparing Mongolian and Chinese cashmere Indicator of fibre quality Main importers of knit and woven cashmere products Mongolian share of wool and other animal hair in world trade, 1996-2006 MFN tariff and GSP of selected countries importing selected Mongolian raw and semi-processed wool and cashmere, 2007 Investments in garment industry by country Share of T&C in the Mongolian manufacturing sector Top five T&C imports from Mongolia into the US, 2004-05 Main clothing products exported Chinas WTO commitments on road/rail transport and maritime auxiliary services Estimated transport costs Transport cost of selected exports, 2006 GSP+ scheme utilization in the EU Tariff treatment of major exports by Mongolias trading partners, 2007
ACKNOWLEDGEMENTS
2.1 Material indicators of herder households 2.2 Comparative quality of Mongolian meat 2.3 Global production and trade of meat Cashmere exports by a team share This3.1 report has been preparedvolume andcomposed of Murray Gibbs (Team Leader), 3.2 Total cashmere processing capacity Swarnim Wagl and the staff of the Trade and Human Development Project (THDP) of the Government of Mongolia and UNDP: Ts.animal hair, 3.3 World exporters and importers of fine Chukhalkhuu (Project Manager), D. Sengelmaa, A. Jargalan, P. Bolormaa and E. Tamir. combed and carded in 2006 3.4 Comparing Mongolian and Chinese cashmere Background papers fibre quality authored by Khashchuluun Chuluundorj, 3.5 Indicator of were also Nyamaa Nyamsuren, Ochirbat Punsalmaa, Purev Lkhamsuren, Yondon Tseden, 3.6 Main importers of knit and woven cashmere products Chimeddamba Daramragchaa and Lkhagvasuren hair in world trade, 1996-2006 3.7 Mongolian share of wool and other animal Damdinsuren. The report benefited from the substantive contributions of Yumiko Yamamoto. Useful, 3.8 MFN tariff and GSP of selected countries importing selected Mongolian raw detailed comments were received from Bill Bikales, Nergui Dorj, J. Doljinsuren, and semi-processed wool and cashmere, 2007 Biplove Choudhary, J. Shishmishig, B. Zoltuya and David Luke. The report was 6.1 Investments in garment proofread by Barent Gordinier. industry by country 6.2 Share of T&C in the Mongolian manufacturing sector 6.3 Top five T&C imports from Mongolia into the US, 2004-05 The initiative for the preparation of the report was taken jointly by UNDP and the 6.4 Main Mongolia. In this regard, Government of clothing products exported the contributions of Pratibha Mehta, 7.1 Chinas WTO commitments on road/rail transport and Shoko Noda, Nergui Dorj and J. Doljinsuren from UNDP and Enkhbold Voroshilov, maritime auxiliary D. Badarch, M. Dondogdorj, B. Chimedtseren, D. J. Shishmishig, B. Zoltuya, services Munkhjargal, A. Chuluunbat, costs 7.2 Estimated transport Purevsuren Tumurtogoo, Khorolmaa Gombosuren, MunkhtuyaTransport cost of selected exports, Batbilegt from the Government are Chimeddorj, and Mendjargal 2006 7.3 gratefully acknowledged. 8.1 GSP+ scheme utilization in the EU 8.2 Tariff treatment of major exports by Mongolias trading partners, 2007 During the various phases of the preparation of the report, contributions were also made by Kofi Addo, G. Doyod, B. Purevchuluun, N. Bayanzul, Muslum Yilmaz, Martin Claessens, Esperanza Duran, Emilio Fernandez-Castano, Khaulanbek Akhmadi, Reiner Petzoldt, Dashnyam Bumbei, Gunther Mau, Peter Willem Ormel, Narangerel Davaasuren, Udval Gombosuren, S. Demberel, B. Tumennasan, Fernando Bertoli, Albert Gierend, Shijir Ochirbat, Batmunkh Buyantogtokh, Bazargur Damba, G. Yondonsambuu, Mumtaz Keklik, Georges Chapelier, M. Khalid Jamil, and Batnasan Namsrai. The overview of this report includes parts drawn from a 2007 draft report commissioned by THDP on the Human Development Impact Assessment of Mongolias Accession to the WTO prepared by Gerald Epstein.
ABBREVIATIONS
ADB AFT AH AO APTA AQSIQ ASCM ASEAN BIT BSE CBTA GATT GATS CBO CEPA CFF CGA CIS CPR COMECON DDA DR-CAFTA EU EC EFTA EIA EPRC FAO FIFTA G33 GCC GDP GIs GMOs GSP GSP+ GTZ FDI FTA GOM HDR HS
Asian Development Bank Aid for Trade Asian Highway (Network) Appellations of Origin Asia-Pacific Trade Agreement Administration for Quality Supervision, Inspection and Quarantine (China) Agreement on Subsidies and Countervailing Measures Association of Southeast Asian Nations Bilateral Investment Treaty Bovine Spongiform Encephalopathy (mad cow disease) Cross-Border Transport Agreement General Agreement on Tariffs and Trade General Agreement on Trade in Services Community Based Organizations Comprehensive Economic Partnership Arrangement Carbon Facility Fund Customs General Administration (of Mongolia) Commonwealth of Independent States Centre for Policy Research Council for Mutual Economic Assistance Doha Development Agenda Dominican Republic Central American Free Trade Agreement European Union European Commission European Free Trade Association Environmental Impact Assessment Economic Policy Reform and Competitiveness Project Food and Agriculture Organization of the United Nations Foreign Investment and Foreign Trade Agency (of Mongolia) Group of 33 countries Gulf Cooperation Council Gross Domestic Product Geographical Indications Genetically Modified Organisms Generalized System of Preference, EU Generalized System of Preference Plus, EU German Technical Cooperation Foreign Direct Investment Free Trade Agreement Government of Mongolia Human Development Report Harmonized System
ACKNOWLEDGEMENTS
HTS IBLI IMF IPCC IEC ISO ITA ITC IP IPOM IS HACCP HD HDR LDCs LIFDCs LLDCs LSMS MERCOSUR MDGs MEAs MFA MoFA MFN MIT MMA MNCCI MNCSM MRPAM MTA MWCA NAFTA NAMA NGOs NSO OECD PPP PTA RIAH ROO SAARC SACU
Harmonized Tariff System Index Based Livestock Insurance International Monetary Fund Intergovernmental Panel on Climate Change International Electrotechnical Commission International Standardization Organization International Technical Advisor International Trade Centre Intellectual Property Intellectual Property Office of Mongolia Indication of Source Hazard Analysis Critical Control Point Human Development Human Development Report Least Developed Countries Low Income Food Deficit Countries Landlocked Developing Countries Living Standards Measurement Survey Mercado Comn del Sur Millennium Development Goals Multilateral Environmental Agreements Multi Fibre Arrangement Ministry of Food and Agriculture Most Favoured Nation Ministry of Industry and Trade Mongolian Meat Association Mongolian National Chamber of Commerce and Industry Mongolian National Centre for Standardization and Metrology Mineral Resources and Petroleum Agency of Mongolia Mongolian Taxation Authority Mongolian Wool and Cashmere Association North American Free Trade Agreement Non-Agricultural Market Access Non-Government Organizations National Statistics Office (of Mongolia) Organization for Economic Cooperation and Development Public Private Partnership Preferential Trade Area Research Institute of Animal Husbandry Rules of Origin South Asian Association for Regional Cooperation Southern African Customs Union
ABBREVIATIONS
SITC SMEs SOE SSIA SPS SWOT T&C TBT THDP TIFA TIR TPR TRIPS TRIMs TRQ UAE UHT UN UNCTAD UNDP UNEP UNESCAP UNIDO USAID USSR VAT VHT WB WIPO WTO
Standard International Trade Classification Small and Medium Enterprises State Owned Enterprises State Specialized Inspection Agency (of Mongolia) Sanitary Phyto-Sanitary Strength, Weakness, Opportunity, Threat (analysis) Textiles and Clothing Technical Barriers to Trade Trade and Human Development Project Trade and Investment Framework Agreement Transports Internationaux Routiers Trade Policy Review Trade Related Aspects of Intellectual Property Trade Related Investment Measures Tariff-Rate Quota United Arab Emirates Ultra High Temperature United Nations United Nations Conference on Trade and Development United Nations Development Programme United Nations Environmental Programme United Nations Economic and Social Commission for Asia and the Pacific United Nations Industrial Development Organization United States Agency for International Development Union of Soviet Socialist Republics Value Added Tax Vapour Heat Treatment World Bank World Intellectual Property Organization World Trade Organization
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OVERVIEW
1. THE CONTEXT
As a member of the Soviet-era Council for Mutual Economic Assistance (COMECON), Mongolia benefitted from large subsidies from the USSR and other partners. It enjoyed guaranteed access to their markets, and this regime contributed to creating the conditions for reasonably high levels of human development. By 1990, life expectancy increased to 63.7 years and the adult literacy rate rose to 97.8 percent (95 percent for females). There was universal access to health services, and malnutrition was rare. Women accounted for 43 percent of graduates of tertiary education; 85 percent of them were in the workforce, often prominent in professions such as medicine and education.1 The collapse of COMECON in 1991, however, forced Mongolia to fundamentally alter its place in the world economy. It had to seek new trading partners in a competitive environment, a process which logically led to its accession to the WTO.3 The entry into the WTO in 1997 provided benefits to Mongolia in terms of improved and more secure access to markets,2 opened the possibility to pursue trade objectives in concert with likeminded countries in a multilateral framework, and resulted in a more stable and transparent economic regime which encouraged trade and FDI. WTO membership also gave Mongolia policy choices to seek redresses to adverse trade measures taken by other countries under the WTO Dispute Settlement Understanding. It could also take part in the negotiations for WTO accession of partners like Russia and China (which it has done actively in the case of the former). On the other hand, for a country at its level of development, Mongolia accepted relatively stringent commitments in its terms of accession to the WTO. This was followed by the institution of a trade regime that went far beyond the parameters set by the terms of accession and the provisions of the WTO Agreements (see Box 1).
Contrary to a general perception that Mongolia was required by the WTO to apply these measures, many were autonomous actions of the government. This makes attribution of the causes of specific outcomes in Mongolia in the 1990s difficult because of policy bundling-WTO accession constitutes but one element in the overall transition process. It is almost impossible to assess what could have been the impact of WTO accession in isolation of all the other macro-economic reforms set into motion around the same period. Mongolia appears to have fully implemented its WTO obligations (seeking and obtaining a waiver when it could not meet its commitments regarding the export tax on cashmere), but has been less active in exercising its WTO rights. That many of the policy options in the 1990s, irrespective of their connection to WTO membership, were not exercised or relinquished contributed to a painful transition process marked by a rise in unemployment and deterioration in the quality of life of the Mongolian people. While the collapse of the manufacturing sector was hastened by the demise of COMECON, the response served mainly to exacerbate its negative impact on human development. In recent years, the minerals sector has grown, buoyed by new discoveries, and generally high world prices for gold, copper, molybdenum and fluorspar. This has resuscitated some progress on human development, but as is the case when sectors of the economy make big leaps, there are others that are left behind. Even when average growth rates look impressive, they conceal the persistence of poverty and growing inequality in Mongolian society.
1 2
Mongolia HDR (2003). Although most WTO member countries were already extending de facto MFN treatment to Mongolia, these tariff rates were bound only upon WTO accession. 3 For example, it was required to accept more onerous terms than Chinese Taipei (Taiwan), which enjoys over 20 times the per capita GDP of Mongolia.
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OVERVIEW
BOX 1. MEASURING THE IMPACT OF WTO ACCESSION BOX 1. MEASURING THE IMPACT OF WTO ACCESSION
It is difficult to quantify the impact of WTO accession for the simple reason that the trade regime applied after 1997 did not reflect the parameters set by Mongolias terms of accession. This was most striking in tariff policy, where Mongolia bound its MFN tariff at 20 percent, but applied across-the-board rates at much lower levels, even at zero for a short period. A large proportion of the policy measures introduced in the transition process, such as the extensive privatization measures, were not required by the WTO obligations. Mongolia has not made use of the provisions of the WTO on trade remedies (e.g., emergency safeguards, anti-dumping and countervailing measures) and thus these WTO rights have not been transmitted to domestic producers who have been injured by import surges. Furthermore, although Mongolia did not accept any WTO-plus obligations in the area of TRIMs, it seems to have abolished all performance requirements, including those permitted by the WTO, such as export requirements, as well as application of national treatment across the services sectors. Mongolia was well on its way in the transition process when it acceded to the WTO in 1997, hence the terms of accession did not imply major changes in the trade
measures. However, it was obliged by the Agreement on Subsidies and Countervailing Measures (ASCM) to abolish its export subsidy programme that linked tax benefits to export performance. Mongolia was not an original member of the WTO, so it did not benefit from the exemption from the export subsidy prohibition granted to developing countries with less than US$1000 per capita GDP,4 nor the seven-year grace period for the phase-out of such subsidies available to economies in transition.5 It also failed to enjoy the transitional periods accorded to original members for the TRIPS and the TRIMs Agreements. Mongolia agreed to convert its export restriction on raw cashmere to an export tax of 30 percent ad valorem, and to eliminate the tax after ten years. Mongolia obtained a waiver from the WTO to continue this export tax until 2012. At the same time, the acceptance of the WTO Agreements, including GATS and its schedule of commitments on trade in services, as well as the TRIPS and SPS Agreements and others, instituted a much more transparent trade regime. This has helped stimulate trade and investment. Mongolias accession to the WTO enabled the United States Administration to obtain a repeal of the application of the Jackson-Vanik Amendment and grant Mongolia full MFN treatment as a WTO member in 1999, two years after its accession.
Mongolia has been successful in its transition to a democratic regime. It is not evident, however, that stakeholders and civil society have had significant input into the formulation of trade policy. To ensure that human development
concerns are fully reflected in trade laws and negotiating positions, efforts must be made to increase public awareness of trade issues and agreements and more effective consultative mechanisms need to be established.
4 5
WTO ASCM, Article27:2(a) and Annex VII. WTO ASCM, Article 29s.
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OVERVIEW
2. THE EVOLUTION OF MONGOLIAS PRODUCTION AND TRADE
Mongolias process of industrialization, which began in 1962, was greatly abetted by its membership of COMECONit transformed from an agricultural country to one with sizable industrial and mining sectors. After 1990, however, Mongolian industry was hit hard by a shortage of raw materials from Eastern Europe, including oil and energy from the USSR. Export markets disappeared and there was a flood of imports. The increasing export of Mongolian raw materials deprived domestic processing industries of needed raw materials. Between 1992 and 1993, the country liberalized prices, lowered trade barriers and undertook tight fiscal and monetary policies to stabilize the economy.
Table 1. Main Economic Indicators
1997 GDP growth (% per annum) GDP, current price, billions of Tugrik Inflation Rate (%) Unemployment Rate (%) Monetary survey (billions of Tugrik): M2 Net foreign assets Net domestic credit Balance of payments (millions of USD): Current account Current account/GDP (%) International reserves Tugrik rate per USD General government budget (billions of Tugrik): Total revenue and grant (billions of Tugrik) Current revenue Total expenditure and net lending Current expenditure Overall balance Overall balance/GDP 4.0 832.6 20.5 7.5 170.07 135.44 67.64 102.9 813.16 222.5 206.0 287.65 192.61 -65.15 -7.8 2000 1.1 1018.9 8.1 4.6 258.8 201.7 84.8 -69.9 -7.2 190.9 1097.0 351.0 346.2 429.7 314.1 -78.7 -7.7
Adding to this shortfall was the reduced corporate income tax and dividends from state owned enterprises. In the initial crisis years of 1991-1993, GDP declined for three years in a row, down by more than 21 percent. Only in 1994 did the Mongolian economy start to rebound. The annual average growth rate was around 2.8 percent from 1996 to 2000, but fell to 1 percent in 2001, due to the deterioration in the terms of trade, deceleration of the process of privatization and the dzuds (severe cold weather) of 2000-01.
2001 1.0 1115.5 8.0 4.6 331.1 220.2 129.3 -61.7 -6.1 206.7 1101.3 439.3 430.0 489.9 366.8 -50.6 -4.5
2002 4.0 1240.8 1.6 3.4 470.1 308.5 200.0 -105.1 -8.7 268.2 1124.1 477.0 469.7 550.5 415.3 -73.4 -5.9
2003 5.5 1461.2 4.7 3.5 703.3 256.3 514.6 -98.7 -7.1 203.4 1170.3 535.8 526.4 616.5 446.3 -80.7 -5.5
2004 10.6 2152.1 11.0 3.6 847.0 311.0 647.3 63.4 1.5 207.8 1211.8 713.1 706.3 752.5 538.7 -39.4 -1.8
2005 6.2 2779.6 9.5 3.5 1140.1 570.2 816.0 104.3 1.3 333.1 1226.7 837.9 832.6 764.6 600.3 73.3 2.6
2006 7.9 3715 6.0 3.2 1536.5 410.2
2007 9.9 4557.5 15.1 2.8 2401.1 423.6
7.0
2.6
1360.4 1354.1 1237.0 982.3 123.4 3.3
1851.2 1845.7 1749.2 1361.5 102.0 2.2
Source: Mongolian Statistical Yearbooks 1999 and 2007, and Bank of Mongolia Annual Report 2005
While these policies helped lower inflation from 268 percent in 1993 to 57 percent in 1995, they also led to the downsizing of the public sector, from 51.8 percent of GDP to 31.5 percent.6 This served to lower aggregate domestic demand at the same time when external demand for Mongolias exports had fallen drastically.7 Further, between 1996 and 1999, prices of Mongolias main export commodities fell sharply, notably a 42.5 percent drop in gold prices.
In the past few years Mongolia has posted respectable growth rates: 10.6 percent in 2004, 6.1 percent in 2005 and 9.9 percent in 2007. Since 2005, Mongolia has recorded a budget surplus, reaching 2.2 percent of GDP in 2007. However, the fall of world prices for key exports, such as copper, will inevitably reduce the budget surplus for 2008. Mongolias net international reserves have been accumulating continuously from 1999, reaching US$975.3 million in 2007.
6 7
World Bank (2002), p. 5. McKinley (2004).
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OVERVIEW
Figure 1. Share of trade partners in total trade
raw materials (20.4 percent), food products (8 percent) and manufactured consumer goods (18 percent). In recent years, copper concentrate, gold and other minerals and cashmere products have accounted for more than 90 percent of exports. The economy is thus more susceptible to both the booms and busts in the world commodities market. In the 1980s, Mongolia ran large trade deficits, financed by low-interest credits from COMECON countries. At the beginning of the transitional period, the foreign trade regime changed from a two-sector regime (convertible currency and transferable roubles) to an exclusively convertible currency regime. Payments among former COMECON countries shifted to hard currency and reflected world prices. This made the large deficits untenable. Exports to former COMECON countries declined from almost US$600 million in 1990 to only US$42 million by 1998, while at the same time trade with Asian and Western European countries increased. Since Mongolia did not export much to the OECD countries before 1990, the market access issues that were being addressed by other developing countries were relatively new for Mongolia. The sources of Mongolian imports also changed significantly (Table 4). By 2002, the US, Asian and Western European countries accounted for 61 percent of total imports, compared to 39 percent in 1993.
Table 2. Composition of exports and imports of Mongolia (%)
2003 Total exports, of which Copper concentrate Precious metal Clothing and apparel Knitted products Leather and skins De-haired cashmere Meat Fluorspar concentrate Camel and sheep wool Crude oil Total imports, of which Petroleum products Vehicles and cars Clothing and apparel Foodstuff Chemical products 100 26.6 22.7 10.0 8.9 8.6 5.5 2.1 3.3 1.2 0.7 100 22.4 12.0 10.4 7.7 5.4 2004 100 32.7 28.0 7.2 8.9 2.6 5.3 0.9 2.4 0.8 0.7 100 23.7 10.3 10.0 7.2 4.6 2005 100 30.6 31.1 4.9 4.7 2.7 5.7 0.7 2.4 0.6 0.9 100 27.5 9.1 6.4 6.6 4.6 2006 100 41.5 17.7 2.6 2.4 2.7 5.2 1.0 2.3 0.4 1.1 100 27.4 10.6 4.3 6.7 4.9 2007 100 41.6 12.1 1.6 2.0 2.1 6.0 0.8 2.3 0.6 2.7 100 36.9 9.0 1.4 8.4 2.5
During the transition, government farms were privatized, and due to a lack of financial resources resulted in the collapse of the infrastructure for delivering products to the agro-processing industries. Grain production fell by 75 percent between 1990 and 2003, while the agricultural sectors share of GDP fell from 38 percent in 1995 to 21 percent in 2007. The collapse of the manufacturing sector in the 1990s forced displaced skilled workers to work as herders or artisanal miners or in the informal service sector. Many workers left the country, either individually or on contracts under labour agreements. A boom occurred in the clothing industry due to newly acquired access to the US market and in response to the discriminatory quotas in place against China and other major competitors. The abolition of these quotas in 2005 meant this sector could no longer compete. The mining sector is now the driving force of Mongolias economy and accounts for around 30 percent of GDP and 78 percent of export income. On the other hand, it accounts for less than 5 percent of total employment (many employees are foreigners). An informal, artisanal mining sector has emerged, which provides livelihoods for many poor people. However, such mining often takes place under hazardous conditions, degrades the surrounding environment and involves an unacceptably high degree of child labour. With the decline of agriculture and industry, services have become a key sector in the Mongolian economy employing half the work force in 2007. In the decade following WTO accession, total trade has grown four-fold, from US$919.8 million to US$4.1 billion in 2007. There has been a dramatic shift in the structure and pattern of trade. In 1989, Mongolian exports consisted of mineral products (42 percent), other
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China today accounts for over 50 percent of Mongolias trade turnover exceeding US$4 billion. Russias share has declined to only around 20 percent, even though it remains a source for
OVERVIEW
all of Mongolian demand for oil. Within Russia and China, Mongolias trade is mainly with the bordering regions: the Siberian region including Irkutsk in Russia and Inner Mongolia of China. The escalating tariff structures of Russia and China favour imports of raw materials rather than processed goods. Exporters of products of animal origin face additional non-tariff barriers arising from SPS and TBT.
2.1 ENTRY INTO THE WORLD TRADE ORGANIZATION
Table 4. Shift in sources of imports

1992-99 Russia China Japan Rep. of Korea US Germany Singapore Total 41% 14% 12% 5% 5% 4% 2% 83% Russia China Japan Rep. of Korea Germany US Ukraine 2006-07 34.9% 29.3% 6.2% 5.4% 3.2% 2.8% 1.4% 83.3%
After 1997 Mongolias trade relations have been governed by the rights and obligations of the WTO Multilateral Trade Agreements and the commitments it accepted as terms of accession to the WTO. The Government has adopted, by and large, open trade and investment regimes. The main areas where Mongolian laws were inconsistent with WTO Agreements were with respect to income tax exemptions linked to export performance and excise taxes on alcoholic beverages. To conform to the WTO Agreement on Subsidies and Countervailing Measures, Mongolia phased out the export subsidy under which foreign-invested enterprises that exported more than 50 percent of their production received a tax exemption for three years and 50 percent tax relief in the subsequent three-year period.8 As this subsidy was contingent upon export performance, it contravened Article 3 of the Agreement. In response to criticism that tax incentives discriminate against local enterprises in favour of foreign-invested companies, the State Great Khural (Parliament) of Mongolia amended the laws to eliminate the tax incentives for foreign-invested companies starting from mid-2006.
Table 3. Shift in destination of exports9
1992-99 China Russia Switzerland US Japan Kazakhstan UK Total
8
Apart from these two instances there seems to have been no significant contraction of pre-accession Mongolian policy space arising from WTO obligations and commitments. On the contrary, many of the difficulties faced by Mongolian agriculture and industry seem to have arisen from a reluctance to make use of the policy space existing within the scope of these obligations and commitments. Mongolia did not obtain transitional periods to phase in its obligations. Its existing laws were considered largely consistent with the TRIPS and TRIMs agreements. It did not accept any TRIMsplus commitments (as did China for example) and thus has the right to apply a variety of performance requirements. As Mongolia did not apply export subsidies on agriculture, it did not have the right to introduce such practices in the future. Mongolia bound all its tariffs under GATT 1994 at a ceiling rate of 20 percent across the board with a few exceptions.10 This bound rate is comparatively low for developing countries, particularly in agriculture where the 20 percent rate is among the three lowest across the G33 countries. Mongolias applied tariff rates are much lower. Before WTO accession Mongolia applied a uniform rate of 15 percent. From May 1, 1997, until July 1, 1999, tariffs were eliminated across the board only to be re-imposed at a uniform level of 5 percent in 1999 (then increased to 7 percent in January 2001). Since 2002, Mongolia has applied an across-the-board MFN tariff of 5 percent, with few exceptions. Due to this single rate there is neither a pattern of tariff escalation, nor a dispersal of tariff rates among sectors. It has been proposed to introduce such dispersion to encourage technology transfer, as well as to address concerns of food security.
10
2006-07 China Canada US Russia Italy Korea UK 71.4% 10.2% 5.3% 2.9% 2.7% 1.8% 1.6% 95.9%
24% 22% 16% 6% 6% 6% 5% 85%
This excluded wool and cashmere washing and de-hairing and primary processing leather industries. 9 National Office of Statistics.
Indentured ethyl alcohol (75 percent); Rum, gin, vodka, liqueurs, tequila (30-50 percent); unmanufactured tobacco (40 percent); Cigars and cigarettes (30 percent); Arm and ammunition (30 percent); wooden furniture (30 percent), etc.
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OVERVIEW
It made a specific commitment to convert its embargo on the export of raw cashmere to an export duty to be eliminated after ten years. Mongolia sought and obtained a waiver to continue application of this measure until 2012. Products subject to an export tax include camel wool, raw cashmere, raw goat-skins and cut timber. On trade in services, Mongolia made commitments with respect to business, communications, construction, distribution, financial and travel-related services. To conform with the TRIPS Agreement, the Law on Patent and Copyright of 1993 was revised in 2006 and the parliament adopted the Law on Joining the World Intellectual Property Organization (WIPO), Copyright Treaty and the WIPO Performers and Phonograms Treaty. The Law on Trademarks and Geographical Indications entered into force in 2003. In November 2001, the WTO membership approved the launch of the Doha Development Agenda (DDA) of multilateral trade negotiations. Mongolia is involved in the negotiations and recognizes that this presents a unique opportunity to improve access while reinforcing the system of rules to support development and growth. The negotiations also allow Mongolia to seek solutions to trade problems in alliance with groups of like-minded countries. These include the goals of reducing trade-distorting agricultural support in the EU, United States and other developed countries, providing greater flexibility in trade rules to achieve food security, and to tighten the WTO rules on freedom of transit.
2.2 OTHER TRADE-RELATED ISSUES
Accession negotiations. As a member of the WTO, Mongolia has the right to negotiate terms with acceding countries and has exercised this right with respect to Russia, Ukraine and Kazakhstan. Mongolia has conducted numerous bilateral negotiations with Russia since 1999 in this framework. Russias application of WTO rules will reduce many of the current difficulties faced by Mongolia in exporting to the Russian market. Trade-related laws. Under the planned economy, foreign trade was under the monopolistic purview of the state. The transition to a market economy created the need for a legal basis for private companies and individuals to engage in foreign trade. The following legislation constitutes the development of the legal infrastructure for trade:11 1990 the Customs Law, modified in 1996 1993 Excise Tax Law 1996 Customs Tariffs Law 1996 Export Customs Duties on some selected products 1998 VAT Tax Law 2002 Law on Free Trade Zones 2002 Law on the Legal Status of Altanbulag FTZ 2002 New Civil Code
Import licensing. The system of licensing is guided by the need to protect human, animal and plant health while safeguarding national security. Import licenses are required for restricted goods only and are issued for a term of one year with the possibility of extension. In 1998, the Parliament reduced the number of goods subject to licensing from 19 groups to 9, and reduced 4,000 previously-licensed types of chemicals to 300.12
Preferential Trade Agreements. Mongolia is not yet party to any bilateral or regional preferential trade agreements. However, the government has announced a policy of seeking to negotiate PTAs with its major trading partners. Mongolia is also intending to participate in regional preferential agreements such as the Asia-Pacific Trade Agreement. The prospects for and implication of Mongolias participation in regional and bilateral FTAs is examined in Chapter Eight.
11 There are others that complement this core set of laws, covering the following areas: accountancy and auditing, bankruptcy, food safety, registration of immovable property and its taxation, insurance, government procurement, postal services, labour relations including employment of foreigners, rights over land and new provision on land fees, trade names and trademarks, licensing activities, minerals, personal income tax, VAT, standards, pharmaceuticals and their importation, technology transfer, tourism and unfair competition, currency settlements, deposits, loans and banking transactions, environmental protection and foreign trade arbitration. 12 The following still require licensing: rare animals, semen of animals, cultures of micro-organisms, uranium and thorium ores and concentrates, poisonous chemicals, human blood and organs for therapeutic and prophylactic purposes, tobacco, alcoholic beverages, explosives and guns.
16
OVERVIEW
Competition policy. The competition policy of Mongolia aims to ensure fair competition by eliminating restrictive business practices among private enterprises. The Monitoring and Regulatory Agency has been established to enforce its legislation and oversee related disputes and matters. The institutional capacity of the Agency is being built up to focus on domestic competition issues as well as to be able to launch procedures against cartels of foreign firms. The Agency also deals with complaints about the monopoly positions of state-owned and some service firms in the transportation, insurance, petroleum and telecommunication sectors. Investment Regime. Before transition, foreign companies in Mongolia were mostly joint enterprises with COMECON partners. In 1990, the Parliament approved the Law on Foreign Investment, which created a unified legal base for operations of foreign-owned entities. This law has been instrumental in attracting foreign direct investment.13 Legal protection and rights guaranteed to foreign investors include: national treatment with respect to the possession, use and disposal of property within the territory of Mongolia; transfer of profits and dividends; repatriation of proceeds from the sale of assets in the event of liquidation of a business; and free, transferable compensation for any assets expropriated for a legitimate public purpose without discrimination. The nationalization and illegal confiscation of assets and capital of foreign investors is prohibited. Mongolia joined the Washington Convention on the Settlement of Investment Disputes between the State and Nationals of another State (1965) in 1996 and the Seoul Convention on Investment Insurance in 1999. Mongolia is also a full member of the Multilateral Investment Guarantee Agency of the World Bank Group since 1999 and has signed Avoidance of Double Taxation Agreements with 33 countries, as well as Agreements on Mutual Protection and Encouragement of Investment with 41 countries. The improvement in the foreign direct investment climate has been reflected in UNCTADs Inward FDI Performance Index where Mongolias ranking rose from 82nd in 1995-1997 to 15th in 2001-2003.
13
Mongolias UNCTAD Inward FDI Potential Index has risen from 95th place in 1993-1997 to 63rd in 2001-2003.14 The efforts to improve the climate for foreign investment have been gradually merged with taxation reforms. In 2006, a basic tax rate on corporate income was set at a flat rate of 10 percent for businesses earning up to MNT 3 billion in profit (approximately US$2.5 million) and 25 percent for businesses with higher proceeds. Similarly, VAT was lowered from 15 to 10 percent. Progressive rates of personal income tax were all reduced to a flat 10 percent. The 1997 Law on Mineral Resources encouraged investment in mining-by the end of 2001, cumulative FDI stock had reached US$457 million. In recent years, annual FDI has totalled US$300-400 million per annum on average.15 Total foreign investment in Mongolia has reached US$2.4 billion as of mid-2008. While Mongolia does not impose many performance requirements on investors,16 it did not accept any TRIMs-plus commitments in its terms of accession to the WTO and is free to impose a number of performance requirements on foreign investors to attain human development goals, including employment and transfer of technology requirements.17 Government revenue from trade. Trade-related sources of government revenue includes taxes on imports and exports, as well as VAT on imported products (which was introduced in 1998 at 13 percent, later reduced to 10 percent in 2007), excise taxes on gasoline, alcohol and tobacco, and special taxes on vehicles and fuel. In 1995, the Government derived only 17 percent of its budget revenue from trade. However, in 2005, this share of the total budget was 32 percent. VAT was the single most important source of revenue compared to excise taxes or tariffs. In 1995, government revenue from VAT was slightly less than that of tariffs-MNT 8.4 billion compared to MNT 9.5 billion of tariff revenue. In 2005, VAT brought in MNT 154 billion while tariff revenue was only MNT 56 billion.
14
Mongolia Foreign Investment Forum, Keynote address by O. Chuluunbat, Governor, Bank of Mongolia, 2006. 15 According to FIFTA.
16 17
The law has undergone revisions in 1993, 1998, 2001, 2002 and 2008.
Unless further limitations of policy space in this regard have been accepted in bilateral agreements.
17
OVERVIEW
Despite low tariffs and excise tax rates, government revenue from trade has increased significantly. The fact that the volume of trade rose faster than the falling tax rate resulted in an overall increase in government revenue from taxes on trade.18 While trade turnover in the 10 years between 1997 and 2006 increased more than three-fold, from US$920 million to US$3 billion, trade-related government budget revenue increased at a much higher rate: VAT revenue increased by 18 times, excise tax revenue by 11 times and import tariff revenue by 5 times compared to their 1995 levels. In general, between 2000 and 2005, total trade turnover grew at 15 percent annually, but trade revenue grew at 22 percent annually. This can be attributed to a combination of lower import duties and the introduction of VAT. Mongolias imports can be expected to increase, as a result of rising per capita GDP, growing demand for consumer goods and high world prices for essential goods. Increased FDI should lead to more imports of machinery and spare parts, and the consumption of imported gasoline and fuel will continue to increase in parallel with the ever-growing number of imported vehicles. Therefore, it is expected that traderelated government revenue will continue to steadily increase, which should be earmarked for funding for various human developmentrelated programmes, notably poverty reduction, universal health care, access to secondary education and environmental sustainability.
Figure 2. Foreign direct investment by sector
Figure 3. Import tariffs, VAT and special excise tax rate, 1995-2004
Source: Economic Freedom Index of Mongolia, Open Society Forum.
3. HUMAN DEVELOPMENT CHALLENGES IN MONGOLIA19
In recent years the Mongolian economy has shown satisfactory growth rates led by a booming mining sector, expansion in the domestic services sector and unusually clement weather, which has permitted an increase in agricultural production. However, almost one-third of the population lives under poverty, and disparities between rich and poor, rural and urban dwellers are exacerbating. A concern of trade policy is to mitigate these disparities.
3.1 THE MEASURE OF HUMAN DEVELOPMENT
Source: FIFTA
The concept of human development (HD) is wider than the measure of human development, the HDI. The HDI captures some of the key quantifiable development achievements: longevity, knowledge and standard of living. These are computed by using the most proximate indicators such as: life expectancy at birth (for longevity); a weighted combination of the adult literacy rate and the gross primary, secondary and tertiary enrolment (for knowledge); and discounted GDP per capita in purchasing power parity terms in US dollars (for standard of living). In the first half of the 1990s, the Mongolian HDI went down from 0.652 to 0.635, reflecting the crisis accompanying the early years of transition. Since the mid-1990s, the trend has reversed, and in the decade up to 2008, the index rose to 0.7, placing Mongolia, as before, among the group of countries with medium human development indicators. Mongolia ranks 114th out of 177 countries. On intra-national achievements, all aimags (provinces) have had significant improvements
19
18 This suggests that Mongolia was on the right side of the Laffer curve, that is, an inverted U-shaped relationship between total revenue raised (on the y-axis) and the tax rate (on the x-axis). When tax rates are lowered, revenue rises.
This section is excerpted from Chapter 1, Mongolia HDR (2007).
18
OVERVIEW
in life expectancy since 2000, with the highest improvements in Bayanhongor and Dornod. The more striking divergence is in GDP per capita. In the aimags of Orkhon and Omnogovi, both sites of significant mining and metallurgical work, GDP per capita more than doubled between 2000 and 2006. Seven other aimags showed gains of more than 50 percent. However, six aimags had gains of less than 10 percent, including two (Govi-Altai and Dornogovi) in which per capita GDP actually declined. Because the GDP indicator has shown by far the greatest variation across aimags, HDI rankings are heavily, but not entirely, influenced by GDP. The Gender-related Development Index (GDI) in 2008, which measures development along the same three dimensions as the HDI only for women, was estimated at 0.69, almost exactly the same as the HDI for that year. This indicates the absence of any systematic discrimination against women in Mongolia. Indeed, womens average life expectancy of 69.2 years is higher than mens (62.6 years). The PPP-adjusted per capita income of men and women, however, was US$3,045 and US$2,611, respectively. Thus, while women generally have better social indicators, they lag behind in the economic sphere. The Gender Empowerment Measure (GEM) of 0.42 indicates that women also lag behind in terms of participation in economic and political life and in decision-making processes. For a country at its level of per capita income, Mongolias overall health and education indicators are noteworthy. Although measured only every ten years, its adult literacy rate of over 97 percent is among the best in the world. The combined school enrolment ratio places Mongolia 66th out of 172 nations. As of 2007, Mongolias average life expectancy is 63.1 for males and 70.2 for females. The HDI rank is relatively lower only because of low per-capita GDP. Mongolian per capita income exceeded 1990 levels only in 1999, and as of 2007 was nearly 65 percent higher than in 1990. The economy today relies much more on domestic resources than foreign savings for capital accumulation, which is in contrast to the socialist period and much of the 1990s. As an open and largely private sector-led economy, Mongolia has developed businesses that rely
on competitiveness rather than state or external subsidies for their survival, laying foundations for a more sustainable economic structure than the old regime, which relied on exports to captive markets.
Table 5. Indicators of universal primary education 2003-2006
2000 Literacy rate, youth total (% of people ages 15-24) Primary completion rate, total (% of relevant age group School enrolment, primary (% net) 97.7 2002 n/a 2003 n/a 2004 98 2005 n/a 2006 n/a
84.5
96
98
95
101.2
86.8
95
87
80
84
95.6
91.4
Source: Second MDG Report of Mongolia for 2005-2006.
With the recovery of GDP growth and increased social investments, the other correlates of human development (such as school enrolment and infant mortality) have turned around. Between 2000 and 2007, average life expectancy at birth increased by 5.2 years, to 66.5 years. In 2006, Mongolia allocated about one-fourth of its national budget to education and health. In 1997, the budget share for education was only one-seventh. Expectedly, the literacy rate among the youth aged between 15 and 24 is higher than the national average, but school attendance rates tend to fluctuate, reflecting the level of hardship among families. A review of school attendance shows that rural students are at a disadvantage since they do not have access to upper secondary education. In 1997, the Government pursued three strategies: (a) close down small schools in remote rural villages (bag schools); (b) discontinue grades 9 and 10 in rural schools; and (c) merge schools in cities and aimag centres into larger complex schools. There are similar improvements in average health indicators. Urban women fare better than rural women in accessing quality health care as indicated by the fact that nearly 40 percent of mothers who die while giving birth are rural herders. Infant mortality rates have fallen from around 64.4 per 1,000 live births in 1990 to 15.4 per 1,000 live births in 2007.
19
OVERVIEW
The reform initiated during the transition process has led to major changes in the Mongolian health care system. Private practices are now permitted, and there have been serious attempts to orient the system from being hospital-based to more primary care-focused. The family group practice (FGP) model was introduced in 1998 when family doctors organized into private group practices. Their incomes were also guaranteed through risk-adjusted capitation payments from the government. Official user fees and social health insurance have been gradually introduced. With the withdrawal of government support for health insurance to students and the self-employed in 1999, the coverage rate fell from a high of 95 percent around 1998 to 77.6 percent in 2005. The self-employed category includes herders (since the negdel cooperative system has been dismantled). Mongolia inhabits an environmentally vulnerable topography. Natural disasters such as drought and extreme snowfall, desertification, and sand movement caused by global climate change have forced many herders to abandon their nomadic lifestyle of herding and move to urban areas. For those who have chosen to remain nomadic herders, insecurity based on poverty has led them to inordinately increase the size of their herds to an unsustainable level. This has accelerated desertification of grazing areas, forcing herders to settle along rivers and other surface water sources. In the capital city, 75,000 households live in the ger (traditional tent) areas and use about 200,000 tons of coal and 160,000 cubic meters of wood for heating per year. The use of coal burning stoves accounts for a substantial share of the capitals air pollution. According to a GEF report, improving the coal stoves used in the ger districts could reduce carbon dioxide emissions by 42-45 percent.20 Energy in Mongolia is provided primarily by coalburning thermal and electric power stations. In 2007, Mongolia extracted 850,200 barrels of crude oil and exported 726,400 barrels to China. The central energy system covers over 50 percent of the population. The Government is paying
special attention to the electrification of rural areas and has adopted the national program called 100,000 Solar Energy Gers, which will be implemented in three stages between 2000 and 2010. In recent years, the government has also made significant investment in generating power from wind.
Table 6 Mortality and health indicators, 1995-2007
Indicators 1997 1998 1999 2000 2001 2002 2003 2004 2007 63.18 63.36 63.51 63.63 64.58 66.54
Life expectancy 64.25 65.11 at birth, total Male Female Mortality rate, adult, male (per 1000 male adults) Mortality rate, adult, female (per 1000 female adults)
61.07 62.69 62,0 60.43 60.66 60.75 60.79 61.64 63.13 67.67 67.61 66,3 66.13 66.26 66.74 66.5 67.77 70.23 10.0 9.4 9.3 9.3 9.8 9.5 10.3 10.7 9.9
8.7
7.9
8.0
7.0
7.0
7.0
6.8
6.8
6.4
Mortality rate, infant (per 40.18 35.38 36.07 31.23 30.22 30.42 23.5 1000 live births)
22.8
15.4
Mortality rate, under 5 (per 55.58 47.78 49.03 42.44 40.7 38.65 31.33 29.11 22.1 1000 live births) Sources: Min. of Health 2002; Min. of Health and Centre for Health Development 2004; Statistical Year book 2007.
3.2 POVERTY AND INEQUALITY
For a dynamic appreciation of human progress, poverty rates give a more recent picture than HDI (whose constituents such as literacy and life expectancy are stock variables determined by past investments). As an example, the relatively modest nature of the decline in HDI between 1990 and 1995 was largely a result of continued high literacy rates and life expectancy, a legacy of the human capital built during the socialist era. During that period the HDI did not capture the extent of the trauma that was experienced by the Mongolian people, when Soviet financing, amounting to about one-third of GDP, ended abruptly. The adverse effects were quantified in the first Mongolian Living Standards Measurement Survey (LSMS) conducted in 1995. This revealed that 36.3 percent of Mongolians-or 828,000 people-lived in poverty. That survey established a Gini coefficient for income distribution of 0.31, reflecting low levels of income inequality and a large bunching of households below and around the poverty line. Although no comparable surveys were conducted during the socialist era,
20
GEF (2000).
20
OVERVIEW
there has been little doubt that poverty was rare during the 1980s. By the late 1990s, Mongolia had established a private sector-led economy with a greater degree of competition and more broad-based ownership of assets. The 1998 LSMS determined that the number of poor people had increased slightly to 850,000, even though in percentage terms this reflected a slight decrease in poverty incidence to 35.6 percent. The third LSMS conducted in 20022003 in the aftermath of the three dzuds was further evidence of the depth and intractability of Mongolias poverty challenge. It showed a shift in poverty from urban to rural areas, with the rural headcount of 43.4 percent significantly larger than the urban headcount of 30.3 percent. The most recent data-not based on full household Living Standards Measurement Surveys and therefore not strictly comparable with the earlier studies-indicate a drop in poverty incidence to 32.2 percent as of 2006. Despite strong economic growth since 2004, income poverty has stayed at roughly the same high level for a decade. There are reasons why the link between GDP growth and poverty reduction has been tenuous. First, throughout the transition era, growth has been accompanied by widening inequalities. While Mongolias income inequality measures are not yet severe by international standards, this trend, if not reversed, is certain to ensure that the benefits of economic growth are not shared equitably by all income groups. Second, for much of the last 15 years the re-distributional role of Government spending was undercut by inadequate fiscal resources. Third, growth in the livestock sector has generally taken the form of an increase in herd size (hence recorded as GDP growth), but the distribution of livestock among herding households has become increasingly unequal. Fourth, growth that is primarily produced by the capital-intensive mining sector is far less likely to have a broad impact on poverty reduction than growth originating from labourintensive service, manufacturing and agriculture. In other words, the persistence of poverty in Mongolia owes a lot to the failure of the growth process to generate remunerative employment in sufficient number and quality. Mongolia has a 64.2 percent labour-forceparticipation rate. The agricultural sector,
wholesale and retail trading, public administration and education generated more than half of the employment in 2007. There has been a large migration in recent years from the countryside to urban areas. For example, the population in Ulaanbaatar has gone up from 645,600 in 1997 to over 1 million in 2007. About 60 percent of the population (1.6 million) lives in urban areas. Half the country lives in apartments and the other half in ger districts.21 There are not enough jobs in the formal sector to go around. Therefore the increase in the urban population has supplied more jobs in the informal sector. It has been estimated that the informal sector contributes to one-third of average household incomes in Ulaanbaatar, and helped 15 percent of the households in Ulaanbaatar to rise above the official poverty line.22 However, a large number of new workers in the informal sector were previously employed in the formal manufacturing or mining sectors. This reflects the wide scale of human capital displacement in Mongolia. Improvements in the HDI have been broad-based in geographical terms, with impressive increases across the country. But between 2003 and 2006, a large increase occurred in national inequality, as well as intra-urban and intra-rural inequality. This suggests an alarming division of Mongolian society into those who are benefiting from growth and those who are nota bifurcation that cannot be easily categorized as a rural-urban gap, or an inter-regional gap, but one occurring in both urban and rural areas and in all regions. These data reflect the existence of a substantial portion of the Mongolian populationestimated at more than 30 percent of the total in every survey for more than a decadewhich is trapped in poverty. According to the most recent living standards survey, the magnitude of poverty in 2002-2003 was 43.4 percent in rural areas, compared to 30.3 percent in urban areas. This marks a reversal of the findings of the 1995 and 1998 LSMS reports, both of which found that urban poverty was significantly higher than rural.
21 20
Mongolian Statistical Yearbook (2007). Bikales et al. (2000).
21
OVERVIEW
When the urban population faced hardship in the 1990s, rural households transferred meat and other animal products to relatives and friends in the city. All this changed, however, during the harsh winters of 2000-2002, when 11.2 million livestock died, making rural livelihood an untenable proposition for many people. While the enormous loss of livestock inevitably accentuated rural poverty, gradual revival of manufacturing and service sectors in urban areas made urban poverty less acute, thereby reversing the poverty rankings between rural and urban Mongolia. During the socialist era, apartment areas were separated from ger areas, and this situation persists in every urban area in Mongolia. The apartment areas are served by electricity, centralized heating, water supply and a full range of education, health, social, and commercial facilities. However, services are minimal in the ger areas, which are characterized by individual fenced plots and/or small shelters. Water tankers supply neighbourhood water kiosks; sanitation facilities are on-plot pit latrines; and coal, wood, or dung-fired stoves are used for heating and cooking. Thus, households in the ger areas pay significantly more for heating, water, and solidwaste disposal than those in apartment areas. As of 2005, over half the population of Ulaanbaatar and at least half of the population of the provincial capitals were dwelling in ger areas.23 With the collapse of the construction industry and the end of public sector housing supply, the total cessation of public housing construction, coupled with high migration, led to a rapid growth in ger housing areas over the past several years, especially in Ulaanbaatar. Also, often more than one household share the apartment, in breach of regulations. At the end of 2000, only 40 percent of the urban population had access to piped-in water.
4. CONCEPTUAL LINKAGES BETWEEN TRADE AND HUMAN DEVELOPMENT (HD)24
In the broadest sense, development is about improving the quality of life. The conventional emphasis on measuring national progress in terms of gross national product (GNP) is not only inadequate to capture the diverse facets of wellbeing, but it blurs the end of development itself, which is overall human welfare. The premise that people are the real wealth of nations, and the real end of development, led UNDP to define human development as a process of enlarging peoples choices. These choices can be infinite, but the three essential ones are for people to lead a long and healthy life, to acquire knowledge, and to have access to resources needed for a decent standard of living. Additional choices range from socio-economic and political freedoms to opportunities for being creative and productive, and enjoying self-respect and guaranteed human rights (HDR 1990, p.10). Drawing on the work of Amartya Sen, among others, the paradigm of human development views poverty as a deprivation of capabilities, and not just incomes. It is broadly seen as a denial of choices and opportunities to lead the kind of life that people have reason to choose and value. The notion of human capabilities thus focuses on what people are actually able to do and what people are able to be. Incomes are only important for their instrumental roles in expanding opportunities. The paradigm rests on two pillars: Capabilities. Formation of human capabilities, such as being educated, healthy and in a position to command control over resources; and Functioning. How people make use of these acquired capabilities for leisure, production, political-economic liberties, and participation in socio-cultural affairs within and across borders. It has to be noted that while human development is a broad philosophical concept, trade agreements, on the other hand, set out the rights and obligations of members in precise language. Nonetheless, there is clear room for trade policy to contribute to the four dimensions of human development.
23 National Statistical Office of Mongolia 2001, and Population and Housing Census 2000.
24
Draws on Gibbs and Wagl (2003).
22
OVERVIEW
4.1 EMPOWERMENT
This is an all-encompassing notion that addresses the peoples capability to shape the processes and events that affect their lives, not just on the economic front, but also the socio-politicalcultural. Going beyond the notions of basic needs for the poor, often with an accent just on commodity possession, the human development paradigm downplays this as being paternalistic. The paradigm attaches importance to issues of dignity and self-respect, which has a serious bearing on how people engage in processes that lead to higher incomes and capabilities, and political voice.
Table 7. Trade destinations and value
many people to rise out of poverty by finding world markets for their products, it also entails risks, such as in cases where people invest their limited resources to develop an export capacity only to find their future threatened by trade measures provoked by protectionist forces in their export markets. Governments can enhance empowerment by providing adequate access to credit and insurance to facilitate this conversion to export orientation, and reduce the risk encountered by small producers. Integration also opens up traditional domestic markets to competition
/min USD/
2003 Total turnover China Russian Federation Japan Republic of Korea EU USA Total Exports China Russian Federation Japan Republic of Korea EU USA Canada Total Imports China Russian Federation Japan Republic of Korea EU USA Total 196.3 265.4 63.4 67.6 86.4 23.5 801.0 287.0 41.2 8.5 7.5 44.7 142.9 0.7 615.9 483.3 306.6 71.9 75.1 131.2 166.5 1416.9
2004 671.1 362.6 108.4 70.9 297.6 202.8 1890.8 413.9 20.6 33.4 9.7 186.7 156.3 14.7 669.7 257.2 341.9 75.0 61.2 110.9 36.5 1021.1
2005 821.5 445.2 81.3 128.8 251.3 192.6 2249.2 514.2 27.2 5.8 65.1 131.9 152.5 122.1 1064.9 307.3 417.9 75.5 63.7 119.4 40.1 1184.3
2006 1.450.3 592.9 104.7 103.9 227.3 162.9 3028.4 1.046.5 45.1 7.1 21.4 108.0 118.9 171.2 1542.8 403.8 547.9 97.6 82.5 119.3 44.1 1485.6
2007 2.062.0 789.4 140.7 157.0 308.2 122.6 3998.8
2003 34.1% 21.6% 5.1 5.3% 9.3% 11.7%
2004 35.5% 19.2% 5.7 3.7% 15.7% 10.7%
2005 36.5% 19.8% 3.6% 5.7% 11.2% 8.6%
2006 47.9% 19.6% 3.5% 3.4% 7.5% 5.4%
2007 51.6% 19.7% 3.5% 3.9% 7.7% 3.1%
Percentage in comp.
Percentage in comp. 1.400.1 57.3 14.4 40.6 102.4 64.5 178.5 1.884.5 Percentage in comp. 661.9 732.1 126.3 116.4 205.8 58.1 2.114.2 24.5% 33.1% 7.9% 8.4% 10.8% 2.9% 25.2% 33.5% 7.3% 6.0% 10.9% 4.6% 25.9% 35.3% 6.4% 5.4% 10.1% 3.4% 27.2% 36.9% 6.6% 5.6% 8.0% 3.0% 31.3% 34.6% 6.0% 5.5% 9.7% 2.7% 46.6% 6.7% 1.4% 1.2% 7.3% 23.2% 0.1% 47.6% 2.4% 3.8% 1.1% 21.5% 18.0% 1.7% 48.3% 2.6% 0.5% 6.1% 12.4% 14.3% 11.5% 67.8% 2.9% 0.5% 1.4% 7.0% 7.7% 11.1% 74.3% 3.0% 0.8% 2.2% 5.4% 3.4% 9.5%
If trade spurs economic growth and creates jobs, it can potentially lead to higher per capita incomes and enhanced human capabilities. Seeking empowerment also means ensuring an acceptable degree of economic security in peoples livelihoods. They need to be protected from the shocks of greater integration into the global economy. While integration has enabled
often, unfair competition from imports. Poor people, particularly in the agriculture sector, can find such livelihoods adversely affected by surges of imports (as has happened in Mongolia). Trade policy can empower citizens through the establishment of mechanisms that provide all stakeholders with an input into its formulation and execution, and to enable producers to
23
OVERVIEW
obtain a legal right to protection against unfair competition, and low cost, dumped or subsidized agricultural imports that undermine their livelihoods. The disciplines of trade agreements or commitments accepted by governments should not be such as to inordinately restrict peoples capabilities to shape the processes and events that affect their lives. This includes maintaining influence over foreign enterprises established in their territories. Trade policy can also empower the poor by upgrading the negotiating infrastructure and skills to contribute to an effective defence of national interests in international trade relations.
4.2 PRODUCTIVITY
nip in the bud the efforts of poorer people to derive benefits from world trade. It would include duty-free/quota-free access for the products of less developed countries, and greater freedom of service suppliers from developing countries to cross national frontiers. Broader issues of productivity are also affected by contextual constraints, such as being landlocked, which requires facilitated transit remedies to offset their disadvantage in engaging with the outside world.
4.3 EQUITY
This concerns investments aimed at enhancing human potentials so that greater productivity lends itself to higher growth. Human development is a means to higher productivity -- a well nourished, educated, and active labour force is an important productive asset. But rather than viewing humans as mere inputs into the production process, the HD paradigm views them broadly as ends of development itself. This implies that there is a crucial distinction between human resource development and human development, with the former just being one aspect of the latter. This human development goal is related to trade in a dependent mannerwhile trade can bring in opportunities that allow a countrys workforce to be more productive, a capable and alert population is also better placed to compete in the globalized world. Pertinent here are issues such as access to technology, training, provision of incentives to orient small and medium enterprises (SMEs) to produce for world markets, the time and support necessary to build up capacity to prepare to face world competition and access to low cost energy. Trade measures supportive of this process include, for example, investment performance requirements, the right to apply various types of subsidies and duty drawbacks on capital good imports. Trade policy can contribute to productivity by ensuring a greater access to technology and training for workers. This also requires secure access to markets that encourages export-oriented investment, and improved disciplines over protectionist action and trade harassment (e.g., anti-dumping) that could
Enlargement of peoples choices requires that they can access opportunities equitably. This implies that the prevailing power structures have to improve, such as better distribution of assets like land and credit, transfer of public incomes through fiscal measures and socio-political reforms that enhance opportunities for all groups, ethnicity and gender. In many countries, trade integration has been accompanied by exacerbated inequality. This calls for corrective action, including in the form of trade measures targeted to certain regions, women, minorities and ethnic groups. Privatization and participation of enterprises from advanced countries in sectors such as environmental or energy services have the potential of creating efficiencies that can improve the quality of life for poorer people. However, experiences show that the anticipated win-win scenario does not always emerge. Governments must thus have the ability to implement measures to reduce disparities, whether through subsidies, or reserving of investment opportunities. Measures to promote equity would include provisions to ensure universal services at affordable costs, a major issue in the GATS negotiations, and not to restrict movement of persons to those categories or occupations already enjoying higher levels of opportunity. Trade policy can also contribute to equity by providing greater opportunities for poorer people to upgrade the safety, quality and reputation of their products, and eliminate tariff and other barriers, such as transit impediments, to their products in foreign markets. Trade policy can also contribute to equity by protecting poorer and more vulnerable producers from import surges and unfair competition that would threaten their livelihoods.
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4.4 SUSTAINABILITY
Not to be confused with renewal of natural resources only, sustainability in human development terms means that the physical, human, financial and environmental resources are governed by the current generation in a way that does not prevent the next generation from improving its own welfare. Trade policy can influence not only the environmental sustainability of herding and mining, but also that of manufacturing industries. This must be done to avoid situations that arose in the textile and clothing industries in several Asian countries, where major investments were driven by a short-term market distortions, rather than solid economic criteria. Likewise sustainability must be sought in the agricultural sector, where growing import dependence puts the country at risk during times of soaring world food prices. Trade agreements need to be designed with a view of not doing damage to the environment. Agreements that directly draw on environmental themes such as mining, agriculture, environmental services need to balance their trade dimensions with conservation. Trade agreements should, on the one hand, provide access to state of the art technologies, while ensuring that people will develop and retain the capacity to protect their own environment. The paradigm of human development views sustainability in much broader terms. Creation and nurturing of domestic institutions that help preserve developmental achievements is also key to sustainability. As the 1997 financial crisis in East Asia demonstrated, absence of such institutions and social safeguards erode gains from growth. Governments should thus retain the possibility of preventing destabilizing shortterm capital movements, or not partaking in tariff concessions that lead to inordinate reductions in revenue. Sustainability in patterns of livelihoods of poor people also touches on issues of traditional knowledge and cultural resources. It is a challenge to orient new trade regimes on intellectual property to confront issues of biopiracy, and protect all geographical indications, while nurturing protection of accumulated knowledge and skills of poor people.
5. DEPLOYING TRADE POLICY TO AUGMENT HUMAN DEVELOPMENT
This report aims to provide the basis for more human-development-oriented policy-making to enable Mongolian trade negotiators to engage in WTO and other trade negotiations on a more informed basis. The report takes the view that Mongolia can leverage its place in the world economy to redress its poverty, inequality and human development challenges. Enumerated in terms of the broad objectives of empowerment, equity, productivity and sustainability, the report describes the state of human development challenges in a particular sector or issue, and suggests specific trade measures. Such trade measures are foreseen to be an integral part of larger efforts to empower poor people to derive benefits from trade in the form of higher incomes, while protecting the most vulnerable from trade shocks and unfair competition that could destroy their livelihoods. This demands that the trade measures are applied from the grassroots level up to increase the productivity of the poorer segments of society. The goal is to remove artificial barriers such as interference by middlemen, and furnish technical support needed to produce safe, high quality products that can be accepted in world markets. The report also argues that such measures must be sustainable, in the environmental sense that trade expansion should not be permitted to degrade the environment or worsen human insecurity. The access to markets should be secure from shifts in the trade policies of other countries, and export incomes less vulnerable to fluctuations in world prices for raw materials. What follows summarizes the overarching themes that emerge as the most pressing human development challenges and suggested trade goals to help meet them. Human Development Challenge 1 Reverse trends toward greater inequalities in Mongolian society Increasing disparities in human development levels between rich and poor, urban and rural dwellers are exercising acute strains on Mongolian society, to the extent that the situation has been
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OVERVIEW
escribed as politically explosive by the EC25. The national Human Development Report 2007 stated that although the economy had been growing rapidly and budget revenues are robust, one third of Mongolian households remain below the poverty line and there was a risk that the MDG target of halving the share of the population living in poverty would not be met26. Mongolia remains a relatively gender-equal society, with women enjoying equal degree of rights, access to services and even higher life expectancy and education. However, during the transition post-1990, female job losses and the increase in female-headed households living below the poverty line have all been greater than for men. Trade Policy Goal 1 Empower the poor to derive greater benefit from international trade. Trade policy can help orient the traditional, labour intensive sectors of agriculture and industry to be more productive, increase their value-added and obtain improved access to world markets. Trade policy can also shield them from their exposure to unfair import competition. In many developing countries, small and poorer producers have been able to derive benefits from globalization, rather than be its passive victims. There is a need for an aggressive and imaginative trade policy aimed at empowering the poor to become productive competitors in world trade. A rural renaissance in Mongolia cannot occur if the livestock sector that was a source of income of 40 percent of the population in 2007 does not obtain higher shares of export income than the current 10 percent.27 Trade policies that target the promotion of specific products such as meat, dairy and cashmere are a good start.
Human Development Challenge 2 Promote rural development and enhance food security. The FAO estimates that 38 percent of the population is unable to meet minimum nutritional requirements. Mongolia is classified as off track or regressing with respect to two targets of the first Millennium Development Goals of reducing the number of people in extreme poverty and the proportion of underweight children.28 Over the past decade, rural poverty has increased and some agricultural practices are no longer environmentally sustainable. As noted by the UN Special Rapporteur on the Right to Food in 2005, problems of food insecurity and chronic malnutrition persist as poverty deepens, despite high levels of multilateral aid and the efforts of the government and international agencies.29 In 2007, there were 122,000 hectares under cultivation, less than one quarter of that in 1990. This under-utilization of land resources has been accompanied by rising food imports. Import of wheat alone has increased five-fold between 1997 and 2007. The dramatic rises in world food prices created considerable hardship for the poor in Mongolia. Though, in the aggregate, these were offset by the high prices Mongolia received for its mineral exports, the gainers and losers in Mongolia do not overlap, and this calls for redirection of state revenues towards targeted spending in favour of the urban and rural poor. Trade Policy Goal 2 Pursue measures to increase the production and exchange of economically viable foodstuffs, and protect producers from import surges and unfair competition that undermines livelihoods. The role of trade in the decline of the agricultural sector should not be overstated. However, by choosing not to utilize mechanisms that are aimed at protecting producers from sudden surges of imports, often dumped or subsidized products, Mongolia has voluntarily forfeited its WTO right. Further, Mongolia has become increasingly dependent on food aid. It has entered the ranks
25 26
Communaut Europenne Mongolie Document de Stratgie 2007-2013. Mongolia HDR (2007), p. 9. 27 UNDP Mid-Term Trade Policy Concept (2008).
28 29
Communaut Europenne Mongolie Document de Stratgie 2007-2013. EC/CN.4/2005/47/Add. 2, March 8, 2005.
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of the WTO Net Food Importing Countries (NFIDs) and the FAO LIFDCs (Low Income Food Deficit Countries). The FAO has noted that while the LFIDCs have been able to rapidly increase food imports because of the availability of subsidized exports from developed countries. From a human development perspective, high import growth may undermine otherwise viable domestic production, and cause hardship to vulnerable and low income men and women when price of imports rise suddenly, as has occurred in recent years. The distortions caused by this dependence on artificially low priced imports have been highlighted in the WTO negotiations.30 Mongolia has become an active member of the G33, the group of developing countries pursuing the goals of food security and rural development and defence of the interests of small farmers. It is associated with the proposals of that group to institute a Special Safeguard Mechanism (SSM) to shield small farmers from import surges that threaten their livelihoods. The proposal also aims to exclude sensitive Special Products from tariff reduction formulas and to achieve a major rollback of agricultural subsidies. These trade measures are a necessary complement to efforts to increase food production. A determined effort at the national level, such as the implementation of the Atar3 Crop Cultivation Campaign, will lead to a significant increase in food production. Human Development Challenge 3 Enable herder households to command a decent stream of regular income. Mongolia is an eminently pastoral country. Roughly two-fifths of the population leads a semi-settled and nomadic lifestyle in rural areas. In 2007, Mongolia was estimated to have more than 171,220 herder households.31 Women constituted nearly half of the 360,000 herders working in animal husbandry. Herders are among the poorest and most vulnerable groups
in the society with a poverty incidence rate of around 40 percent. 32 The losses suffered during the dzuds of the early 2000s, when 11.2 million livestock died, prompted the herders to increase the size of their herds to an environmentally unsustainable level. Their traditional meat and dairy products are plagued by poor quality and unsanitary production methods, which largely excludes them from export markets, and in the case of milk, from domestic urban consumption. The quality of raw cashmere is also declining, as emphasis is being placed on quantity. Furthermore, they are vulnerable to exploitation by middlemen who take advantage of their lack of mobility and market information. The opportunity for adding value to their products before export is also lost as cashmere and leather factories are producing well under capacity. Mongolia seems headed to becoming primarily an exporter of raw cashmere and hides and skins. Within herder households, women combine unpaid domestic labour while participating in the processing of outputs such as cashmere. Because men are seen as the head of household and tend to dominate the final transactions involving money, this affects womens bargaining power and intra-household equity. Because of such power relationships, women have benefited less than men when, for example, state assets were privatized in the 1990s. Inequalities are emerging even within the livestock sector: over 60 percent of households have fewer than 100 animals (the minimum viable number). However, if all these herders were to possess 200 head, the ecological strains impact would, according to the 2007 Mongolia HDR, almost certainly lead to serious difficulties.33 Trade Policy Goal 3 Increase productivity of herders to compete in and derive benefits from international trade. Converting nomadic herders into export oriented productive units will not be easy. It will require the implementation of measures along the whole production and distribution chain to enable herders to access international markets, for meat and dairy products and to increase their earnings from cashmere production.
32 33
30
See submission to the WTO Committee on Agriculture by MERCOSUR, Chile, Bolivia and Costa Rica, Export Subsidies: Food Security or Food Dependency, G/AG/NG/W//38, September 27, 2000. 31 Statistics Bulletin, December 2007, National Statistical Office. Mongolia HDR (2007).
Mongolia HDR (2007). Mongolia HDR (2007).
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The first step is to ensure the safety and quality of their goods particularly by ensuring that food exports meet the quality and health standards of export destinations. For example, important categories of meat exports have been excluded from the Russian market due to diseases occurring in one region of Mongolia. The second step is to enhance the reputation of and value added to Mongolian livestock products through measures, such as the registration of Geographical Indications with supportive trade promotion efforts, as well as assisting herders to produce fibres in line with shifts in world fashion, notably for cashmere garments. The third would be to reduce or eliminate the tariff and non-tariff barriers facing the exports of Mongolian livestock products in importing countries. These efforts must be complemented by measures to create greater employment opportunities in rural areas and the opportunity for herders to supplement their income. Toward this goal, UNDP has advocated policies aimed at revitalizing the soum (sub-provincial) centres. The various facilities that would be required as part of the strategy to support export efforts, such as technical services and training, quality control, commodity exchanges, and improved distribution systems in themselves would introduce more dynamism in the soum centres. Furthermore, community-based tourism can also provide new sources of income for herder families and other rural dwellers. An emphasis on the quality of cashmere, and the creation of new, and better paid employment opportunities in the soum centres is a means of relieving the strain on the environment caused by the continual increase in the size of herds. Furthermore, the reestablishment of free education and health care, would free up resources that herders could use for investment. Human Development Challenge 4 Leverage the minerals sector to attain broadbased economic growth and employment creation while minimizing the vulnerabilities of dependence on commodities. In 2007, minerals production in Mongolia reached almost US$1.6 billion, accounting for 70 percent of the total industrial output, and 30
percent of GDP.34 The contribution of the mining sector to human development, however, remains below its potential. The number of artisanal miners in fact exceeds the number of people working in the formal mining sector. These men, women and often children work in dangerous conditions, using techniques that degrade the surrounding environment. Even the large mining operations do not always respect environmental norms. While the mining sector makes a major contribution to the state exchequer, the recent boom in export earnings reflects the high world prices for copper, gold and other minerals. These prices have already begun to slide, with negative implications for the budget. In 2006-07, income from the minerals sector provided 42 percent of the total state budget, 52 percent of tax revenue, and 78 percent of export income, representing US$600 per capita. The incomes of aimags with substantial mining and smelting operations have soared, while others are only catching up. Within the aimags, because companies provide housing and a variety of social services to mining communities, there is a risk of them evolving into rich enclaves, while the communities outside live in worse conditions. The issue of intra-aimag and inter-aimag inequality is serious, and calls for the promotion of industries and services with backward and forward linkages to the minerals sector. Because the minerals sector is attracting state-of-the-art technology, such linkages with the rest of the economy can also help diffuse technology. The development literature has also long talked about the adverse impacts of a booming natural resource sector on manufacturing through the channels of real exchange rate appreciation. From a human development perspective, there is another channel of adverse influence. Because of volatile commodity prices, revenue streams dependent on these sources can disrupt the pattern of stable health and education expenditures needed for generational improvements in human development indicators. One policy suggestion to minimize potential Dutch Disease effects is to set up a long-term human development fund and draw from it in modest tranches to fund education, health,
34
Statistical Year Book (2007).
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infrastructure and social security programs, whose rates of return accrue over a longer time horizon. Trade Policy Goal 4 Create forward and backward linkages and improve value-addition in the processing of exportable minerals. The exports of mineral products do not face significant trade barriers, and the challenge in this sector is to ensure that other sectors of the economy also share the benefits of the mining boom. From a trade policy perspective, the government could negotiate to require the mining companies to honour investment performance requirements related to human resources training and transfer of technology. For example, mining companies could hire more local workers and support rural development initiatives, as was the case with the Baruunkharaa project, which converted indigent female-headed households into productive vegetable farmers. Local administrations could be given more control over mining operations, particularly with respect to environmental rehabilitation plans. Policies need to be put in place to promote the diffusion of the state-of-the-art technology applied in mining and smelting to other sectors of the economy. The producer services sector is a major conduit for diffusing and adapting technology. The SMEs supplying services to the mining sector should be strongly supported by the government. The plight of the artisanal miners also needs to be addressed by formalizing their operations. In addition to eliminating the problems of unsafe conditions, child labour and environmental degradation, they could help increase production and export of mining deposits that otherwise would not be utilized. Human Development Challenge 5 Revitalize the manufacturing sector to provide new employment for displaced workers and young people. The collapse of the manufacturing industry during the transition period left thousands of
workers unemployed. As a survival strategy, skilled industrial workers were obliged to take on employment as under-skilled herders. Many resorted to artisanal mining to work under hazardous conditions, and to work in the informal services sector as petty traders, thus becoming part of the urban underclass.35 There was also substantial migration to other countries, notably the Republic of Korea. The remnants of the industrial human capital base supported the boom in clothing exports that followed the granting of WTO treatment to Mongolia by the United States in 1999. This combined with the use by the US of discriminatory quotas against China and other competitors until the full implementation of the WTO Agreement on Textiles and Clothing in 2005. However, the clothing industry proved unsustainable in an open world market. Thousands of workers, mostly women, again lost jobs. Employment in manufacturing has continued to decline. The UNDP has pointed out that overall decline of manufacturing has given rise to the phenomenon of the working poor. Job losses in the formal manufacturing sector have pushed thousands of women into the informal sector, where there is greater insecurity not only in terms of income but also the extent to which they access social and health insurance. The revival of the manufacturing industry could provide better jobs for Mongolians, especially young people entering the labour force. Trade Policy Goal 5 Implement an integrated trade and industrial policy aimed at reviving the manufacturing sector. It is difficult to make a categorical assessment of the role of trade policy in the demise of the manufacturing sector in Mongolia. The loss of subsidies and guaranteed markets in COMECON countries was a major shock. However, the drastic reduction of tariffs (and even elimination of tariff for a period) exposed the newly privatised enterprises to the full force of international competition without having even recourse to trade defence measures. This certainly had a negative impact on the light industry sector.
35 Mongolia HDR (2003), p. 26. It notes that the informal service sector has a significant number of well-educated women.
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A strategy to stimulate the manufacturing sector would seem to call for the rationalization of the tariff schedule, to provide greater protection to key industries while freeing the import of capital goods from duties. The legislation on trade remedies (safeguards and anti-dumping) should be applied vigorously to shield producers from injurious import surges and dumped imports. Such policy can build upon existing human capital, including Mongolians working abroad who could be induced to return. However, new human capital must be formed, for which greater cooperation is required between business and education sectors to ensure matching of skills with needs. Key sectors could be those processing the raw materials produced by the livestock sector, such as leather, and those with strong backward or forward linkages to the mineral sector including services and quality consumer products. Human Development Challenge 6 Lessen the restrictions posed by geography for engagement with the rest of the world. Access to markets, trade and transfer of technology are crucial ingredients for economic development, and when transport costs inhibit enterprises from accessing foreign markets or inputs, these ingredients are under-utilized, limiting the potentials for development. Mongolias landlocked position has been described as a tax on the poorprices of basic imports are higher while exports to overseas markets become less competitive. Costs are increased by inadequate infrastructure which create logistical bottlenecks and serve to facilitate corruption that hits small traders the hardest. Geography, however, is not destiny. Countries can orient themselves to lessening its burden. Being landlocked becomes less of an issue if Mongolia specializes in products that are distinct and highly differentiated, drawing on advantages that are not based wholly on the relative cost of production. Trade Policy Goal 6 Improve trade-related infrastructure and logistical impediments nationally, while negotiating
30
bilaterally and multi-laterally (UN, WTO) the pursuit of trade facilitation and the exercise of acquired rights. Mongolia is striving to upgrade its trade-related infrastructure with assistance from donors and in concert with neighbouring countries. Mongolia has signed an Agreement on Trans-Asian Railway Network, an initiative of UNESCAP. The proposed 80,900 km railway network aims to connect the Pacific seaboard of Asia to the doorsteps of Europe. A Transit Mongolia programme aims to position the country as a hub for world transportation, including transit in the long run. Mongolia is also addressing transit barriers through international negotiations. It initiated negotiations for a Tripartite Transportation Agreement with Russia and China, on which a tentative agreement has been reached, although not yet accepted by Russia. Mongolia has been active in the WTO Doha Round negotiations on trade facilitation, submitting joint proposals with like-minded countries aimed at strengthening the WTO rules on Freedom of Transit (GATT Article V). This position has been strengthened by the work of the United Nations in favour of least developed, landlocked and small-island developing countries, in which Mongolia has assumed an active role. Mongolia can also address transit issues in the context of Russias accession to the WTO and by taking advantage of Chinas GATS commitments on transport services. Mongolia will always face a cost disadvantage in competing in overseas markets, exacerbated by the impact of the minerals sector on the exchange rate and on wages. As a consequence, Mongolia will need to emphasize producing quality, value-added products that are price inelastic. Institutionalized efforts to keep abreast of fashion trends in cashmere, or the promotion of GI-registered Mongolian specialities are a step in the right direction. Human Development Challenge 7 Seek international partners for mutual prosperity. The success of efforts to empower poorer people to participate in international trade will depend on the ability of the Mongolian government and entrepreneurs to secure improved market access
OVERVIEW
for their exports. Products of the livestock sector in particular face high tariffs, as well as non-tariff barriers, mainly in the form of SPS regulations in potential major markets, notably Russia. While Mongolia benefits from GSP preferences in the developed countries, the most significant being the GSP-plus scheme of the EU, many of its main export products are not covered, and even when covered, not utilized. In Asian countries, as a result of the extension of free trade areas and regional preferences, Mongolian exporters will face increasing face negative margins of preference in growing markets such as China. In fact, China accords some form of preferential tariff access to imports from virtually all Asian countries, Mongolia being the major exception. Trade Policy Goal 7 Negotiate strategic preferential agreements to reduce trade barriers to Mongolian exports, especially those derived from the rural economy. Mongolia is pursuing the reduction and elimination of tariffs on its exports in the framework of the WTO Doha Round, which lost momentum in 2008 and concrete results may not be obtained for several more years. The negotiations of the terms of accession of Russia to the WTO have provided an opportunity to liberalize access to that market, but these too have become stalled. Mongolia needs to convince other major developed markets to emulate the EUs GSP-plus scheme, which has provided important access opportunities to Mongolian exporters by enlarging the coverage of their GSP schemes to include a wider range of products and to remove positive rates where these are applied. Greater efforts should be made to take advantage of technical assistance to ensure maximum utilization of preferential access already on offer. Trade negotiations should also be directed toward obtaining tariff reductions in Asian markets to avoid a proliferation of negative tariff preferences against Mongolian exports. This may be partially achieved by membership in APTA, but the possibilities of entering into FTAs with major regional trading partners should be studied carefully. In doing so the different templates followed by potential FTA partners should be analysed and the opportunities and threats fully understood.
Before entering such negotiations, the views of all stakeholders and civil society should be taken into account. Adequate consultative mechanisms for stakeholders to express their views on trade policy issues should be established. The objective would be a common appreciation by all major stakeholders of the Mongolian templatea firm negotiating position on what should be obtained and what could be conceded in the interest of human development.
Table 8. Summary of issues highlighted in the report
Human Development Challenges 1 Reverse trends toward greater inequalities in Mongolian society. Trade Policy Goals Empower the poor to derive greater benefit from international trade.
Pursue measures to increase the production and exchange of economically viable foodstuffs, and protect producers from import surges and unfair competition that undermines livelihoods. Enable herder households Increase productivity of herders to compete in international to command a decent stream of regular income. trade. Leverage the minerals sector to attain broadCreate forward and backward based economic growth linkages and improve valueand employment creation addition in the processing of while minimizing the exportable minerals. vulnerabilities of dependence on commodities. Revitalize the manufacImplement an integrated trade turing sector to provide new employment for and industrial policy aimed at redisplaced workers and viving the manufacturing sector. young people. Improve trade-related infrastructure and logistical impediments Lessen the restrictions nationally, while negotiating posed by geography for bilaterally and multi-laterally engagement with the rest (UN, WTO) the pursuit of trade of the world. facilitation and the exercise of acquired rights. Negotiate strategic preferential agreements to reduce trade Seek international partbarriers to Mongolian exports, ners for development. especially those derived from the rural economy. Promote rural development and enhance food security.
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32
CHAPTER
PROMOTING FOOD SECURITY AND RURAL DEVELOPMENT

The Case of Wheat and Milk
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1. LIVELIHOODS AND RURAL DEVELOPMENT
BOX 1.1 PRIVATIZATION STRATEGY
This chapter discusses the human development challenges in rural Mongolia, and the possibility that trade policy could assist in addressing some of them. It focuses on wheat and milk, two products that constituted the traditional strength of Mongolia in the past, but which have fallen into a state of disrepair over recent years. Although other factors have been in play, such as privatization and bad weather, trade policy remains part of any solution. A revival of these sectors by empowering rural women and men, and increasing productivity, would be an important step in reducing inequity in Mongolian society. The FAO estimates that 27 percent of the population is undernourished, a rate considerably higher that the Asian average.36 Mongolia is classified as off track or regressing with respect to two targets of the first Millennium Development Goals of reducing the number of people in extreme poverty and the proportion of underweight children.37 Over the past decade, rural poverty has increased, disparities between urban and rural populations have widened and some agricultural practices are no longer environmentally sustainable. Farms in the socialist era benefited from free or subsidized inputs, and even produced surpluses for export, but they did so under a soft budget constraint, and issues of economic viability then were nowhere as important as now under a market-based system. Nonetheless, the reversal in fortunes has been conspicuous food imports in Mongolia today have risen to almost 15 percent of total imports, with wheat imports alone increasing by more than 500 percent over a decade after WTO accession.
The privatization law, adopted in May 1991, laid the basic strategy for privatization, which included separate programs for agriculture. Every citizen born before May 31, 1991, was entitled to a book of vouchers to be used during privatization. The book of vouchers included a pink and a blue set. The pink vouchers had on the face a nominal value of MNT 3,000 and were tradable. They were used primarily for small privatization programs. The non-tradable blue vouchers had the nominal value of MNT 7,000, and were used primarily for privatization of agricultural cooperatives, enterprises and livestock by those who worked on collective farms.38 Although the initial wave of privatisation of stateowned enterprises was designed to have an egalitarian impact on the distribution of wealth, the distribution of vouchers to the entire population ended up concentrating ownership in the hands of the rich. They could afford to buy the shares that most people were forced to sell for a fraction of their face value. 39 The agriculture sector accounts for 25 percent of GDP, and provides employment to 40 percent of the population. However, the recent accelerated growth of the Mongolian economy has not permeated to this sector. In a 2005 Report, the UN Special Rapporteur on the Right to Food stated, there are new signs of dynamism in the Mongolian economy, but the benefits seem not to have yet reached those who are poor and hungry. Problems of food insecurity and chronic malnutrition persist as poverty deepens, despite high levels of multilateral aid and the efforts of the government and international agencies.40 Within agriculture, livestock husbandry is the largest sub-sector accounting for 87 percent of the sectors gross product. Between 2000 and 2002 back-to-back dzuds led to a loss of a quarter of livestock. Although the number of herders increased in the early years of economic
38 39
36
Mongolias food supply per person per day has increased from 2,070 kcal in 1990-92 to 2,250kcal in 2002-04, the latest period available. Both the proportion and the number of undernourished people have decreased. Mongolia, however, still has a higher proportion of undernourishment (27 percent of the population) in 2002-04 than the average for the AsiaPacific (16 percent); See www.fao.org/faostat/foodsecurity/MDG/EN/ Mongolia. 37 Communaut Europenne Mongolie Document de Stratgie 2007-2013.
Murrell (1999). McKinley (2004). 40 EC/CN.4/2005/47/Add. 2, March 8, 2005.
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transition, due to privatization and the collapse of the Mongolian manufacturing industries, many herders became impoverished after losing their livestock in the droughts. This fuelled migration, and by 2006, 61 percent of the Mongolian population resided in urban areas, namely Ulaanbaatar, Darkhan and Erdenet. Migration to urban centres, however, did not provide an escape from poverty. Migrant households continue to survive on modest income sources such as salary and pensions, government subsidies, petty businesses, irregular hourly wages (tutoring, taxi driving, etc.) and remittances.
Table 1.1 Budget expenses and investment of donors in agriculture (in million US$)
State budget 304.64 353.77 360.08 340.07 376.41 437.26 474.19 525.85 635.00 634.38 1 041.64 1 213,50 Total expenditure in agriculture and forestry 6.14 6.47 3.57 4.70 6.83 10.41 11.91 11.02 10.77 12.06 14.55 16.05 % of agriculture and forestry in total budget 2.00 1.80 1.00 1.40 1.80 2.40 2.50 2.10 1.70 1.90 1.40 1.30 Donor exp. in agriculture 0.44 0.88 1.60 1.60 1.52 4.41 8.21 14.07 17.43 17.50 15.14 12.37
Trade in agriculture remains at the forefront of global and regional trade agreements both from an offensive perspective of securing new export markets and a defensive perspective of ensuring food security and safeguarding livelihoods of vulnerable people. This is echoed in the WTOs Doha Ministerial Declaration, which states that the rules, disciplines and commitments emerging from the multilateral negotiations on agricultural trade should enable developing countries to take account of their development needs, including food security and rural development.
Figure 1.1 Share of agriculture in total budget expenditure
Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: National Statistics Office Slovakia
BOX 1.2 RISING BREAD PRICES AND HARDSHIP
Source: Koester (2008).
In 2001, a regional development concept was endorsed by the parliament (State Great Khural) to promote equitable development in all regions. However, the percentage of the total state budget devoted to agriculture has declined from 2.5 in 2002 to 1.3 percent in 2007 (Table 1.1). Among a select group of transition economies, Mongolia ranks the lowest in its share of budget support to the agriculture sector. UNDP has recommended the revitalization of soum centres to provide essential services and job opportunities as a crucial step towards stimulating rural development and combating rural poverty.41 The suggestion is to develop soum centres as a hub of employment opportunities, and promote decentralization by giving soum governors and citizens khurals greater influence in implementing local development initiatives, including the authority to command more fiscal resources.
41
Every morning for the last 15 years, Yagaan has always rushed to the citys busiest street to secure her good spot where she sells cigarettes, gums and candies. She is one of the thousands of street vendors who strive to feed their families. Her elder mother, an ill husband and their three children rely on Yagaans earning. She usually buys or borrows the goods from the wholesale Bumbugur market and sells them in the street to earn MNT 3000-4000 (approximately US$3-4) a day. Bread is a major part of Mongolian diet. With the recent increase in the price of bread from MNT 450 to MNT 630-760, Yagaan could only afford one loaf of bread per day with only 2 slices to go around for her children. Three-fifths of her income goes to food, and Yagaan likens recent hikes in food prices to an express train. In April 2008, the Government cut tariffs and VAT on flour to normalize bread prices, but they didnt help much because of rising world prices.
Mongolia HDR (2007), pp. 69-71.
35
During a visit to Russia, the Prime Minister of Mongolia signed an agreement to purchase 100,000 tons of wheat with the waiver of a 40 percent export tax. Altan Taria LLC and Ulaanbaatar Guril LLC, two large producers of flour, distributed this at a discounted price. As a result, the price for flour has not gone up since mid-2008.
Source: The UB Post, articles written by B. Bulgamaa, from April 17, 2008, April 24, 2008 and November 2, 2007, http://www.mof.gov.mn/m_Details.aspx?nid=148.
BOX 1.3 CAUSES OF VOLATILITY IN GLOBAL FOOD PRICES
Crops began to be cultivated intensively only in the 1950s. While wheat and meat production have stagnated over recent years, there has been a steady increase in the production of potatoes, vegetables and eggs. However, the increase in the price of basic foodstuffs like bread has caused considerable hardship among poor urban families. As of 2007, some 700 food processing plants were in operation in Mongolia, employing more than 7400 workers and contributing to about 6.5 percent of the total industrial output. Fifty-six percent of the domestic demand for primary food consumer products is met by domestic production.42
Table 1.2 Food pricescountry average (in 2000 prices)
Food items 1st grade flour (kg) Rice (kg) Mutton (kg) Milk (litres) Potato (kg) Egg (kg) 2001 2002 2003 329 419 1,071 486 349 108 289 413 981 426 355 100 288 394 2004 357 467 2005 299 506 2006 386 581 2007 486 586
1,177 1,252 1,521 2,108 2,417 420 345 85 367 264 84 349 337 107 593 430 150 542 450 200
Source: Mongolian Statistical Yearbook, 2008.
Between 2006 and 2008, world maize and wheat prices more than doubled. Since the beginning of 2003, the prices of butter and milk tripled and the price of poultry has almost doubled. When adjusted for inflation and the dollars decline (by reporting in euros, for example), food price increases over this period are smaller, but still dramatic. There are at least five reasons for this trend. First, energy and agricultural prices have become increasingly intertwined. In the US, as much as one third of the maize crop goes to ethanol production, up from 5 percent one decade ago. Subsidized production of bio-fuels draws largely on agricultural products; in 200007, this is estimated to have contributed to 30 percent of the weighted average increase of cereal prices. High energy prices also raise the cost of inputs. Second, a growing world population is demanding more and varied kinds of food (like vegetables, fruits, meat, and dairy) which cuts into land and water use for grains. Third, the global production response to rising demand has been slow. The production response to high prices is impeded by land and water constraints, as well as by underinvestment in agricultural innovation. Output declined in Australia due to severe drought and stagnated in China, EU, India, and the US. Further, land available for cultivation is limited, and the cost of bringing new land into production is high. Fourth, policy responses in the form of restrictions or duties on exports reduce risks of food shortages in the short term for the producing country, but they are likely to make the international market smaller and more volatile. Export restrictions have also had harmful effects on import-dependent trading partners. Fifth, supply and demand fundamentals do not fully explain the recent drastic increase in prices, and some blame is deserved by speculators and hoarders.
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Recently, however, prices have declined rapidly, the IGC wheat price index in November 2008 had fallen to 50 percent of that of February of the same year.43 This has been provoked by good crop forecasts, removal of export restrictions and concern over a likely global economic slowdown.
Source: IFPRI (2008)
2. PRODUCTION AND SUPPLY OF WHEAT
The State Great Khural of Mongolia amended the Law on Food in 1999, providing a legal basis for regulations aimed at addressing problems of food supply and food security, and the Government announced 2008 to be the Year of Food Supply and Food Security. Primary food products such as flour, meat and milk account for 86 percent of the daily calorie intake per capita of around 2800 kcal.44 According to the FAO, food security exists when all people, at all times, have physical and economic access to sufficient, safe and nutritious food to meet their dietary needs and food preferences for an active and healthy life. Given the high concentration of female-headed households in small urban centres of aimags and soums, and given the higher incidence of poverty among female-headed than maleheaded households, the recent price hike of basic foodstuffs may have worsened the gender poverty gap in urban areas. Overall, rural households spend 54 percent of their income (MNT 17,545 per capita per month in 2002 price) on food consumption as compared to 34 percent in urban households (MNT 15,395).45 As an alternative means of survival, household agricultural production becomes part of their living leading to an increase in the hours spent by women in unpaid domestic work. The consumption of foodstuffs produced by households is significantly higher in rural than urban areas, and the proportion of consumption from household production to the total expenditure increased from 11.4 percent in 2000 to 28.9 percent in 2002 in rural households. 46
43 44
In the pre-transition period after 1959, when mass crop cultivation started, Mongolian wheat production adequately met all domestic demand and generated a surplus for exports. This was made possible because of heavy Soviet subsidization. However, upon the dramatic withdrawal of Soviet support and the rapid privatization of farms in the 1990s, this pattern of production could not be sustained. Aggregate wheat production steadily declined year after year. Some of the reasons that explain the decline are: high interest rates for loans; privatization of crop companies into excessively small units; obsolete technology and equipment; extreme weather; and a decrease in the number of labourers.
Table 1.3 Wheat production, 1960-2007
Year Average in 1960s Average in 1970s 1980 1990 1995 2000 2005 2006 2007 Cultivated land Annual harvest Yield per hecin hectares in hectares tare in tons 322,827 332,730 408,212 532,945 348,485 218,876 159,000 120,700 122,000 248,414 278,768 228,500 596,800 257,800 137,800 73,500 127,800 114,600 7.7 8.4 5.6 11.2 7.4 6.3 5.7 11.6 10.2
Source: Mongolian Statistical Yearbook, 1980-2008.
Crop cultivation accounts for 20 percent of the total agricultural output, employing some 60,000 workers. There has been a notable decline in the stock and quality of capital equipment, limiting the area of crop cultivation to around 120,000 hectares only.47 There are 71 major and minor flour producing factories with a capacity to produce a total of 289,000 tons annually. The two companies, Altan Taria LLC and Ulaanbaatar Guril LLC alone produce and import over 80 percent of domestic demand for flour. In the 2005 trade policy review, the WTO Secretariat observed that the programmes aimed at increasing wheat production had had little impact on Mongolias production
47
International Grains Council (www.igc.org.uk/en/grainsupdate). D.Terbishdagva, et al. (2006). 45 National Statistical Office, UNDP and World Bank Household Income and Expenditure Survey 2002-2003, National Statistical Office Ulaanbaatar 2004. 46 ADB (2005).
In 2007, Mongolia harvested 114,600 tons of wheat from 122,000 hectares, 113,600 tons of potato from 11,600 hectares, 79,100 tons of vegetable from 6,100 hectares, 12,000 tons of animal feed and fodder from 7,000 hectares, and 8,500 tons of oil vegetation from 39,900 hectares. 98 percent of the domestic demand for potato, 50 percent for vegetables and 25 percent for flour were met by local production.
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it continues to import two thirds of its wheat consumption.48 In 2007, the Ministry of Food and Agriculture supported cultivation companies by providing wheat seeds on concessional terms, and assisted in the upgrading of equipment and technology for cultivation. The Government has allocated a total of MNT 2.9 billion to some 217 individuals and legal entities as bonus payment at the rate of MNT 60,000 per ton of wheat.49 The aim of these policies is to support domestic producers. In addition to these direct incentives to crop farmers, the government has also attached great priority to the development of irrigated farming through initiatives such as the Atar-3 crop cultivation campaign. Furthermore, MOFA has received assistance from Korea in setting up a pilot farm based on livestock and cultivation in an arid area in Dornad aimag, using modern techniques as a model for agricultural development in Mongolia.
BOX 1.4 ATAR-3 CROP CULTIVATION CAMPAIGN
To ensure food security and reduce the dependence on the import of vegetables, wheat and flour, the Government has initiated the Atar-3 Crop Cultivation Campaign. Out of the total of 190,000 hectares of cropland, 155,000 is used for grain planting, 11,900 is used for potatoes, and 6,400 for vegetables. These actions combined with good summer weather have created favourable harvest. In 2008, compared to the previous year, grain is expected to increase by 85,800 tons, wheat by 86,900 tons, potato by 30,000 tons, and vegetables by 2,500 tons. This will mean that Mongolias domestic production can meet all of the countrys demand for potato, and roughly 50 percent of demand for vegetables and wheat. The government implemented the Atar-3 by providing assistance to farmers, procuring seeds and new techniques and equipment at concessional prices and by allocating credit for summer ploughing. To create a more favourable legal environment, the size of field that can be legally allocated to one company engaged in crop cultivation has been increased from 3,000 to 20,000 hectares. Within the scope of this campaign, 50-wheel tractors with 120-horse power, 180 tractors with 155-180 horse power, 40 combine-harvesters and 160 units of agricultural trailers and machinery have been purchased by the government for agricultural enterprises. Individuals will obtain combine-harvesters, tractors, and irrigation equipment exempt from import duties and VAT. By 2010, as part of this campaign, Mongolia intends to harvest 420,000 tons of wheat, 173,000 tons of potatoes and 171,000 tons of vegetables, which would totally satisfy domestic needs. Mongolia has a history of engaging in massive crop cultivation campaigns, especially in 1959 and 1976.
Sources: Prime Ministers speech, April 25, 2008, at the opening ceremony of the Atar-3 Crop Cultivation Program; Morning Newspaper, July 18, 2008 (http://www.ubs.mn/ content/view/224/68/).
48 49
WT/TPR/S/145, p. 47. The bonus per ton of wheat increased to MNT 80,000 in 2008.
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2.1 TRADE IN WHEAT AND FLOUR Over the past decade, Mongolias reliance on wheat and flour imports has increased fivefold and two-fold respectively (Figures 1.2 to 1.5). While domestic production of wheat has steadily declined, there has been an increase in both the import and the domestic production of flour. Mongolia has been importing about 40 percent of commercial wheat requirements, in addition to receiving approx. 25,000 tons of food aid from the United States every year (over 50,000 tons in 2004). This is sold domestically at prices below production costs at MNT 185,000 per ton.50 The UN Special Rapporteur on the Right to Food recommended that, mechanisms to monitor the impact of food aid on food security and the broader economy should be established to ensure that food aid does not act as a disincentive to efforts to increase local production.51 While it might seem unrealistic to expect a return to the levels of self sufficiency achieved by the highly subsidized sector under the planned economy, the degree of reliance on external sources has widened so much in such short a period that it has heightened a sense of vulnerability in a remote country living under harsh environmental conditions. The government has thus rightly emphasized a move towards greater self-sufficiency as seen in the Atar-3 Crop Cultivation Campaign.
Table 1.4 Wheat aid from the US
Year 2002 2003 2004 2005 2006 2007 Data from US Food Aid Program Tons US$ 25,000 3,350,000.00 24,500 3,612,000.00 50,000 8,572,500.00 25,000 3,658,800.00 25,000 9,875,000.00 0 0.00 Data from Customs Administration of Mongolia Tons US$ 0 0.00 0 0.00 74,128.4 24,072,900.00 0 0.00 25,039.75 7,491,700.00 24,917.7 8,522,500.00
crop per hectare. Other complementary policies such as concessional bank loans and streamlined procedures for commercial loans should be made available to farmers. They should benefit from wheat seeds, fertilizers and technical equipment.
3. PRODUCTION AND SUPPLY OF MILK AND DAIRY PRODUCTS
Milk has a special place in Mongolian culture, and it has traditionally been self sufficient in producing it. Prior to 1990, some 41 automated milking farms were in operation with the capacity of producing 54.4 million litres of milk in Ulaanbaatar, Darkhan, Erdenet and other urban areas. However, at the beginning of the transition period the state farms were dismantled or looted and the animals were distributed to managers and workers. During 1990-1999, domestic milk production increased up to 470 million litres annually, but in 2001 it dropped by 40 percent to 290 million litres because of the dzuds. The current statistics show that there are 4500 dairy cows in some 200 small and mediumscale milking farms, with an average of 23 cows per farm. The milking yield of Mongol cattle is generally low, but they have the endurance to survive the harsh climate.
Figure 1.2
Figure 1.3
The production of wheat and flour could be aided through trade measures such as the import of duty-free machinery and fertilizers, and the adoption of a Special Safeguard Mechanism to shield farmers against possible future import surges, including dumped and subsidized products. More attention could be given to expanding irrigation and to increasing the yield of
50 The UB Post, Wheat assistance could be damaging market, 14 October 2004, quoted in WT/TPR/S/145, p. 49 51 E/CN.4/2005/47/Add. 2, p. 23.
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Figure 1.4
Figure 1.5
Although Mongolia produces enough milk to meet its domestic demand, only one-third of the total potential milk supply is estimated to enter the market. Two to three percent of total milk production is processed industrially. In recent years, thus, import of milk products has risen. Estimated imports stand at approximately 21 million litres, which is about 15 percent of the total demand, costing US$3 million annually in import bills.
Table 1.5 Supply of wheat, milk and milk products
Wheat ProducConPopula% of Import tion sumption tion Supply in (thou(thou(thou(thouConsands of sands of sands of sands) sumption Tons) tons) Tons) 298.7 340.9 414.2 195.2 79.2 30.5 0 70.9 287.9
infrastructure. There is no reliable system for collection, cooling, processing, storing and transporting of milk and dairy products. The units of production are too fragmented, and the transport costs involved in ensuring a secure stream of hygienic milk supply to the bigger towns is prohibitive. The second reason is related to Mongolias urban preference. Retailing in city markets is dominated by imports. Milk is reconstituted from milk powder, either in Mongolia, Siberia or Korea and marketed as fresh milk. Urban Mongolians have become accustomed to UHT milk, which they consider safer than local milk. It should be noted that until recently milk powder from the EU that entered Mongolia benefitted from an export subsidy of approx. US$0.1 per litre, which is more than what most Mongolian herders are paid for their summer milk.52 The Government has launched campaigns to encourage the consumption of domestically produced milkone example is the state-sponsored lunch program in Ulaanbaatar where domestically produced milk, enriched with calcium and vitamin, are distributed in 83 of the 96 schools. 3.1 TRADE IN DAIRY PRODUCTS A revitalized dairy sector can provide higher incomes and greater employment opportunities to herders. Women are expected to particularly benefit as they have traditionally been involved in the processing of milk. Demand for dairy products in Northeast Asia is expected to grow rapidly, with milk equivalent imports of 100 billion kg forecast for 2015. The market strategy could thus focus more on quality control and branding. In this regard, two types of Mongolian milk, Saihan soum airag made of Bulgan-distilled mares milk and camel milk from Omnogobi aimag, have been registered as Geographical Indications (GIs). All these measures should ideally form part of an export strategy for milk products that emphasizes quality, high safety standards and longer shelf life. The revitalization of the dairy industry in Mongolia calls for actions along the entire production and distribution chain.
Year
1980-1990 1,805.1 582.9 average 1991-2000 2,060.2 270.0 average 2001-2007 2,503.5 126.3 average Milk and Milk Products 1980-1990 1,805.1 272.2 average 1991-2000 2,060.2 332.4 average 2001-2007 2,503.5 304.6 average
Source: Terbishdagva (2006).
250.4 285.7 347.2
108.7 116.3 87.7
21.8 46.5 42.6
There are two main reasons why urban dwellers buy in excess of 20 million litres of milk (and milk equivalent in dairy products) in imports. The first is a systematic absence of a milk distribution
40
52
Tsetsgee Ser-Od et al. (2006)
Herders need to be empowered through the setting up of milk producer groups inclusive of all milk producers, irrespective of type and size (nomads, peri-urban households, small dairy farms, etc). The Mongolia-Japan-FAO/UN Special Programme for Food Security developed a modern dairy food chain model based on lessons learned during the dairy food security project.53 The model links producers to small, medium and large scale processors through six flexible modules, one for each link in the cowconsumer food chain. The modules include: (i) milk producer organisations, (ii) dairy service centres, operated on a full cost recovery basis by private vets, (iii) milk collection units, (iv) milkcooling centres, (v) milk-processing units and (vi) one-stop milk sales centres. On the defensive front, it should be noted that while the world dairy sector is characterized by high tariff protection with only a small amount allowed in at lower rates (within tariff rate quotas), Mongolias tariffs on milk and dairy products are very low by world standards.54 Much of these imports compete unfairly as until recently they have benefitted from heavy export subsidies. It is thus difficult to imagine a positive policy outcome of restructuring and upgrading the domestic milk production sector while it is exposed to competition from low-cost imports. The WTO Secretariat itself has pointed out that Mongolia has the right to raise its duties to the bound level of 20 percent, which might be considered as a temporary measure to facilitate adjustment in the dairy sector. At its 5th Ministerial Conference, held in Hong Kong in 2005, the WTO members agreed to phase out all export subsidies by 2013, and to ensure that food aid was legitimate and not a means for circumventing these disciplines. While the current situation of high prices has led the EU to suspend export subsidies on dairy products, institution of the Special Safeguard Mechanism (SSM) and other trade defence laws
53 See GCSP/MON/001/JPN, field document 6 and Tsetgee Ser-od, Mustafa Hussain, and Brian Dugdill (2008), Selected smallholder dairying experiences from Bangladesh and Mongolia, Paper presented to Asia Pacific Smallholder Dairy Workshop, Thailand, 25-29 February. 54 According to the WTO World Tariff Profiles (2008), examples of average bound MFN tariffs in this sector are 180 percent in Canada (with a peak of 314 percent), 169 percent in Switzerland, 126 percent in Japan, 70 percent in Korea, 70 percent in the EU and 21 percent in the United States. However they are lower in China (12 percent) and Russia (16 percent).
could provide security against the resumption of such measures. In addition, Mongolia could consider raising its tariffs to the bound ceiling of 20 percent, and open up TRQs which could be enlarged over the same period to provide domestic milk producers with the time to adjust to import competition.
Figure 1.6
BOX 1.5 EXPANDING DAIRY EXPORTS TO JAPAN There is considerable potential of exporting all types of milk and milk products (fresh milk, yogurt, sour cream, coffee-creamer, hard and soft cheese) to Japan. Most dairy imports into Japan are subject to TRQs: imports within the TRQs are charged a simple ad valorem tariff, ranging from zero to 30 percent; over-quota imports though face a combined ad valorem and specific duty which can amount to an ad valorem equivalent of between 31 and 557 percent. Tariffs vary according to the proportion of fat in dairy products and the presence of added sugar. Most of the TRQs for non-fat dry milk are allocated to ALIC, the government corporation. Japan has resorted frequently to the Special Safeguard Provisions of the WTO Agriculture Agreement to restrict imports of dairy products. Despite high tariffs and restrictions, Japan is the third largest importer of dairy products in the world, and imports of items such as cheese (with 25 percent tariff but no TRQ) have increased rapidly.55
55 Obara et al. (2005); See http://www.ers.usda.gov/Publications/LDP/ Aug05/LDPM13401/.
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4. TRADE NEGOTIATING ISSUES
Agriculture subsidies in both production and export by some rich countries have resulted in a decade of cheap imports of foodstuffs. The price of major commodities have been sold at prices often 30-40 percent below world prices (e.g. US wheat, EU milk powder). The FAO has noted that the group of Low Income Food Deficit Countries (LIFDCs), which includes Mongolia, has been able to rapidly increase its food imports because of the availability of subsidized exports from developed countries. From a human development perspective, high import growth may undermine otherwise viable domestic production, and cause hardship to vulnerable and low income men and women when price of imports rise suddenly. The distortions caused by this dependence on artificially low-priced imports have been highlighted in the WTO negotiations.56 Mongolia as a member of the G33 in the WTO has been actively promoting the idea of a SSM as a crucial element in any outcome to the Doha multilateral trade negotiation on agriculture which includes among their stated objectives the achievement of food security and rural development. According to the FAO, there have been several cases where Mongolia has experienced import surges (defined as a 30 percent positive deviation from a three-year moving average). Over a 20-year period up to 2003, Mongolia experienced six instances of surges in wheat, three in bovine meat, and 20 in various dairy products.57 In July 2004, all members accepted in principle that a SSM should constitute an outcome of the Round. The SSM would be based on a trigger mechanism that would be engaged in cases of (a) import surges or (b) depressed import prices that threaten the livelihood of small farmers. It should be noted that the WTO Agreement on Agriculture provides a similar facility (Special Safeguard in its Article 5) for many countries, primarily the developed countries. The FAO has advocated the SSM58 and it would seem advisable for Mongolia to institute such a mechanism, in keeping with
56 For example, see submission to WTO Committee on Agriculture by MERCOSUR, Chile, Bolivia and Costa Rica, Export Subsidies - Food Security or Food Dependency G/AG/NG/W//38, September 27, 2000. 57 FAO Briefs on Import Surges: http://www.fao.org/es/esc/common/ ecg/19/en/Surge2Define.pdf 58 FAO Support to the WTO Negotiations Fact Sheet 5; See ftp://ftp.fao. org/docrep/fao/meeting/010/j6831e.pdf.
its own position, although it would likely not be used in the near future.59 However, the increasing volatility of wheat markets in particular would suggest a policy that would shield Mongolian producers from injurious import surges, while protecting consumers from shocks of sudden rises in world prices. An impasse on negotiations on the details of SSM resulted in the suspension of Doha Round negotiations in July 2008 (which have since resumed). The G33 insists that developing countries should have the right to exclude certain Special Products, essential for the livelihood of poor farmers, from any tariff reduction formula that might be applied in the Doha Round. Mongolia provides seasonal protection to some agricultural products. The normal 5 percent applied duty on wheat and flour is raised to 15 percent between August and April of the following year. To decrease prices of some primary food products, import duties and VAT for wheat and 100,000 tons of flour were waived until July 1, 2008.60 An analysis of how effective these temporary measures have been would help answer whether the wheat and milk sectors can be revitalized in Mongolia in the absence of higher tariff protection. Currently world wheat prices are high, and Mongolians are paying the price for the neglect of the agricultural sector in the past. Import costs for wheat and flour are estimated to rise by 35 percent in 2008, which can only be offset by the current high prices obtained for exports of gold and other minerals. In addition to the lowering of the VAT on wheat and flour to dampen domestic prices, it would be useful to install a safeguard mechanism, partly to assure investors in the sector that prices will not be undermined by import surges in the future.
59
The International Centre for Trade and Sustainable Development has prepared a simulation exercise on the SSM. See Montemayor, (2007), and Jales (2005). 60 Ts. Gankhuyag, et al. (2008).
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BOX 1.6 WTO RULES ON SUBSIDIES IN AGRICULTURE Domestic production subsidies have been categorized into amber, blue and green boxes as a function of their impact on trade. Those deemed to have a distorting effect (e.g., price support) fall into the amber box and are subject to overall negotiated ceilings, based on calculations of AMS (aggregate measure of support) with a de minimis exception (5 per cent for developed, 10 per cent for developing countries). This means that Mongolia is able to pay such subsidies amounting to 10 percent of the total value of production of any agricultural product, where support is product-specific, and up to 10 percent of the total value of production where subsidies are not product-specific. Two other categories of subsidies are not subject to limitations: (i) direct payments to producers when linked to supply reduction (blue box), and (ii) those determined to have minimal trade impact (green box). This structure has not served to limit agricultural subsidization, which has increased to almost US$300 billion annually. Subsidy programmes have simply been directed to those boxes where no limits are applied.
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44
CHAPTER
EMPOWERING PEOPLE TO BENEFIT FROM TRADE:

The Case of Meat
45
EMPOWERING PEOPLE TO BENEFIT FROM TRADE
1. HUMAN DEVELOPMENT CHALLENGES IN THE HERDING SECTOR Roughly two-fifths of the Mongolian population leads a semi-settled and nomadic lifestyle in rural areas. In 2007, Mongolia was estimated to have more than 171,220 herder households.61 Herders are among the poorest and most vulnerable groups in the society with a poverty incidence rate of 39.2 percent.62 The challenge facing Mongolia is to empower these men and women to increase their productivity to directly derive benefits from international trade, thereby contributing to reduced inequity. The challenges of building an export base for meat in a nomadic herding society are clear, but with the support of institutions and incentives along the production and distribution chains, combined with favourable market access, Mongolia can look to trade a product in which it has a durable comparative advantage. Between 1990 and 1998 the number of herder households more than doubled from a base of 75,000. Although these households held 40 million heads of livestock,63 every four in five herder household owned a sub-optimal number (less than 200 per household, and less than 50 percent in the aggregate). Privatization of the livestock sector has given rise to a cluster of employment-intensive family-run businesses, with an increase in the number of herders, especially women. After 1998, the share of rural population dropped, but this did not cause a commensurate decrease in the number of herder households as migrants left behind members of the family. Although the privatization of livestock sector provided herders with equal starting conditions to survive in the new market environment, personal initiatives and entrepreneurial skills of herders vary. Surveys on the determinants of poverty show the quality of life in herder families is affected by the number of employed family members, their education levels, consumption structure, remoteness from settlement centres, among others. Dzuds and droughts are a recurring feature of the Mongolian pastoral environment. The dzuds of 2000-01 killed at least 2.2 million livestock and
Statistics Bulletin, December 2007 (National Statistical Office). Mongolia HDR (2007). This included 0.3 million camels, 2.2 million horses, 2.4 million cattle, 17 million sheep and 18.3 million goats.
62 63 61
impoverished thousands. Generally, families with less than 100 heads bore the full brunt of the dzuds and suffered a significant drop in assets.64 Adult animal loss in 2000-01 as a result of multiple dzuds was twice as many as all other disasters combined over the past 40 years. The overall loss in income from these dzuds was estimated to be about MNT 270 billion (24 percent of GDP) as of the end of 2001. The cost to the government of providing subsidized fodder, and other disaster relief services was estimated at about MNT12 billion in 2001. The patterns of livestock movements, mostly seasonal, used to be sophisticated and had a high level of flexibility to cope with the unpredictable environment. Herder families, however, no longer move their livestock to seasonal pastures in an annual cycle.65 Their overall mobility has been further decreased by rising fuel prices and boundary restrictions. Pastoral nomads employ mobility strategies to react quickly to changes in forage availability, which is the kind of traditional know-how that is important to be nurtured from a human development goal of sustainability. Figure 2.1 shows a relatively stable number of livestock between 1961 and 1990, a rapid increase in goat numbers from early 1991 and then the decimating impact of the 2000-02 dzuds. The insecurity bred by these dzuds has prompted the herders to seek to increase the size of their herds, resulting in a record level of 40.3 million heads in 2007. This creates an enormous environmental strain.66 The total carrying capacity of Mongolian pastureland is estimated to range between 62.5 million head of livestock (as converted in sheep unit) during favourable weather conditions and 57 million heads of livestock during harsh weather conditions.67 Herders are disempowered because of declining productivity and the unsustainability of the sector.
64
World Bank (2003). In the northern areas where water availability is higher the herders may move their livestock only twice a year, whereas in the drier south, three or four long-distance moves may be necessary. 66 Mongolia HDR (2007), p. 38. 67 World Bank (2003), and Tserendash (2006).
65
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Figure 2.1
1.1 PROMOTING MONGOLIAN MEAT
Traditional nomadic herding life has clear distinctions between mens and womens work. For example, men take the large livestock, such as cattle, horses, and camels to pasture while the care of the smaller livestock, such as sheep and goats, are attended by women. The increase in the number of goats implies that womens responsibilities in raising goats have also dramatically increased.68
Table 2.1 Material indicators of herder households
Number of households (in thousands) 2005 2006 2007 With electric engine With TV With cars With tractor With motorcycle 67.7 60.1 23.2 2.4 37.4 78.7 70.2 26.6 2.7 42.0 103.9 91.0 33.7 2.7 53.5 Percentage of total herder number 2005 2006 2007 40.2 35.7 13.8 1.4 22.2 46.1 41.1 15.6 1.6 24.6 60.7 60.7 19.7 1.5 31.3
Mongolia is an eminently pastoral country with a tradition of meat production from horses, sheep, goat, cows, yaks, and camels. For the herders to derive income from world markets there are several necessary hurdles to cross. First, there is a need to empower herders to meet the SPS requirements in export markets with the aid of modern equipment and technology. Second, it will be necessary to enhance the reputation of their product. Third, it would be vital to negotiate improved access to export markets addressing both tariff and non-tariff barriers including those related to the administration of veterinary and sanitary regulations. Mongolian meat has been shown to contain high levels of protein, lipid, fat and fatty substances, lactic and amino acids, and minerals.70 It has high water absorption capacity and a narrow fibre composition. Research by Huns Tech Corporation of Mongolia asserts that the biochemical characteristics contained in Mongolian meat compare well and are possibly better than meat of the highest breed cattle from other countries. Further, Mongolian cattle are raised under natural pasturage conditions, and their meat can be considered organic. This label could enhance its value-added in exports, provided proper production techniques are in place and legitimate certification is obtained. Some of these technical characteristics vary with the pastoral rearing practices and the ecological zone in which they take place (steppes, deserts and mountains). Each of these regions lends specific properties to the animals through climate and altitude, floral composition and nutrition.
In 2007, while livestock related products accounted for only 10 percent of Mongolias export revenues, they were a source of livelihood for 40 percent of the population.69 In many developing countries, small and poorer producers have been able to compete and derive benefits from globalization, rather than be its passive victims. A pressing development challenge is thus to transform herder households into businessoriented production units capable of competing in national and international markets.
68 69
Burn and Oidov (2001). UNDP Mid-Term Trade Policy Concept (2008).
70
Research conducted in 2005 by the Food & Technology School of the Science and Technology, University of Ulaanbaatar
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BOX 2.1 REDUCING VULNERABILITY WITH BETTER INSURANCE With the gradual increase in average temperature, decreased amount of annual precipitation, phytomass, and ground water resources,71 herders have became more vulnerable to natural disasters. This calls for an efficient measure of disaster mitigation and early warning system embedded in sheep forage units. At present, there is little collaboration between the private sector, financial institutions and the public sector. By facilitating a favourable legal environment, financial organizations could be steered to offer insurance to alleviate losses from disasters, improve systems of disaster evaluation and forecast in all soums and aimags. In this regard, the positive aspects of pilot projects, such as the Indexbased Livestock Insurance project tested in three selected aimags, and the Livestock Early Warning System, which was embedded in sheep forage units at the grass-root level incorporated with satellite image processing and remote sensing, could be replicated elsewhere. In the absence of hygienic safeguards, however, these qualities can be easily tarnished. The reputation of Mongolian meat has suffered in recent years because of disease outbreaks like Brucellosis and Leucosis. The outbreak of Foot and Mouth disease after 2000 in southeastern provinces led to the collapse of exports to Russia and other markets. The absence of a national animal identification scheme is a major obstacle to enhancing national sanitary standards in the meat supply. Meeting the international sanitary norms of the WHO/FAO Codex Alimentarius and the HACCP norms also remain a challenge.
Table 2.2 Comparative quality of Mongolian meat

Content Protein Fat Minerals Moisture Mongolian meat Mutton Beef 2.78 1.11 2.15 1.16 Horse 1.73 1.10 Yak 2.29 1.13 Goat 5.21 1.17 New Zealand meat Mutton 17.14 18.50 0.88 62.84 Beef 3.50 1.05 Russia Horse 3.10 1.00
18.82 20.35 20.11 21.26 19.26
21.31 19.50
75.76 75.47 76.06 75.31 74.28
74.10 75.90
2. TRADE FLOWS AND BARRIERS TO MEAT EXPORTS
The Russian Federation imports over 90 percent of Mongolian meat exports, followed by Japan, the Republic of Korea and Kazakhstan. Mongolian companies export meat in the form of low value-added products such as frozen carcasses of mammals. The SPS measures and other requirements of meat importing countries are often stringent, and that there have been outbreaks on several occasions of communicable diseases in cows and other livestock presents a serious barrier to the potential increase in meat exports. These exports are further disadvantaged by the existing methods of transportation, storage, and processing which do not meet the requisite sanitary standards and other health regulations of importing countries. Even when standards are met, tariff and other trade barriers present a major impediment. 2.1 EXPORTING MEAT TO THE RUSSIAN FEDERATION 72 The former Soviet Union imported, on average, over 60,000 tons of Mongolian livestock products annually. Six major meat processing plants were established along border. After 1990, 14 Mongolian factories retained permission to export meat to the Russian Federation. Two major problems in exporting meat to Russia are described below. 2.1.1 Tariff rate quotas (TRQ) The Russian Federation applies a TRQ to meat imports: in-quota rates are at 15 percent ad valorem, while applied over-quota rates are 30 percent (down from 60 percent in 2004).
71 According to the ground water assessment conducted at the national level in 2007, 887 rivers and streams were found to have dried up out of the total of 5,121 counted; 2,096 boulders and small springs dried up out of a total of 9,340 counted; and 1,166 lakes and salt marshes dried up out of the total of 3,732 counted [Mongolian Daily News, Ecology, No 068(2832) 2008.03.22].
72
Fact Finding Analysis on Mongolian-Russian Non-Tariff Barriers and Standards in Trade, GTZ Export-Oriented Industrial and Trade Policy Project, Mongolia, Ulaanbaatar, December 2005.
48
The 2008 Russian frozen beef TRQ totals 445,000 tonsdistributed between 388 companies. Of the total quota, 351,600 tons has been allocated to the EU, 18, 300 tons to the US, 3,000 tons to Paraguay and 72,100 tons to other suppliers (which include countries such as Australia, Argentina, Brazil, and Mongolia). Although the quota for Mongolia covers only 2 percent of the total quota, the other countries category covers only 14 percent of Mongolian meat exports. The import duty levied on overquota meat import from Mongolia remains high. The Russian Governments Decree No. 13 dated January 19, 2008, increased out-of-quota import duties on pork and poultry, but lowered duties on beef. In 2008, for all beef categories, out-ofquota import duties were announced to decrease from 45 percent (but not less than 0.6 Euro per kilo for fresh/chilled) and from 50 percent (but not less than 0.5 Euro per kilo for frozen) to 30 percent (but not less than 0.3 Euro per kilo).73
Figure 2.2
Restrictions Department are strict. Russia has prohibited the import of certain beef products from Mongolia due to the outbreak of hoof and mouth disease in one Mongolian region since 2003. There is another barrier: licenses are granted from Moscow by a centralized authority, and require numerous procedures which burden importing and exporting companies. The slaughter of livestock in Mongolia normally takes place during September and October. Russian veterinary specialists are required to personally inspect the preparation process to stamp their seals of endorsement on the freshly prepared meat. However, the Russian Veterinary Organization only grants import licenses in November or December, thus disrupting trade. Russian veterinary standards divide meat into four categories, depending on the possibility of contamination: Category A Category B Category C meat prepared for no less than two hours at 80 degrees; meat prepared at 75 degrees; meat boiled and smoked and prepared to make sausages according to special technological standards and at certain temperatures; and trade unlimited.
Category D -
Currently, the Buryatmyasprom Company holds the majority of the Mongolian meat quota set by Russia. Its monopsonistic position allows Buryatmyasprom to impose its own conditions and purchase meat at prices below international levels. Other licensed companies which are interested in importing meat from Mongolia are forced to buy within-the-quota via auction. Furthermore, the tariff quota is subject to internal territorial limitation: the Russian Federation prohibits the export of Mongolian livestock products west of the Ural Mountains. 1.1.2 Veterinary and sanitary control The standards set for imported meat by the Russian Federation Veterinary Control and
73
Additionally, the Russian Veterinary organization has prohibited mutton imports since 2002 on the grounds of disease control. Mongolia considers this long-term restriction unreasonable. Furthermore, classification in the C category requires specialized preparation which is not favorable to the processing of sheep and goat meat. Establishing boundaries of pastures to prevent the spread of livestock disease would ensure that Russian sanitary standards are met. However, the Russian Veterinary Organization applies a nationwide prohibition. These measures are being challenged in the negotiations of Russias terms of accession to the WTO.
2.2 OTHER MARKETS
USDA (2008).
For beef imports, the United States in-quota rate is US$0.04 per kilo; the over-quota rate is 26.4 percent ad valorem. In the EU the in-quota rates are combined (specific and ad valorem): in some
49
cases, 20 percent ad valorem within quotas, and 12.8 percent and 176 per 100kg over quotas. Some major beef exporters such as Australia and Canada have signed FTAs with the US, which provide for an elimination of both in-quota and over-quota rates. However, in dealing with tariff quota systems, the best approach for Mongolia would be to seek bilateral quotas at low rates for specialty meats. Customs duties in other meat importing countries range from over 30 percent in Japan and Korea, 14 percent in China to low rates of under 5 percent in Saudi Arabia and zero percent in Singapore and Malaysia. The export of mutton to the Middle East faces a few challenges, including having to meet the halal slaughtering requirements. Recently, Mongolia has been exploring the possibility of exporting 50,000 tons meat to the Ukraine, where tariffs on meat have declined dramatically as a result of WTO Accession. Market access conditions for horsemeat are slightly better. Russia applies a tariff of 18 percent, Japan grants duty-free access, and the EU applies a low tariff of three percent. It is the SPS regulations on meat and meat products, however, which are becoming increasingly demanding in developed countries. Meat is one of the sectors subject to the highest number of quality controls inside the EU for health reasons. Mongolian products currently do not meet European hygiene and sanitary requirements. It does not yet possess the necessary technology and organization to trace the ancestry of the animal, to prove that the residue levels are acceptable, and to confirm that the animal has been slaughtered and the meat processed in hygienic conditions.
Table 2.3 Global production and trade of meat
2005
Million tons Production Beef Mutton Trade Beef Mutton World average (kg/year) Developed countries (kg/year) Developing countries (kg/ year) FAO price index (19982000=100)
Trends in the production and trade of meat in the world market are promising. Liberalization of trade, improved production efficiency, economic development and population growth are the key drivers of the products growth. According to a FAO survey, the meat price index rose from 112 in March 2006 to 123 in August 2007, reflecting increases in prices of beef, pork and poultry meat in the world market. In 2007, overall meat production increased by 3 million tons to reach 278 million tons. Beef production grew 1.3 percent from 2006 to reach 67 million tons, out of which 37.5 million tons were produced in developing countries. In 2007, trade of beef reached 7.0 million tons, an increase of 2.5 percent over 2006. Sheep and goat meat production, too, grew 2 percent to reach 13.9 million tons in 2007, even though its exports slipped by 840,000 tons.74
3. TRADE MEASURES TO BOOST MEAT EXPORTS
3.1 UPGRADING QUALITY AND SAFETY STANDARDS Mongolian meat has a long way to go before becoming competitive in export markets. In the least, the sanitary system needs to ensure that the norms set by WHO/FAO, and the principles of HACCP (Hazard Analysis and Critical Control Point) are met. The first step includes the use of identification tags and the creation of laboratories. Though herders are in need of services such as veterinarian services, they cannot afford to pay for privatized care; thus the professionals become unemployed. After privatization of public services, more than 20,000 professional women, including veterinarians lost their jobs. Public investment in improvement of veterinary services remains crucial.75 To build meat processing factories that match international standards, meat processing machinery and equipment could be exempted from import duties, and joint ventures encouraged.
2006 275.7 66.2 13.6 21.1 6.8 0.8 40.0 59.0 31.6 115
2007 278.3 67.1 13.8 21.4 7.0 0.8 40.0 59.3 31.6 120
% Change 06-07 1.0 1.3 2.1 1.5 2.5 -0.3 0.0 -0.1
269.3 64.5 12.9 20.6 6.6 0.8 39.5 58.6 31.0 121
Average consumer meat demand per person
74
Report on 2008 world market trends of main export and import commodities, MNCCI, 2008. 75 Burn and Oidov (2001).
50
BOX 2.2 STAGES OF HACCP
HACCP is based on the principle that production of safe, wholesome foods stems from a thorough risk analysis. There are four building blocks that govern the way a factory is operated. Hygienic design dictates the design of the factory infrastructure and includes the factory site and buildings, the process lines and equipment and the operatives. Hygienic practices maintain the integrity of the facility and include cleaning and disinfection, maintenance, personal hygiene and good manufacturing practices (GMPs). Process development enables the design of safe, validated processes whilst process control, based on quality systems, ensures that each product in each batch every day meets the process requirements. Heres a sequence to be followed: Obtain management commitmentDefine terms of referenceSelect the teamDescribe the productIdentify intended useDefine production processIdentify and analyze potential hazardsSpecify control measuresDetermine CCPsEstablish critical limitsEstablish monitoring systemEstablish corrective action planVerify and review.
Source: www.gi-mongolia.com
management of grazing fields and enhanced hygienic conditions of cattle (this can obviously find synergies with the EU project for veterinary care of Mongolian cattle). Transport and transit costs remain a major impediment on the supply chain. The lack of refrigeration facilities means that much of the transportation takes place in winter. Transportation to the slaughtering house encounters problems such as re-hydratation and feeding during truck transport. They also need to be slaughtered within 24 hours of arrival. 3.2 BRANDING MONGOLIAN MEAT AS A GEOGRAPHICAL INDICATION The use of Geographical Indications (GIs) is a means of upgrading the reputation of Mongolian meat products building upon the unique traditions and geographical and cultural characteristics of the country. The image of Mongolian meat as a natural and ecologically clean can be enhanced by the use of geographical indications. In consultation with Mongolian meat producers and scientists, three different agro-ecological zones were proposed as a first basis for differentiation: Gobi, Mountain, and Steppes. The exact definition of these territories was established by Mongolian Meat Association and the National Geographical Institute. The Mongolian Meat Association (MMA) considers that the following activities are needed to institutionalize and foster GIs: By the National Government - Develop a legal framework on use and protection of pastoral lands (draft law developed); - Codify each underway); animal (preparation work
The legal and institutional framework for the current SPS control should be streamlined and controls that have no value to exporters eliminated. The Mongolian National Centre for Standardization and Metrology (MNCSM) acts as the WTO enquiry point and coordinates the implementation of the WTO Agreement on Technical Barriers to Trade (SPS). Mongolias current institutional capacity to ensure that exports meet Sanitary and Phyto-sanitary standards (SPS) is very limited, and at times, characterized by a duplication of mandates across agencies. On food, for instance, Mongolia has 605 standards, of which only half conform to international standards. Other steps would include the establishment of producers organizations for product certification and the promotion of reasonable
- Improve livestock products sales system and set up a legal framework for stock exchange (draft law has been developed and being discussed at Government level); and - Establish or assign a particular organization in charge of production, control, marketing support and export of GI products. By the province, soums and local governments - Conserve the natural environment, and protect pastoral lands from chemical and other forms of pollution;
51
- Set up a system of veterinary and other preventive services on a permanent basis and regularly record bookkeeping of veterinary passport for every herder household and farmer; - Cooperate with the MMA on development of technical specifications for GI registered products and control system; and - Raise herders awareness on GI products and collective production of pasture meat. By herders and farmers - Establish cooperatives and organizations to conduct GI meat production and enable proper use of pastoral lands; - Improve information and knowledge of herders on how to produce GI product, to negotiate a contract with meat processing plants and companies on supply of such products on annual basis; - Bear collective responsibility of quality of products; and - Maintain bookkeeping on every animal origin, injections and other veterinary services. By meat processing plants and companies - Produce registered GI meat only if meatprocessing plants are certified by the Ministry of Food and Agriculture and Professional Inspection Agency; - Label and pack GI products according to the technical specification indicated in the contract; and - Maintain and keep database on purchased animals and their origin and provide with the special conditions of separate storage and sales of such products.
BOX 2.3 WHAT ARE GEOGRAPHICAL INDICATIONS?
The TRIPS Agreement defines Geographical Indications as indications which identify a good as originating in the territory of a Member, or region in that territory, where a given quality, reputation or other characteristic of the good is essentially attributable to its geographic origin. This definition draws on two established concepts: Indication of Source (IS) and Appellation of Origin (AO). IS refers generally to any expression or sign used to indicate that a product originates in a country, or a specific place (for example, Made in Mongolia), while AO refers to the geographical name of a country or locality (for example, Champagne). All AOs are clearly IS, but the converse is not necessarily true. GIs differ from other forms of IP like patents, which are rewards for new creations. GIs are not newly created, but only recognized at a point in time. They are thus an unconventional IP, with huge development implications, for unlike other forms of IP (which are created and owned by individuals or corporations), GIs are owned publicly (by the state, or legally recognized agencies created by communities). There are thousands of producers around the world whose livelihoods depend on the reputation of their GI products.76 To date, the use of GIs has been largely confined to European countries. However, developing countries, particularly in Asia are becoming aware of the role that can be played by GIs in protecting their traditional knowledge and reputations. This awareness has, in part, been provoked by the piracy of geographical and traditional names by others. To date, Mongolia has identified and recognized 13 GIs in its territory.77
Source: UNDP (2006)
77
It is common for GIs to consist of the name of the place of origin of the goods. Most GIs refer to drinks, meat, cheese, fruits, vegetables, and sometimes clothing and crafts. Examples of GIs include Champagne (France), Roncal Cheese (Spain), Parma Ham (Italy), Napa Valley wines, Scotch whisky. Examples of Asian GIs that may not necessarily be registered in their country of origin are: Basmati rice; Phu Quoc fish sauce; Long Jin tea; Himalayan waters; Alphonso mangoes; Bhutanese red rice; Jasmine (Hom Mali) rice; Thai silk; Lao Agar fragrance; and Sumatra Mandhelling coffee, etc.
76
Yak dairy products (Arkhangain sarlagiin suu, tsagaan idee); Saikhan distilled mares milk (Saikhanii airag); Uvs seabuckthorne (Uvsiin chatsargana) ; Shaamar honey (Shaamariin zogiin bal); Gobi Camel wool (Goviin temeenii noos); Red garlic from Zavkhan aimag (Zavkhanii ulaan xalist sarmis); Ar Janchivlan mineral water (Arjanchivlan rashaan); Mongolian pastural horse meat (Mongoliin belcheeriin aduunii makh); Mongolian mountain beef (Mongoliin khangain ukhriin makh); Mongolian plain steppe beef (Mongoliin tal kheeriin ukhriin makh); Mongolian plain steppe mutton (Mongoliin tal kheeriin khoninii makh); Janchivlan mineral water (Janchivlangiin rashaan); and Undur-Ulaan dairy products (Undur-Ulaanii suu, suun buteegdekhuun).
52
At present, Mongolia has a Law on Trademark and Geographical Indications. A regulation for its implementation provides for a system of registration and protection of Mongolian GIs in foreign markets under the legal framework set by the WTO Agreement on TRIPS. The Intellectual Property Office of Mongolia (IPOM) has issued a regulation for the implementation of Articles 1618 of the Mongolian Law providing for a system of registration for GIs. In November 2005, a Joint Declaration was signed by the Ministry of Trade and Industry (MIT), Intellectual Property Office of Mongolia (IPOM), Ministry of Food and Agriculture (MFA) and Mongolian National Chamber of Commerce and Industry (MNCCI) by which they commit themselves to use and foster GIs as a development tool. The Geographical Indication National Centre was established under the Mongolian National Chamber of Commerce and Industry (MNCCI) to provide with legal advice and to introduce activities of internationally accredited certification organizations. BOX 2.4 SOUM CENTRES The 2007 Mongolia HDR stressed the importance of a reinvigoration of the soum centres as a means of stimulating rural development. The revitalization of the agricultural sector and orienting it to compete in national and international markets could entail just such a reinvigoration. The soums could evolve into dynamic support centres for trading activities and for the provision of the necessary technical, financial and social services. The various actions to upgrade the productivity of the wheat, dairy, meat and cashmere could be largely supplied from the soum centres. These would include such activities as veterinary services, dairy cooling collection and processing, meat inspection and processing, livestock exchange markets, and seed centres. Herders could be empowered through their organization into cooperatives; soum centres could have facilities for providing step-by-step training courses to upgrade their business and economic knowledge, particularly for women whose access to training of herding skills and techniques needs to be enhanced.
The series of operation required to ensure quality of meat along the supply chain could be administered from the soum centres, which could provide weighing and storage facilities, laboratories and offices for technical assistance and advice to herders. The volume of financial operations being carried out in the soum centres has been increasing; they could provide longterm, low-interest-rate loans with flexible mechanism on collateral and re-payment interest rates. Tax incentives could be given to commercial banks and non-banking institutions that introduce such services. The local administrations could support employment of poorer people, particularly youths, having no livestock of their own. Support could be provided to womens partnerships to develop brand handicraft items. Various services in support of the tourist industry, particularly Community Based Tourism, which coordinates closely with herders, could be supplied from soum centres. The soum centres could also become a hub for social services to facilitate access to health, education and information. The tendency for herder children to drop out of school to help their families is expected to increase with the introduction of more intensive livestock production. It is thus important to arrange for non-official, home-based education services, cover kindergarten-age children in Ger kindergarten preschool education facilities and improve outreach of mobile information and library services to meet herders and farmers households needs. A family doctor system should be introduced.
Source: Mongolia HDR (2007).
53
In general, Mongolia is characterized by unique and relatively homogeneous geographical features which grant distinctiveness to a number of its traditional products. In OECD countries, consumers preferences are changing in favour of greener and organic products with a willingness to pay a premium for products known to be GIs. With secure price incentives, GIs could play a role in developing uniform quality standards, creating new jobs in aimags through new ventures or foreign partnerships, protecting against abuse of name and origin, spurring tourism, and generally being a positive force for rural development. There are ongoing initiatives78 in this regard. Thirteen products have been registered as GIs according to Mongolian law of which four GIs of meats specifically registered by the Mongolian Meat Association: Mongolian pasture horse meat; Mongolian Mountain beef meat; Mongolian steppe beef meat; Mongolian Gobi mutton meat.79 Just having a regime of GI protection, however, is no guarantee that premium prices will flow automatically. As UNDP (2006) notes, it takes a lot of time, patience, savvy marketing and quality control to create a valuable GI. But all successful efforts begin by assessing better the needs of local producers, how they are organized, what kind of support they receive on sanitation and quality control, certification, and supportive legal framework.
78 There are GI projects aimed at enhancing practical knowhow on making the most of GIs, and fostering partnerships with the Europeans. The project Enhance Mongolian exports through Geographical Indications and GSP+ is run by the International Trade and Market Research Centre (ITMRC), Mongolian Ministry of Industry and Trade (MIT), with the support of the Mongolian National Chamber of Commerce and Industry (MNCCI), the Intellectual Property Office of Mongolia (IPOM). Another project, Support to Mongolias agriculture associations in the sustainable development of Geographical Indications is funded under the ECs Asia Invest. In identifying potential GIs and improving the branding of organic agricultural products, an initiative One Village One Product is also ongoing at the initiative of the Enterprise Mongolia project jointly implemented by the Ministry of Industry and Trade of Mongolia and UNDP. 79 Berenguer (2006).
54
CHAPTER
DIVERSIFYING SOURCES OF HERDERS INCOME:

The Case of Cashmere
55
DIVERSIFYING SOURCES OF HERDERS INCOME
1. CASHMERE IN THE MONGOLIAN ECONOMY Cashmere is an important source of herders livelihood: as Mongolias third most valuable export after gold and copper, it can potentially play a key role in reducing rural poverty. The countrys annual production of about 3,000 to 5,500 tons is second only to China. Between 2005 and 2007, Mongolian receipts from cashmere exports doubled to US$184 million. Broadly, there are three socio-economic classes of herders who produce cashmere: in 2002, the poor owned 100 or fewer heads of livestock per household on average; a second tier, considered middle level, owned 100 to 500 livestock per household; and every two in 100 herders could be considered wealthy with at least 500 livestock per household, including around 200 goats on average. The average gross income from cashmere sale per households ranged from US$125 to US$1,647.80 In 2007, women constituted nearly half of the 360,000 herders working in animal husbandry. Their involvement is always in addition to their unpaid household chores. A National Statistics Office survey showed that women spend twice as much time per week for non-economic activities than men.81 Herder women tend to concentrate on the preparatory stages such as cashmere moulting, selecting breed, de-hairing (cutting long fleeces), and packaging. Herder men are more active in trading. Although women play a crucial role in the value-adding process, because men typically deal with the final transactions involving money, traditional gender stereotypes are perpetuated, unfairly affecting womens bargaining power. This could be countered by providing women with training required to participate more actively in the marketing of livestock. Furthermore, the changes in herd composition from single species to mixed species to maximize self-sufficiency and minimize risk have increased the work for women and children (especially boys) as they have taken
World Bank (2003). See UNIFEM/UNDP (2002); UNIFEM and Gender Center for Sustainable Development, Cashmere Value Chain: Participation of Women and Men, 2004. Ninety households from Baatsagaan, Buutsagaan, and Bumbugur soums of Bayankhongor aimag, which is the largest raw cashmere producer in the western region of Mongolia, participated in surveys and primary assessment as part of a study that covered all stages of cashmere value chain. Two-thirds of the families studied did not have any cattle and half of all families did not have any horse or camel.
81 80
some additional work managing the increased species of livestock. Womens productive and reproductive work responsibilities remain theirs despite an increase in overall workload; as a result, womens work has intensified.82 There is built-in vulnerability in the cashmere sector because of volatile prices. In the late 1990s, the export price of de-haired cashmere averaged around US$120 per kg, but this dropped to US$48.2 per kg in 2002. Combined with the losses incurred during the dzuds, fluctuations in price adversely affect the livelihoods of herders. This was reflected in Mongolias world market share dropping from 5.1 percent in 1996 to 2.7 percent in 2001. The Mongolian cashmere processing industry was set up in the 1970s. The most prominent installation has been the Gobi Factory;83 today there are around 11 full-scale cashmere factories. In 2008, these and 20 other primary raw cashmere processors were involved in MITs annual inspection. Overall, however, the total installed capacity is under-utilized as the domestic supply of raw cashmere is inadequate. Table 3.2 shows that there is excess capacity in scouring and de-hairing processors. In contrast, according to sheep forage unit-based analysis, the 6000 tons of total raw cashmere produced from 18.3 million goats in 2007 may well have approached the limits of production based on traditional pastoralism. This presents a painful human development dilemma in Mongolia of ensuring economic viability of the sector without too much strain on the environment.
82
Burn and Oidov (2001). Gobi Company can process 1000 tons of raw goat cashmere, 200 tons of camel wool, 60 tons of tops, 145-150 tons of yarn, 400,000 to 420,000 pieces of knitwear, and 120,000-150,000 meters of blankets. In December 2006, the Mongolian states 73.4 percent equity interest and 5.7 million common shares of Gobi Cashmere were privatized. The remaining 26.5 percent is privately owned by 19,105 shareholders and traded on the Mongolian Stock Exchange.
83
56
Table 3.1 Cashmere export volume and share

1993 1996 Total export of cashmere and cashmere products (Million $USD) Total export of de-haired (HS6: 5105.31.10-Fine animal hair, carded/combed, of Kashmir (cashmere) goats) cashmere (Million $USD) 1999 2002 2005 2007
33.5
71.0
70.3
45.2
93.8
184
relative decline of demand for high-end products; fragmentation of production; and dominance of brand names in world market. In 1996, the top five importers of raw cashmere accounted for 55 percent of the market. By 2000, they had accounted for over 75 percent, with Italy and the UK emerging as the biggest players.
Table 3.2 Total cashmere processing capacity
Scouring Dehairing Spinning Knitting (000 pcs.) Weaving (000 meters)
9.2
51.6
45.9
30.5
52.7
100.3
Total export of dehaired (HS6: 5105.31.10 -Fine ani250.7 mal hair, carded/combed, of Kashmir (cashmere) goats) cashmere(Tons) Share of total export of cashmere and cashmere products in total export of Mongolia (%)
720
1168.3 632.3 919.2 1581.1
Total processing capacity (ton) Total cashmere resource available in Mongolia (ton) Surplus of processing capacity (%)
24,900
4,051
1,866
1,995
163
9.20 16.80 15.50
8.60
4.9
5.1
6,000
3,000
Source: G. Doyod; NSO (2007); General Customs Office of Mongolia (2005, 2007)
83.1
62.5
Source: EPRC-USAID (2005); updates by authors.
2. SALIENT ISSUES IN INTERNATIONAL COMPETITION 2.1 COMPETITION IN EXPORT MARKETS Mongolias main competitors for raw cashmere in world exports are China, Iran and Afghanistan. Others like Pakistan, India, New Zealand, Austrialia, Kazakhstan, Kyrgyzstan and Tajikistan also have small production schemes. While the demand in the mid-to-low quality end of the cashmere market is expanding, every category under the Standard International Trade Classification (SITC) classification 268 of wool and other animal hair has been experiencing a downward trend in recent years. Thanks to sustained demand from China, however, Mongolian exports of wool and animal hair (SITC 268) have appeared stable in recent years ranging between US$160 million and US$174 million in 2006-07.84 Raw cashmere is often produced in one country, processed in several others and sold to consumers in third countries. The global cashmere industry has experienced the same trends as the overall garment industry: falling costs and prices overall;
84 Note that cashmere-processing companies in Mongolia utilized only 50 to 70 percent of their processing capacity in 2005 and Mongolian de-haired cashmere was exported to China, spun there and imported back into Mongolia. Therefore gross export data needs to be interpreted by net export in order to analyze overall value addition. For example, in 2004, gross export of Mongolian cashmere and cashmere products worth approximately US$80 million was converted into net exports worth US$57 million (USAID-EPRC 2005).
Figure 3.1
Source: ITC Trademap
China is the largest producer of cashmere, and developments there pose both a shortrun challenge and a long-run opportunity for Mongolia. After Chinas entry into the WTO in 2001, it has been the epicenter of the entire industrys consolidation through a series of mergers and acquisitions.85 In contrast to Mongolias nomadic style of livestock herding, China has moved towards a more intensive form of cashmere goat herding. In the province of Inner Mongolia, some of the worlds major importers have channeled capital and technology. The application of new technologies such as production of the 80-90 count high worsted products and nano-technology increased the international competitiveness of Chinese worsted cashmere sweaters.86
85 86
World Bank (2003). http://www.agriffchina.com/e-agriffchina/memberdetail.jsp?id=43650
57
Statistics from the General Administration of Customs indicate that China exported US$1.2 billion worth of cashmere in 2004.87 Rising demand has led to pastoralists in China increasing their goat flocks relative to other livestock species. There is no reason why this global supply chain, built around a network of contracts linking vertical and horizontal integration cannot involve Mongolian manufacturers and herders to a greater extent. 2.2 ILLICIT TRADE AND SMUGGLING Mongolian cashmere is sought by Chinese producers for the longer length of its fibre, resulting in a chronic shortage of raw cashmere for domestic processors. This situation prompted the Mongolian government to impose an export embargo in the 1990s which was later converted to an export tax (as a result of WTO membership). However, the export tax has not had the desired effect as there has been massive smuggling of raw cashmere out of the country. Enforcement of this regulation has been weak as traders pay bribes to custom officials to avoid the tax and other charges, as well as related documentation required for the export of raw cashmere. The infrastructure linking herders with manufacturers is under-developed, and the long frontier with China makes customs control difficult. As Chinese processors value the longer fibred Mongolian cashmere, both countries can gain by cooperating to combat smuggling and encouraging the flow of exports through legal channels.
Table 3.3 World exporters and importers of fine animal hair, combed and carded in 2006
Exported value 2006, US$000 310,040 Trade balance 2006 in US$000 274,114
Exporters
Importers Italy (63.7%), United Kingdom (11.8%), Japan (11.7%), Republic of Korea (5.2%), Hong Kong (SAR) (2.4%), Germany (2.3%), India (1%) China (44.4%), Italy (34.6%), United Kingdom (7.7%), Switzerland (5.6%), Japan (4.8%), United States of America (2.2%) Italy (63.3%), China (18.9%), United Kingdom (12.9%), Germany (4.9%) China (100%) Pakistan (100%) China, Hong Kong (SARC), Republic of Korea, United Arab Emirates. US (50%)* China, Hong Kong (SARC), Italy, Japan, Republic of Korea, United Arab Emirates, United Kingdom, Peru China, Hong Kong (SARC), Italy, Japan, Republic of Korea, United Arab Emirates, United Kingdom, Thailand
China
Mongolia Islamic Republic of Iran Kyrgyzstan
83,012
83,012
5,525 80
5,525 80 6 -1,881 -803 -43
Afghanistan 14 India Australia New Zealand Pakistan 4 2
-55
Source: http://www.macmap.org; updates by authors.
2.3 ACCESS TO CREDIT AND LABOUR The cashmere sector is negatively affected by the cost of credit in Mongolia, which is considerably higher than in China. A medium sized, fullyintegrated processor in Mongolia is estimated to pay well over 30 percent on average in annual interest rate, whereas this is less than 10 percent in China. Although the corporate tax was reduced from 35 percent to 30 percent in January 2007, high interest rates substantially reduce the competitive margins of Mongolian manufacturers. In China, the average cost of converting raw cashmere into one kilogram of finished product is between US$8 and US$12. In Mongolia, this cost is around US$24. In addition to problems of credit, the nature of the labour market plays a role as well. In China, labour is abundant, permitting a flexible mode of casual employment with workers retained on a payroll of approximately US$20 per month during the procurement season. They are let go when not in demand. In Mongolia, qualified labour (knitters and sorters) is harder to find, wages are higher, and labour laws are stricter when it comes to over-time compensation.88
87
Jingjing (2005).
88
World Bank (2003)
58
With both labour and capital costs higher than in China, Mongolian processors are doubly disadvantaged. In one survey, only 23 percent of the processing enterprises indicated that they generally have sufficient financial resources to buy cashmere; nearly half said they face financing problems periodically, and 31 percent have frequent or constant financial constraints. These restraints impede the ability of processing enterprises to compete with Chinese traders for raw cashmere supplies. The herders, on the other hand, appear to benefit from the high cash payments offered by Chinese traders, even if they are not always fairly compensated for quality. Furthermore, commercial banks in Mongolia have been reluctant to accept herd sizes of less than 100 as collateral due to risks associated with extreme weather conditions. This is changing, however. Between 2004 and 2006, the share of loans issued by commercial banks to borrowers outside the capital city increased from around 15 percent to nearly 23 percent. Three commercial banks in particularKhan, Xac and the Mongol Posthave contributed to this outreach.89 Credit is instrumental in allowing productive herding enterprises to expand, diversify household income and reduce vulnerability to future shocks. However, in the absence of complementary human development programs, the money could be channelled into consumption instead of investment. According to a survey, one-third of the herder households used the credit they received to expand their livestock size to instead pay student fees of their children.90 The reintroduction of the system of free education would thus contribute to increasing the productivity of herders.
3. THE STATE OF THE DOMESTIC CASHMERE MARKET 3.1 DECLINE IN QUALITY A major threat to the Mongolian cashmere industry and the ability of herders to increase their incomes is the decline in quality. A variety of interrelated factors, including the increase in and modification of the composition of the herds, neglect of animal husbandry techniques and market imperfections that discourage emphasis on quality production have contributed to this decline. The trade-off between quality and quantity is not fully recognized: the 15 percent price differential offered by Mongolian processors for fine cashmere with low micron diameter does not compensate the herders for the consequent 20-25 percent reduction in weight. This acts as a disincentive to herders efforts to reduce the diameter of their fibres. Recently, domestic processors have begun to offer higher premium for fine cashmere but this opportunity is limited to urban centres. Despite the thickness of Mongolian cashmere, its advantage lies in its length. The longer fibre length is crucial in making knitting and spinning efficient. For better results, Chinese and foreign invested manufacturers typically mix Mongolian fine cashmere with shorter length Chinese fibre. In contrast, Mongolian domestic processing industries lack spinning capacity and have to import yarn. The issue of deteriorating product quality can be best corrected by empowering the herders. The majority of herders at present are not even members of legally recognized cooperatives, a fact which blocks their social rights and their ability to compete.
89 Khan Bank has 466 branches in all soums and the capital city. It provided an average loan of US$1304 in 2007. Its total loan portfolio reached US$421 million in 2007. XacBank has 68 branches and extension units in 21 aimags and serves half (165) of the total soums in Mongolia. Its loan portfolio reached US$88.7 million in 2007, of which 70 percent was for rural customers. The Mongol Post bank has 230 units located in all soums, districts, and the capital city. In 2007, its total loan amounted to US$144.5 million; Khan Banks Annual Report (2007); Mongol Post Banks Annual Report (2007). Micro-finance Strategy for Pastoral Risk Management, FAO/TCP project on management of drought and dzud (TCP/MON/0066). 90 Herder Group Study covered a total of 14 herder groups including 191 households from Khovd, Uvs, Omno-Gobi, Khentii, and Arkhangai provinces.
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BOX 3.1 EMPOWERING HERDERS TO IMPROVE QUALITY AND PRODUCTIVITY
Raw cashmere constitutes 30 to 50 percent of income in an average herder household. This dominance is most pronounced in the Gobi regions. Until recently, before initiatives were taken to grant legal status to collectives or herder groups, herders operated in small, isolated, ill-informed economic units with little bargaining power. Herders often became indebted to traders during the national holiday of Tsagaan Sar (White Month) and school seasons, and were forced to sell their products to the traders at prices they offered. In return, they accepted barter of items like rice, tea, flour and tobacco. Herders are handicapped by their limited knowledge of prevailing market prices, and face restricted mobility due to increased cost of gasoline. They have no choice but to sell their raw cashmere at prices well below prevailing prices in the capital city. These sales coincide with the windy season when cashmere is more likely to be contaminated with dirt and, scruff, and almost no differential premium is paid between low quality coarse cashmere and fine cashmere. Traders are also known to cheat unsuspecting herders by misquoting daily market prices, displaying wrong numbers on their calculators or using illegal weighing scales. Unsurprisingly, much of the surplus goes to middlemen.
Source: Livestock Products Marketing Project document, 2001.
An important factor contributing to the increased micron diameter is the cross breeding of the native breed of Govi-Gurvan-Saikhan and UuliinBor with the rest of the goat herds to increase cashmere yield. This has been possible because of the decline in breeding standards, since the discontinuation of the relatively sophisticated animal breeding program during the socialist era. Local breeds of Mongol Goats, Ulgii, Grey, Erchim, Bayandelger and Zalaa-Jinstiin-Tsagaan normally produce lower quality output compared to Gobi-Gurvan-Saikhan and Uuliin Bor; the latter yield high-quality cashmere with lower micron diameter. It is not the case, of course, that all cashmere has to have fine micron diameter. With suitable technology, cashmere from any kind of breed can find suitable application. For instance, although Gobi-Gurvan-Saikhan and UuliinBor breeds cashmere micron is thicker than Mongolian local breeds, they are being utilized in the US and Italy for luxury garments. Generally, with cross-breeding getting out of professional supervision, the average diameter of cashmere has become more coarse and thick.92 At the same time, valuable breeds have become extinct. Bayan-Delger, one of the finest cashmere breeds, vanished because herders in its area of origin in Sukhbaatar aimag had to move to Khentii and Dorno-Gobi provinces because of extreme desertification and drought. This highlights not only the importance of state supervision and support to nurture breeding techniques that result in reduced micron thickness while maintaining high yields, but also broader monitoring of breed type and growth. 3.2 ROLE OF MIDDLE-AGENTS Middlemen in the cashmere market exacerbate the decline in quality by mixing high and low quality raw cashmere and by misleading herders by not using standardized measures. Some efforts have been made to improve quality by establishing a few central laboratories at RIAH and the Eermel factories, however, these efforts
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Table 3.4 Comparing Mongolian and Chinese Cashmere

Origin Mongolian cashmere Chinese cashmere Average size of micron 15.5-16.0 13.5-14.5 Length Color
38-43 mm Pale, dark 33-35 mm White, pale
Table 3.5 Indicator of Fibre quality91

Category 1 2 3 4 Superior I II III Average micron of cashmere 13.0015.5 15.51- 16.5 16.51-17.5 17.51-19.0 Amount of coarse fibre in raw cashmere Up to 20 percent Up to 20 percent 20 to 30 percent 30 to 60 percent
91 Mongolia does not categorize its cashmere according to world market standards, which divides cashmere varieties into two categories: cashmere and cashgora. Mongolian cashmere is categorized in grades and classes.
An example is that of Gobi-Gurvan-Saikhan, which was developed by crossbreeding with the Don breed of former Soviet Union. This was then crossbred with local goats of Dund-Gobi and Bayan-Khongor aimags in response to herders interest to harvest a higher yield of cashmere. Uuliin Bor was developed by crossbreeding local goats with those from the Altai Mountains of the former Soviet Union, which soon crossbred with local goats of Uvs, Knovd, and Gobi-Altai aimags, without proper attention paid to its coarse cashmere fibre.
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do not reach herders in rural areas. Usually raw cashmere is bought by Chinese traders in small amounts with the middlemen or changers mediating mostly at Emeelt and Nalaikh markets and at border points. The Chinese traders consistently pay higher prices than those that are offered by domestic processors. If the current domestic market situation continues, whereby no differentiated prices are offered in relation to the segregation of quality cashmere, the herders ability to obtain a premium price for selling fine cashmere would be suppressed. This inefficiency could ultimately push the quality threshold of average width of Mongolian raw cashmere to 17.5 micron, down to the level of that produced in Afghanistan and Iran. This contrasts with practices in certain other developing countries, where raw cashmere collectors mediating between herders and processing industries of high end markets offer US$20 to US$40 (per one kg) price difference for thick fibre with 17.5 micron and high quality cashmere with 13-15 micron. In the absence of strategic and financial support to improving premium quality, local herders income from cashmere sector will inevitably decline. BOX 3.2 HERD SIZE AND DECLINE IN QUALITY OF CASHMERE The poor herder households who lost their livestock during the dzuds of 2000-02, sought to regenerate their lost source of livelihood by borrowing goats from richer herders. Given their experience during the dzuds, herders strove to increase their goat herds to the maximum, by not culling male goats and older female goats. The threefold increase in the number of cashmere goats during the 1990s led to a decline in the quality of fine cashmere. As the dzuds and droughts killed many yearlings, the thicker diameter adult goat hair, particularly the coarse hair of adult buck accounted for an increasingly larger proportion of the cashmere harvest, resulting in an overall decline in the quality of cashmere on the market. Furthermore, due to their experience with extreme weather in recent years herders now hesitate to comb and depilate cashmere from their goats at the
usual seasonal periodearly spring, and in particular, early April. The reason is that sudden blizzards and heavy wind starts to occur during this period and goats are unlikely to survive harsh weather conditions and cold without their fine cashmere intact in their body. The delay in combing results in an increased amount of hair and fibrous material in the composition of raw (greasy) cashmere is affecting overall quality. According to the survey conducted for A Gender Lens on the Rural Map of Mongolia: Data for Policy, 43.7 percent of the livestock is owned by 12.5 percent of households, while 44 percent of households own 9.9 percent of the livestock.
3.3 INCOMPLETE INFORMATION AND MISSING MARKETS From a human development perspective, it is essential that the processors purchase raw cashmere directly from herders to maximize any surplus that may be gained from trade. This requires a more efficient and transparent mechanism that minimizes the discretion of middlemen. One solution is to set up a commodity exchange for cashmere, in which organized cooperatives of herders can offer their cashmere for sale in exchange for fairly negotiated prices. Local commodity trading markets could remove the distortions resulting from information asymmetry by getting rid of exploitative informal networks that are inefficient because of the use of barter. In general, herders capacity to use market information for profitable business needs to be enhanced. Existing initiatives such as the Agricultural Market Watchdog,
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spearheaded by MercyCorps, incorporates cellular phone-based information sharing and web-based database networks connecting market surveyors of raw material prices in all 21 aimags. These should be strengthened and consolidated. BOX 3.3 HOW WOULD A COMMODITY EXCHANGE FOR CASHMERE WORK? Privately run co-operatives would be established in geographically suitable soums. They could initiate direct contracts with a single processor for delivery of a single or multiple products (cashmere, or hides and skins). The herder groups will be responsible for assuring quality by sorting, grading, cleaning and packaging cashmere. The co-op would then guarantee timely delivery of the quality and quantity of products specified in the contract. Herder groups would be trained on the importance of honouring a contract and to implement a contingency plan in case of shortfalls. In instances of culling and destocking, the co-op could establish a retail market outlet in an urban centre such as Ulaanbaatar, Darkhan or Erdenet. Responsibility for monitoring should be assigned to the best negotiators, skilled at calculations and record keeping. Co-ops would transport raw cashmere to urban centres for auction, and revenues would be redistributed to the herders. The co-ops would also organize training and advocacy sessions on the long-term benefits of direct marketing and collaboration between processors and herders. Commodity Exchange representatives may organize their own small-scale private auctions when they have truly superior products to offer such as pure white fine cashmere, or superior breeding sires.
For the commodity market to work effectively, it should seek to fulfill a key set of objectives: Manage agricultural risks. Building on the result of pilot projects like the Index-based livestock insurance93 informed decision making by herders could be enhanced to anticipate and mitigate risks. Information on livestock forage quality and quantity including portable NIRS (Near Infrared Reflectance Spectroscopy) technology would allow pastoralists to destock their animals appropriately, and respond to emerging drought conditions sooner. Develop fodder and forage. Cooperatives should become more engaged in establishing a supply network of forage, fodder and veterinary services. There is a need to supply goat herds with supplemental feed during winter and spring and ensure timely combing. Feed is currently transported from Uvs, Domod and Ulaanbaatar, although there are local haymakers in the aimags. Establish cooperatives and improve public-private partnerships. There is a need for innovative publicprivate partnerships (PPP) to strengthen livestock health and veterinary services, rehabilitate wells and overgrazed pasturelands, among others. PPP is a viable way to leverage the combined strengths of government agencies, and nonstate actors. For example, an average cashmere output of one Mongolian goat is around 300 grams, whereas Chinese Liaoning breed or its Inner Mongolian goats produce around 520 grams on average.94 This was possible because of a concerted cooperation involving the Chinese Ministry of Agriculture, local governments, scientists and grassroots professionals. There was a strong link forged between the Chinese cashmere sector and foreign manufacturers such as Italys Carlo Barbera and Giovanni Schneider. This success story from across the border indicates that a sustainable base from which to rebuild Mongolias debilitated breeders technique and technological prerequisites can only be built with a multi-pronged approach to public-private cooperation, domestic and foreign.
93
Implemented by MOF and WB, and Agricultural Risk Management Fund established by Mercy Corps and Global Livestock Collaborative Research Support Program. 94 Lupton (2008).
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Tune to fashion trends. Mongolian raw cashmere suppliers have had difficulty in adjusting to changes in world fashion. In the absence of professional guidance, herders cross-bred their white, beige, and red colour goats in response to high demand for white colours. As a result the black and brown goat herds decreased. When fashion swung back to favour dark colours, processors had to resort to artificial dyeing and painting. Over the past decade, some of the worlds largest producers have begun to outsource processing jobs in developing countries. Brand names have changed their competitive strategies to enter into affordable cashmere, blended with wool, silk, cotton and synthetics. Given the existing price differential between raw fibre and the end-product, Mongolia would benefit if it can become a reliable source of cashmere for world manufacturers, with certain value-adding stages (beyond sorting and scouring) done in-country.
the export tax did not produce expected results because of poor enforcement, lack of financial resources of processors, and the absence of a coherent wholesale network and supply chain. The Mongolian Parliament passed a decree in May 2008 to commit state subsidies to domestic cashmere processing industries that purchase Mongolian raw cashmere from herders for not less than MNT 30,000-MNT 32,000 (approx. US$26 to US$28). The Ministers of Industry and Trade and of Finance were also assigned to negotiate a tripartite memorandum of understanding with the Union of Banks in Mongolia and Mongolian Wool and Cashmere Association to facilitate loans for working capital to qualified domestic cashmere processing companies. Under this measure, a concessional loan of MNT 6 billion (US$5.2 million) was guaranteed to Gobi Company, amounting to more than half of the total of MNT 10 billion (US$8.7 million) concessional loans to be allocated. However, these measures were not implemented during the short peak purchasing season mid-March and early April in 2008. Another law has been drafted to allocate MNT 5,000 (US$4.3) per kg of raw cashmere sold by each herder. Around MNT 30.5 billion (US$26.1 million) is planned to be allocated from the Development Fund of Mongolia in support of this draft law aimed at alleviating poverty among herders.
4. TRADE POLICY MEASURES
4.1 EXPORT TAX ON RAW CASHMERE In its terms of accession to the WTO in 1997, Mongolia accepted to convert the then existing ban on the export of raw cashmere into an export tax bound at the ad valorem equivalent rate of 30 percent, to be eliminated after ten years. However, in 2007 a waiver was sought from this WTO commitment to extend this period, which was granted for five years. The decision to extend the export tax on raw cashmere has been a subject of heated debate in Mongolia. In theory, an export tax benefits processing industries and hurts herders by depressing domestic prices (see Box 3.4). This poses a human development policy dilemma. While herders are among the poorest in the country, the expansion of the processing industry could be a basis for expanding formal employment opportunities, particularly for women. The challenge is to compensate herders directly or indirectly for losses they might incur as a result of the export tax. Better coordination of the supply chain network infrastructure and improved market mechanisms could be seen as an indirect way of offsetting such a loss. In reality, however,
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BOX 3.4 THE ECONOMICS OF EXPORT TAXES In economic theory, export taxes are predicted to lower the domestic price of the taxed good, encourage domestic consumption and decrease exports. This assumes that the economy is small in the sense that it cannot influence world prices and that the market is competitive. In the diagram below, domestic prices fall by the full amount of the export tax, reducing exports substantially from its pretax level. Like most taxes, export taxes, too, impose efficiency losses and reduce foreign exchange earnings, but these are weighed against the objectives of protecting interests of specific groups and raising government revenue. The welfare effect of an export tax is slightly different in the case of a large exporting country because it can push up world prices when it reduces its exports, and reap a terms-of-trade advantage. Although Mongolia is a small economy, it may not be considered so in the specific product category of cashmere. In the aggregate, thus, a small export tax could raise national welfare. Applying this text-book prediction to Mongolian cashmere, the primary consumers are the domestic processors who should benefit. And the producing herders lose unless compensated through governmental transfers. The porous border with China, however, weakens the effects of an export tax in Mongolia. The herders do not lose much if they access an alternative market, legally or illegally, driven by better financed Chinese processors. Even though the policy of export taxation is supposed to benefit the processing industry, because of smuggling and weaker capacity, they are unable to outbid Chinese traders, who require the long-haired Mongolian variety as an input into their fabric. The lowered margin of domestic prices as a result of an export tax is less meaningful if there are other prices at play, such as much lower interest rates in China.
Economic theory also says that if the sole policy objective is to help consumers (domestic processors of Mongolian cashmere), a consumption subsidy is a better instrument than an export tax. An export tax distorts both production and consumption, whereas a consumption subsidy targets the intended objective of boosting consumption only. In Mongolia, it would help processors, but not affect the incentive of herders who continue to face world prices. Exports, thus, do not fall by as much as when an export tax is slapped on. This simple economic proposition may not be the reason but Mongolia shifted its policy recently from applying an export tax on cashmere to subsidizing domestic consumption. Initially, Mongolia sought and obtained a waiver in the WTO to extend the export tax until 2012. It was then proposed to increase the rate of the export tax to the bound ceiling of 30 percent ad valorem (or MNT 12,000 per kg). However, the proposal for this increase in the export tax was withdrawn in May 2008 after the domestic price of cashmere fell suddenly. The government did not wish to put additional pressure on the herders. Instead, the Mongolian Parliament passed a decree committing state subsidies to domestic processing industries that purchase Mongolian raw cashmere from herders above a threshold price.
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It is obvious that the abstractions of a textbook partial equilibrium model do not fully apply to Mongolian reality because the crucial assumptions of perfectly competitive and functioning markets do not exist. For example, in the diagram below, contrary to what theory predicts, domestic price was consistently higher than the world price when an export tax was levied between 1997 and 2002.
In economics jargon, this is a second-best world characterized by multiple distortions and missing markets. This justifies governmental intervention, especially to help herders with quality standards, logistical support, and setting up of a Commodity Exchange. Bilateral cooperation with China to enforce measures against the illicit flow of goods across the border also appears necessary. Indeed, in the run up to the Olympic Games, China strictly regulated the inflow of raw materials from livestock. This lowered prices in Mongolia temporarily benefiting the ailing processing industry.
certain cashmere products at zero or reduced tariffs in the EU. 96 The US GSP program provides preferential duty-free treatment for 3400 products from 131 designated beneficiary developing countries and territories.97 According to the MIT data of December 2007, only 2 percent (around US$900,000) of Mongolian non-agricultural products exported to the US was covered under GSP. So far, it covers noils of wool or fine animal hair (0.4 percent), other waste of wool or of fine animal hair (2.6 cents per kg), certified hand-loomed and folklore wall hangings of wool or fine animal hair, blended items with 30 percent cashmere and 70 percent or more of silk or silk waste by weight.98 However, GSP was underutilized in respect of these products. Mongolia has sought, so far unsuccessfully, to include cashmere products under HS Code No. 6110 in the current GSP of the United States. Processed cashmere apparel is not fully covered by the GSP scheme of Russia and Japan. Where cashmere apparel does not benefit from GSP, the MFN rates are often quite high hence the inclusion of raw and semi-processed cashmere in the GSP schemes of donor countries, plus duty free or lower rates in other countries combined with technical assistance to exporters, would enable herders and SMEs to benefit meaningfully from preferential schemes on offer.
Figure 3.2
4.2 ACCESS TO MARKETS 4.2.1 Preferential tariffs Mongolia is a beneficiary of the new GSP-plus scheme offered by the EU for vulnerable countries faced with specific trade or development needs since.95 This regulation applies to 7,200 products, and provides an opportunity to sell
95
Source: MIT et al. (2006).
96
EC Regulation No. 980/2005.
Products of HSC 5105, such as 5105.31.10 (combed tops), 5105.39.11 (combed camel wool) and 5105.31.20 (goat cashmere tops) cannot enter duty free, but have a reduced tariff of 2 percent. 97 US Generalized System of Preferences (GSP) Program, February 2008. 98 Office of the US Trade Representative (2007).
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4.3 ENHANCED BRANDING AND SECURE MARKETS The cashmere processing industry is yet to be fully responsive to shifts in world fashion, and in nurturing the brand, reputation and image of Mongolian products. One step in this direction would be to register Geographical Indications (GIs) for Mongolian cashmere, and train exporters to build a valuable GI brand and provide a legal base to pursue and settle disputes. For example, Mongolian textile firms through MCWA have obtained the registration of the Gobi Camel Wool as a GI, and are now in the process of registering the indication in European countries. There have also been efforts to upgrade the spinning and knitting capacity to remove bottlenecks in supplies to the clothing sector. Among the strategic measures to be taken in the cashmere sector until 2012, the government foresees spending a total of around US$116.4 million to support local processors. Based on the calculations of the MWCA, value addition worth US$42.7 million was generated in 2006, of which US$22.9 million was generated from value-added end products, US$12.6 million from de-haired cashmere production and US$7.1 million from scoured and washed cashmere. BOX 3.5 INSUFFICIENT TRADE FINANCE The private sector in Mongolia is inexperienced in export marketing. In a UNESCAP survey, over 90 percent of exporters identified export financing as a major issue in their inability to optimize export opportunities.99 Mongolia included the whole financial service sector in its GATS commitments in its terms of accession to the WTO. However, even though the country has experienced a flood of private insurance companies, in addition to the former state monopoly Mongol Daatgal (privatized in 2004), none of these entities has started to offer export insurance. A large portion of the loan portfolio of commercial banks is directed at financing imports of wholesale and retail trade, construction, and import
of heavy duty machinery designed for extractive industry. The country does not yet have a single credit database in or any credit rating agencies. The majority of Mongolian herders who own less than 100 heads of herds essentially have little or no access to preferential loans. In 2007, approximately 7.5 percent of the loans issued by commercial banks went to the agricultural sector. This, however, does not guarantee that the herders would utilize their loan for agricultural purpose only. They are known to finance their consumption needs through loans.
Consolidation loan by sector
EU countries remain the main destination of Mongolian exports of cashmere knitwear and woven products. With the exception of the UK, there has been a substantial growth in the export of cashmere products to the EU, particularly to Germany, France, Belgium, and Eastern European members. Mongolian export of combed tops of goat cashmere to Italy increased from US$21.8 million in 2004 to US$40.5 million in 2007. The United States is the second largest destination but exports to that market have significantly decreased since 2005, along with the collapse of clothing exports. Exports of cashmere knitwear and woven products to China have declined dramatically, while there has been a corresponding increase in exports of raw materials, such as combed tops of goat cashmere from US$22.6 million in 2005 to US$44 million in 2007. Imports by Japan and Korea of these processed goods have also decreased.
99 Trade Finance Infrastructure Development in Mongolia, UNESCAP, 2003
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Table 3.6 Main importers of knit and woven cashmere products

Main importers of Mongolian exports of cashmere knitwear and woven products (US$000)
2003
2004
2005
2006
2007
Amount, (000 USD) 5,906.8 1,974 9,685.5 697.1 12,733 1,026.3 12,818.2 6,468.7 1,071.2 640 365.1 495.7 154.9 9 120.5 9.2 396.0 385.6 358.8 333.8 218.5 57.7 22.4 1.2
coupled with the natural disadvantages of being landlocked, it normally takes anytime between 8 and 57 days for domestic exporters of cashmere products to reach their final export destinations.100
1 + 2 3 4 5 6 7 8 9 -
Trend
EU Japan US Canada Republic of Korea Russian Federation Switzerland Hong Kong SAR China Total amount
5,686.8 19,021.4 2,321.4 25.6 1,071.2 157.8 1.8 0 737.1 360.5 764.6 217.1 53.1 4.3 3,698.1 416.8 390.3 323.4 73 21.2 10.3
15,561.1 34,501.7 17,315.7 15,683.8 8,242.7
Source: Foreign Trade Statistics, (2005, 2006, 2007), Mongolian Customs General Administration (2008); updates by authors.
BOX 3.6 THE BURDEN OF PAPERS ON TRADE In addition to the export tax, there are many small fees and charges that exporters need to pay to multiple authorities, which cumulatively act as a barrier. A typical list of requirements includes: a. Certificate of origin from MNCCI (mandatory); b. Veterinary certificate from the Institute of Animal Husbandry and Veterinary (mandatory); c. Advanced payment of tax notified by the Customs Office (mandatory); d. Customs declaration (mandatory); e. Corporate Income Tax notified by the Mongolian National Taxation Department (informal); f. Certificate of packaging, different kinds according to different kinds of raw material (mandatory); and g. Certificate of conformity from Mongolian National Centre of Standardization and Metrology (mandatory). There has been an effort to introduce electronic Single Window system, which integrates key sectors of trade, customs, banking and transportation. Due to lack of infrastructure and sound transport logistics
Source: MNCCI (2007)
Table 3.7 Mongolian share of wool and other animal hair in world trade, 1996-2006
World Trade Value USD 1996 Wool and other animal hair Value USD 2003 Mongolias export % World Share 2006
SITC Product
% % % Value Share Annual Annual USD of growth Growth total 2006 19962006 2006 19962006
268
6.8bn
4.6bn 5.1bn - 2.71
0.04
11.1
3.04
Source: UN Czomtrade.
100
The price of renting one wagon increased from MNT 360,000 in 2005 to MNT 1.8 million in 2007.
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ANNEX TO CHAPTER THREE DIVERSIFYING HERDER INCOMES THROUGH TRADE IN TOURISM
administrators enter into agreements with herder groups and local communities and help them connect with donors interested in participation-based conservation. Currently, 77 herder groups and local communities from 32 soums of 8 aimags are officially involved as members of CBTN. This is a small share of all herders, but interest is growing among them to enter into formal agreements with tour operators. Their level of capacities, however, varies. Those that are already involved in community-based conservation efforts with the help of donors are in a better position to organize and profit from tourism, while as the environmental law envisions, permitting local herders to acquire rights to protect, manage, and possess local natural resources. The herder groups of Hustai National Park have been the most successful so far in attracting tourists, owing to their reintroduction of the near-extinct Przewalski horses (Takhi). The CBTN has tried to encourage individual herders by suggesting that they can receive around MNT 10,000 per tourist per day from tour operators for their services. The donorfunded Altai Sayan project has the largest number of herder groups (28) in the CBTN. Among the four western provinces included in the project, herders of BayanUlgii and Khovsgol provinces appear to need strategic support to expedite their search for alternative sources of income as they confront increasing decertification. The Jankhai, one of the herder groups in Khovsgol province, received 50-60 foreign and 100 domestic tourists in 2008 and has increased the number of its gers. The UNDP/Japan Enterprise Mongolia project has supported CBT in Bayan-ugli Sagsai soum, Dadal in Khentii, and Khamrin Khiid in Dornogobi. Faced with shortage of credit and onerous interest charges, some herder groups have established their own revolving funds to finance initiatives such as sending students to attend tourism universities. Government agencies could complement such herder
The global tourism industry is expanding: an estimated 670 million tourists travel annually at present spending nearly US$500 billion. These numbers are expected to treble by 2020 with at least 1.5 billion tourists travelling each year spending US$5 billion per day. Developing countries are striving to secure their share of this burgeoning market. In 2007, the Mongolian tourism sector contributed nearly 2 percent of GDP and employed approximately 7000 people in full-time positions, 60 percent of which were women.101 Getting acquainted with the nomadic way of life has become one of the main tourist attractions in Mongolia. However, few tourist dollars reach the herders themselves as national and international tour operators dominate services and profits. In 2006, ten big tour operators received more than half the number of inbound tourists.102 The number of travel companies with foreign investment is around 250, led by Korea, China and Japan, who rely on their own network of support services (airline, hotels/camps, and tour-guides). The challenge is to structure the tourist trade to make a positive contribution to human development in rural Mongolia by augmenting herder incomes and capabilities. In May 2005, the Community Based Tourism Network (CBTN) was established with nonprofit status, aimed at empowering herder groups and local communities. Providing alternative income opportunities for herders could reduce their perceived need to continually increase herd size, thereby reducing pressure on the environment. The CBTN objectives are incorporated in the development programmes of aimag, soum, and Strictly Protected Areas (SPA). The local
101
NSO (2007) and Compilation of tourism statistics 2008, Department of Tourism. 102 Community Based Tourism working group agreement with Peace Corps, 2006.
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initiatives with a more integrated package of services from online technical support on marketing and banking to transport and logistics operations, risk analysis and fundraising. In terms of broader legislative support, Mongolia amended its competition law in 2000 (Law on Prohibiting Unfair Competition), which is expected to help create a fairer playing field between domestic and international tour operators. In the context of the WTO Doha Round a group of developing countries submitted a proposed Annex on Tourism to the General Agreement on Trade in Services (GATS), which would entail commitments on the part of the tourist sending countries.103 Mongolia is also considering seeking to amend its bilateral air transport agreements with the tourist sending countries. On its overarching commitment made on tourist services as part of the WTOs GATS, Mongolia agreed to impose no limitations on market access and national treatment on the three modes of service supply (cross-border, consumption abroad and commercial presence). However on the fourth mode, the movement of natural persons, it left its commitments unbound except for measures affecting the entry and temporary stay of people with managerial and technical skills, which are in short supply in Mongolia.
103
http://www.unwto.org/quality/news/en/news.php?op=6
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Table 3.8 MFN tariff and GSP of countries importing selected Mongolian raw and semi-processed wool and cashmere in 2007
HS Code (first 6 digits are international) Selected key exports of wool and cashmere (raw and semi-processed) under HSCs Chapter 51, 2007 MFN tariff and GSP of selected key importing countries, to which Mongolian raw and semi-processed wool and cashmere exported, 2007 China Hong Kong India 51011100, 51011900, 51012900 =15.00%; 51013000, 51012100 =30.00% 51021110 = 15.00% 51021990, 51021910 = 15.00% EU Japan Russia
10.00% 0.00% 0.00% GSP is 7.50% 51021100 = 0.00% 51021910, 5102194000, = 0.00% 51021100 = 0.00% 51021900 = 0.00% 51021100 = 15.00% 51021910, 51021930, 5102194000, 51021990 =15.00% 51021910, 51021930, 5102194000, 51021990 =15.00% 51053100 = 15.00% 51053100 = 15.00%
5101
Wool, not carded or combed (sheep)
38.00%
0.00%
5102.11.20
Washed or dehaired (goat) cashmere
51021100 = 9.00% 51021930 = 9.00%
51021100 = 0.00% 5102194000 = no data
5102.19.42
Washed camel mane
5102.19.44
Washed camel wool, other than normal
51021930 = 9.00%
5102194000 = no data 51053100, 51053900 = 0.00% 51053100, 51053900 = 0.00%
51021990, 51021910 = 15.00% 51053100 = 15% 51053100 = 15%
51021910, 5102194000, = 0.00% 51053100 = 2.00% 51053100 = 2.00%
51021900 = 0.00%
5105.31.10
Combed tops
51053100 = 5.00% 51053100 = 5.00%
51053100 = 0.00% 51053100 = 0.00%
5105.31.20
Goat cashmere tops
HS Code (first 6 digits are international)
Selected key MFN tariff and GSP of selected key importing countries, to which Mongolian value-added wool and cashmere knitwear exports of wool and and woven products were exported, 2007 cashmere (raw and semi-processed) EU Japan Korea Russia Switzer-land US under HSCs Chapter Canada 61 Womens or girls cashmere overcoats (other than specified in 6104) 6102101010 and 6102101090 = 12% GSP is 0% 611012010 = 18%; 6110121090 = 18.00% GSP is 16% 6110121010, 6110121090, 6110129010, 6110129090 = 12.00% GSP is 0% 6301201000, 6301209010, 6301209090 = 12.00% 630120010, 630120090 =5.3% 6102101000 =3931.29 $/Ton but original tariff reported by the country is 20% but not less than 3 euro/kg 61101210 = 2620.86 $/Ton but original tariff reported by the country 20% but not less than 2 euro/kg 6301201000, 6301209010 =917.30 $/Ton but its Original tariff reported by the country 20% but not less than 0.7 euro/kg 6301201000, 6301209010 =917.30 $/Ton but its Original tariff reported by the country 20% but not less than 0.7 euro/kg 61021000 = Total ad valorem equivalent tariff is 2.92% GSP is 1.46% 61101200 = Total ad valorem equivalent tariff (estimat-ed) is 1.00% and its GSP is 0.50% 63012000 = Total ad valorem equivalent tariff (estimat-ed) is 5.02% GSP is 2.51% 63012000 = Total ad valorem equival-ent tariff 63012000 (est.) is 5.02% =0.00% GSP is =2.51%
6102.10.20
61021000 = 18.00%
610210010, 610210020 =10.90%
61021000 = 13.00%
61021000 = 16.40% + 559.00 $/Ton
6110.12.00
Jerseys and cardigans, of goat cashmere
611012010, 611012020, 61101210 =10.90%w
61101200 = 13.00%
61101210 = 4.00%
6301.20.10
Blankets made of goat cashmere
63012000 = 17%
63012000 = 10.00%
63012000 =0.00%
GSP is 12%
GSP is 0% 6301201000, 6301209010, 6301209090 = 12.00%
GSP is 1.10%
63012000 = 17% 6301.20.20 Blankets made of camel wool GSP is 12%
630120010, 630120090 =5.3%
63012000 = 10.00%
GSP is 0%
GSP is 1.10%
Source: http://www.macmap.org; updates by authors.
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CHAPTER
SPREADING THE GAINS FROM GROWTH:

The Case of Minerals
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SPREADING THE GAINS FROM GROWTH
1. THE STATE OF MINERALS IN THE

ECONOMY
In 2006, minerals production in Mongolia was valued at over US$1.4 billion, accounting for 70 percent of the total industrial output, and 30 percent of GDP.104 In 2007, minerals production grew by 13 per cent. Income from the minerals sector provided 42 percent of the total state budget, 52 percent of tax revenue, and 78 percent of export income, representing US$600 per capita. The formal mining sector employs over 40,000 people, or 35 percent of the total industrial sector workforce. Another indication of the sectors pervasive influence is that the transportation of mineral products accounts for nearly 70 percent of the total volume of cargo shipped on Mongolian railways.
Figure 4.1 Share of the minerals sector in the economy105
Foreign direct investment (FDI) in the minerals sector has soared by five times in five years, from US$40 million in 2002 to US$200 million in 2006. This accounts for 48 percent of total FDI in Mongolia, ranking Mongolia ninth among world destinations for FDI in the minerals sector. Four percent of total geological expenses disbursed worldwide were spent in exploration activities in Mongolia. These increases have largely been facilitated by the 1997 Minerals Law of Mongolia and by increases in world prices for gold and minerals. The Law on Foreign Investment was endorsed by the State Great Khural in 1993 and amended in 2001 and 2002. This law allows foreign investment in all industries and services, unless otherwise prohibited, and provides legal guarantees, rights and obligations of foreign investors. The Minerals Law, revised in 2006, states that if the mining license holder undertakes to invest no less than US$50 million during the first five years of its project, an investment agreement may be concluded with a mining license holder at latters request. The number of years escalates with the amount agreed to be invested: the term of agreement is no less than 30 years if more than US$300 million is invested. The investment agreement stabilizes the tax rate and grants license holders to transact in foreign currency commensurate with their export earnings. BOX 4.1 WTO AND PERFORMANCE REQUIREMENTS Mongolia does not limit foreign participation in any sector of the economy, and applies the same geographical restrictions on both foreign and domestic investors. Foreign investors are encouraged, but not legally obliged to use local goods and services, or equity, except in mineral deposits of strategic importance. They are not bound to engage in substitution of imports, nor export a certain percentage of output. There is no requirement for foreign investors to transfer technology. As a member of the WTO, Mongolia is bound by the Agreement on Trade Related Investment Measures, under which it is prohibited from imposing two specific performance requirements on investors (a) the use of products of domestic origin (local content requirement); and
In 2005, Mongolia was the third largest producer of fluorspar, and it accounted for around 1 percent of world output of copper and gold. It ranked ninth in the production of molybdenum (the world output was nearly two million tons). Between 2005 and 2007, a total of 1.3 million barrels of crude oil was also extracted, out of which 1.2 million barrels were exported. It is expected that the minerals sector output will account for 41 per cent of GDP in 2011, rising to 65 percent by 2021, when the Oyutolgoi coppergold deposit is in full production.106
Statistical Year Book (2007). Report of MRPAM Activities of 2007, UB, 2008, p. 46. 106 Realization of this potential is primarily dependent on bringing the Oyutolgoi and Tavantolgoi deposits into production by 2010, as 40 percent of the net GDP growth for the period of 2004-2021 will be provided solely by the metallurgical complex of the Oyutolgoi deposit. The projections assume prices of US$500/ounce for gold and $3400/lb for copper based on average price for the previous 10 years.
105
104
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(b) conditioning imports by the investor on the amount of local production that it exports (trade-balancing requirement). Unlike China, Mongolia did not accept any TRIMs-plus obligations in its terms of accession; it is thus free to impose export performance requirements, transfer of technology requirements, employment and other socially oriented requirements. It appears, however, that in the Bilateral Investment Treaty with the United States, Mongolia agreed to abolish all performance requirements, including those in the mining sector and those imposed for HD-oriented objectives. This could be corrected in future negotiations.
2. HUMAN DEVELOPMENT CHALLENGES AND OPPORTUNITIES
has estimated that the recent fall in copper prices from US$6700 to US$5000 per ton would imply a shortfall of revenue in the 2009 government budget of as much as 3.5 percent of GDP. 107 Further, a minerals sector that does not do enough to create jobs for the youth, upgrade skills of those employed, create backward and forward linkages and choose to develop enclaves detached from the socio-environmental surroundings may create very little trickle-down effects in the local economies. There has also been a lot of discussion on the phenomenon of Dutch Disease in economies fuelled by natural resource booms, where appreciation of the exchange rate contributes to the decline of the non-booming manufacturing sector. If this effect is realized, the stunting of what modest base Mongolian has in manufacturing would be harmful to human development. There is however another channel of adverse influence: because of volatile commodity prices, revenue streams dependent on these sources can disrupt the pattern of stable health and education expenditures needed for generational improvements in human development indicators. One policy recommendation to minimize the potential Dutch Disease effects is thus to sterilize the flow from the boom by setting aside the funds, only drawing on it in modest, steady streams for investments aimed at boosting competitiveness in the non-booming sectors. This is akin to setting up a long-term human development fund from the proceeds to overhaul education, health and social security institutions of the country.
This burgeoning role of minerals in the economy presents both human development opportunities and challenges. The State Great Khural in 2008 set out a programme for the next 15 years to exploit the mining sector to contribute to national development though increased revenue and a more efficient and competitive economic structure. The minerals sector is seen as a source of state-of-the-art technology that can diffuse through the whole economy, and lead to an overall upgrading of skills and, in particular, opportunities for youth. The job creation, and the upgrading of skills are human development friendly by definition, but the enhanced revenues can also be channelled to the kind of social spending that augments human development. On the other hand, a development strategy that is insufficiently broad and excessively reliant on commodity booms is risky. The gains from trade in minerals can fluctuate widely adding to uncertainty in the states coffers but also individual jobs and incomes. The World Bank
107
See World Bank (2008) at http://bcmmongolia.org.
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BOX 4.2 GOVERNMENT POLICY, 2007-2015 The State proposes to hold more than 51 percent equity for strategically important deposits, which have been explored, discovered and of which the reserves have been confirmed. Recommendations include: Launch the utilisation of the Oyutolgoi copper and gold deposit, Tsagaan Suvarga copper deposit, Tavantolgoi coking coal deposit, Asgat silver deposit, Tsav base metal, Tumurtei iron ore deposit, Choir-Nyalga coal and bitumen deposit, Tsaidam lignite deposit, Mardai and Gurvan Bulag uranium deposits and other major strategically important deposits; Increase the operating and processing capabilities of the Erdenet factory; Intensify cathode copper and steel production; Process coking coal and obtain state-ofthe-art technology to extract fuel out of coal; Increase the degree of processing of raw minerals before export and increase the production of finished products; Expand geological reconnaissance and exploration activities; and Establish a legal framework to prevent the exploitation of deposits with low economic value.
in the realm of wages. Although productivity and wages are considerably higher in this sector, its broader impact on employment and poverty has been limited because of the capital-intensive nature of mining activities.108 The 2007, HDR identified four ways in which the contribution of the mining sector to human development could be enhanced: (a) increasing the quantity and quality of employment; (b) providing revenue to be invested in agriculture and other labourintensive industries; (c) establishing forward and backward linkages between mining and other industries, such as power, metal processing and a broad range of services; and (d) providing investment and stimulating demand in the economy through a balanced industrial strategy.
Figure 4.2 Production possibilities after natural resource boom
2.1
Organised Mining
The Mongolia HDR 2007 observed that despite the leading role played by mining as the engine of growth in recent years, concerns have been raised about its capacity for generation of productive employment. Mining is typically a male-dominant industry. However, female share of employment in mining and quarrying in 2007 was 33 percent, up from 28 percent in 1994; 19,000 and 10,000 new jobs were created in the sector for men and women, respectively, over the last decade. However, the ratio of womens to mens monthly wages in mining and quarrying sector declined slightly, from 87 percent in 2002 and 2003 to 83 percent in 2005. An increase in womens economic participation in mining sector does not reflect greater gender equality
74
108
Mongolia HDR (2007).
BOX 4.3 DUTCH DISEASE AND HUMAN DEVELOPMENT
Also known as the Gregory Thesis, the phenomenon of Dutch Disease occurs when following a natural resource boom, the price of non-tradable goods increases, causing appreciation of the real exchange rate (ratio of the price of tradables to non-tradables). This makes the non-booming tradable sector uncompetitive, and leads it to contract (or deindustrialize). A simple economic analysis, as shown in figure 4.2 above, is as follows. The initial equilibrium of the economy is at point A. Following a discovery of a major resource, the Production Possibility Frontier (PPF) undergoes a skewed expansion from NT to NT*. Point B could have been the new equilibrium if the expenditure elasticity of demand for nontradables is zero. But because the economy now has higher real income at B, it consumes more of both non-tradable as well as tradable goods than at A, and not only more tradables as would have been the case at B. The new equilibrium occurs at C where the relative price of non-tradables is higher (as indicated by the steeper relative price line, the inverse of the real exchange rate). This permits increased production of non-tradables, but the nonbooming tradable sector contracts. The booming sector typically creates a resource movement effect and a spending effect. The first effect is caused when mobile factors are sucked into it and wages are bid up, causing other tradable sectors to contract. The second effect is a result of extra revenue flowing into the economy that creates extra demand for labour in the non-tradable sector. Their prices go up, because demand for non-traded goods increases. Prices of traded goods, however, are set internationally, so they do not rise. This is, by definition, an appreciation of the real exchange rate, i.e., the rise of the relative price of non-tradables to tradables. Because the manufacturing sector is seen as a more durable repository of technological progress and long-term employment, countries are reluctant to weaken what manufacturing base they have when they undergo a shortterm boom in the natural resource or the nontradable sectors.
Source: Warr (2006).
A mining and metallurgical complex demands a large workforce to construct the facilities and related infrastructure and to work in the plant, leading to the establishment of a satellite township with comfortable housing facilities, complemented by an adequate social infrastructure with services, shops, schools, sports and cultural palaces, communication centres and administrative facilities. Tripartite cooperation among state, business and local communities can provide employment and training for local residents, and promote local community development and environmental conservation. Mining complexes provide a source of resources for social and welfare purposes, as the higher salaries of the workforce imply higher social insurance fees, providing a secondary source of financing for human development. Such towns include Erdenet, Bor-Undur, Baganuur, Berkh, Shariin Gol, Nalaikh, Oyutolgoi and Tavantolgoi.
BOX 4.4 BOR-UNDUR CONCENTRATE PLANT
The Bor-Undur concentrate plant employs around 1600 workers, including about 140 engineers and technical specialists. The plant trains around 150 people a year across 15-20 disciplines in cooperation with the Technical University of Mongolia, Darkhan Technical College and Saint Petersburg Mining University. As the plant is expanding its capacity and installing new machines and equipment, the plant authority places great importance on empowering local engineers and technical specialists. It offers opportunities for them to travel to similar facilities and plants in other countries for exchange and acquisition of know-how. The plant management has also invested in the well-being of its workers. Some 40 facilities including a cultural palace, schools and hospitals belong to the Bor-Undur plant; it spends almost US$1 million on their maintenance. The producer service sector plays a vital role in the diffusion throughout the economy of advanced technologies applied in the mining sector. Many local companies, such as Geomandal Group, Geomaster Engineering, GeoInfo, Monrud, Geosan, Geofile, MainInfo, Local Logistics LLC
75
and Ochir Undraa LLC have been established in Mongolia to provide professional and logistic services. Many emerged during 2001-2005 in tandem with the growing inflow of foreign investment. These companies cooperate with two to three mining companies, offering a range of services. The companies included in the study have claimed that they altogether provide services to 34 foreign-invested mining companies. Thirteen of the 26 companies said they were able to hire between 5 and 100 new employees after they began servicing foreigninvested mining companies. This hints at an opportunity to develop small and mediumsized servicing companies including areas like information technology, accounting, marketing, advertising and financial management where Mongolias formal education system could contribute. Moreover, many foreign servicing companies have opened up their representative offices and hired hundreds of local staff in Mongolia. These include: Central Asian Mining Logistics; Redpath Mongolia; Major Drilling Mongolia; Australian Independent Diamond Drilling; Landdrill International LLC and Leighton Mining and Infrastructure; MCS International; Geomandal; and Gobi Drilling. Besides Erdenet, Oyu Tolgoi and other gold and copper mines, most of the mine deposits in Mongolia are comparatively small in size and more diversified in activities. This structure creates a demand for mining services including quality grinders, protective and transportation services and other equipment for workplace safety. These service providers will help reduce imports, decrease local unemployment, and serve as a bridge between the local people and mining companies. Encouraging SMEs to be involved in manual gold, fluorspar and other mineral exploitation will be important for providing new, higher-skilled employment in rural areas.
BOX 4.5 SELL GLOBALLY, GIVE LOCALLY
Mining companies can make a direct contribution to human development in the areas in which they operate by financing projects aimed at supporting agricultural production and rural development. The Baruunkharaa regional development project is one of such projects aimed at offering alternative approaches to rural poverty reduction by assisting poor households to cultivate and commercialize vegetables. The Boroo Gold mine of the Canadian Centerra Gold Company operates in Bayangol soum of Baruun Kharaa, where it started a local development fund for soum development. In the initial phase, poor households were provided with access to land to cultivate vegetables for household food security. Eventually vegetable cultivation was transformed from a means of subsistence to small for-profit businesses. The project also aimed at reducing gender inequalities; when the project began, 36 percent of the families were single-mother households and 82 percent were unemployed. The first year of the project covered mostly people in their 50s. However, in the following year younger people were covered as well, allowing many who lived off childrens allowance or pension to generate additional income from these activities. Of course, the influence of mining can be much bigger at the macro-level. It can create whole new cities and industries. Take the city of Erdent as example. In 1973, Soviet and Mongolian construction workers launched a construction work in the back valley of Erdenetiin Ovoo, which would later become the Erdenet copper-molybdenium concentrate plan. The Erdenet factory gave birth to the city of Erdenet, and the city has spawned other industries besides a copper concentrate factory. The Erdenet food factory is one of the largest factories in Mongolia, and the Erdenet carpet factory produces over one million square meters of carpets, part of which is exported. Another major facility in Erdenet city is a power plant with a capacity of producing 132 million kilowatt/hour electricity on average.
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2.2 ARTISANAL MINING Artisanal mining practices have sprung up spontaneously in Mongolia with little government control. Beginning in 1997, a large number of unemployed workers from cities and villages, displaced during the transition process, turned to informal mining. They were followed by herders ruined by the dzuds of 2000-2002. More recently, there has been a pull of people to artisanal mining due to the high prices of minerals, notably fluorspar, where small-scale miners perform a useful role in sorting the ore. As of 2007, artisanal miners are estimated to mine around ten types of mineral resources (including gold, fluorspar, coal and decoration stones) at nearly 100 sites in about 80 soums of 21 aimags. Artisanal mining provides 10 percent of the total output of the mining industry, obtaining resources from deposits that are not possible to be exploited by industrial means. It is estimated that there are over 65,000 individuals making their livelihood from artisanal mining and that the number of people involved in artisanal mining during the peak seasons of summer and autumn may be five to six times than those engaged in the formal mining sector when herders or even students join the hunt for extra income. However, they do not pay any taxes and their activities often negatively impact the interests of the local people. The majority of small-scale gold and fluorspar miners are men, but during summer time many women and children participate. Women involved in artisanal mining generally perform three different categories of tasks: (a) in the extractive process; (b) as workers in sorting, transporting and crushing of the preparation of minerals; and (c) as food and beverages suppliers. Although gold mining and processing are collective labour efforts, gold miners engagement in different stages of mining varies, depending on tasks, types of gold sites and gender. For instance, according to a survey conducted by the ILO, gold miners at hard-rock sites in Bornuur have to participate in main stages such as digging holes, lifting and carrying gravel and water, washing gold, transporting or carrying stones, setting explosives and amalgamating gold with mercury. In hard rock gold mining, men mainly carry out the mining, whereas
women and children engage in processing breaking rocks, and making gold concentrates. No female miners were observed or reported in small-scale coal mining. All fluorspar mining is reportedly carried out by men, whereas children and women break and bag the fluorspar ore.109 In the summer season many students carry out small-scale mining to finance their studies. BOX 4.6 RISKY ESCAPE FROM POVERTY
Artisanal mining has emerged as a response to poverty and lack of attractive remunerated employment opportunities. There are an estimated 65,000 artisanal miners in Mongolia They are the so-called ninjas unauthorised prospectors for gold and other minerals, working across the country at abandoned places and hard rock sites of formal mining companies. But artisanal mining is not legalized or organized. Lack of legislation and registration with the government deprive these people from accessing social services. Labour safety measures are totally absent and the risk of disease and fatal accidents is high as minimum health and safety standards are not observed. In addition, alcoholism, crime and child labour are prevalent among artisanal miners. Artisanal miners have also been blamed for the use of mercury, pollution of rivers and springs, destruction of plants and trees and land degradation. If these problems can be mitigated through legalization and adoption of environmentallysound technology, artisanal mining has a prospect of developing into a sustainable small-scale mining sector. One artisanal miner from Bayankhongor aimag sums up his predicament: I have been engaged in artisanal mining in a mined-out area for the past three years. Sometimes Im lucky and find gold, at other times I find nothing. I have three school-aged children, but only one of them goes to school. Our daily income is from gold mining, although we have a few animals. Many others like me survive like this, and it is our desire that informal mining operations are formalized as soon as possible.
Source: www.sdc.mn/en/Home/Natural_Resource_Management/ Sustainable_Artisanal_Mining, and /www.sdc.mn/ressources/resource_en_162984.pdf
109
Uitterdijk Appel (2004)
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People engaged in artisanal mining lack basic training. They generally work in an unsafe environment with no ventilation, often exposed to toxic gas. This results in many fatalities and injuries. Over the period of 2005-2007, the Mine Rescue Unit responded to 94 emergency cases involving 32 fatalities. In remote areas it is impossible to respond to the accident on time. The negative impact of artisanal mining is aggravated by the widespread use of child labour.110 In addition, artisanal mining operations often pollute water sources and pasture lands, causing soil and land degradation. The latest incident took place at Khongor soum in Darkhan Uul aimag, where the entire community together with their surrounding environment were intoxicated and polluted, causing international outcry and follow-up inspection by experts. However, when a joint team from the WHO, UNEP and FAO conducted a survey to determine the impact of mining practices of gold at Khongor soum, they found that the residents of Khongor soum had not been affected by mercury over recent periods, neurological and skin disorders were not related to mercury intoxication, and the prevalent skin disorders were predominantly caused by bacteria, fungus and parasites. Despite artisanal mining being the last occupational resort of the desperate, it can play a crucial role in supporting livelihoods. The government is thus seeking to bring artisanal mining within the ambit of control and effective regulation. Cabinet Decree 71 of 2008 sets out a seven-year sub-programme to develop micromines that will use small-scale equipment, but apply high technology to ensure that the health and safety standards are met. Micro-mines will work on waste dumps from large mining operations and on deposits that cannot be commercially exploited using current technology and equipment. In 2008, the government also approved an ad-hoc code for coordinating artisanal mining. This Code sets out the rights and duties of local authorities with respect to permitted artisanal mining operations. These include: (a) deposits where the expected
110 National Consultative meeting in Ulaanbaatar, 2006, on mining, legal framework and environment; As of 2006, there were 7309 children aged 5-17 in mining gold of which 1316 were girls, and 687 children collected fluorspar of which 118 were girls
economic return does not justify construction of a large mine; (b) waste dumps from mining operations, and abandoned mine areas where environmental rehabilitation is required; and (c) areas approved for artisanal mining by tripartite agreement among the mining license holder, the local soum, the district governor and cooperatives of mining license properties. BOX 4.7 TARGETS FOR ARTISANAL MINING BY 2015 A legal framework implemented and evaluated; Share of workforce with professional credentials to reach 75 percent; Total output of micro-mines to reach 95 percent of artisanal mining output; Industrial accidents to decrease by 75 percent; Size of rehabilitation on degraded land to increase by 80 percent; Unemployment rate not to exceed 4 percent in the area; Poverty rate to decrease by half; 100 percent of cooperative members to be covered by social insurance; Compared to 2007, occupational and pandemic diseases to decrease by 65 percent; Child labour to be banned completely; and 75 percent of children of artisanal miners to be involved in pre-school education.
3. ENVIRONMENTAL CHALLENGES AND RESPONSES
3.1 THE IMPACT OF MINING ON THE ENVIRONMENT The various phases of mining operations impact the surrounding environment differently. Prior to mineral resource exploitation a detailed environmental impact assessment is required; but some companies implement the environment plan half-heartedly leaving the area with little room for future environmental rehabilitation. Monitoring by local authorities is often insufficient. Mongolia has ratified some 18 international conventions
78
on environmental protection and has endorsed 32 laws on environmental protection, which has resulted in nearly 300 regulations and standards being honoured. Despite this legal framework, implementation is weak. Violations of Mongolian laws are repeated on a daily basis, including the Minerals Law of Mongolia, which states in article 7.3 that: conducting exploration or mining without a valid license is prohibited. Artisanal mining is damaging the environment by: (a) digging and dumping earth, causing soil degradation; (b) altering river courses and channels, decreasing river flow volume and polluting the rivers and lakes with waste water; and (c) using improper and illegal chemicals that are toxic and hazardous, such as mercury and cyanide. Larger companies are also responsible for environmental degradation. Many of them have been known to renege on the rehabilitation agreements that they had entered into with the Ministry of Environment. In some cases, environmental degradation arises through flaws in the initial conditions. For example, the license for the Shariin Gol mine lacks discharge and effluent limits, and up until the year 2000, the mine operated without the need for consultation with local authorities. Only after the introduction of new regulations has the mine been obliged to coordinate its activities with the aimag and soum authorities. The disposal of tailings has negatively affected the environment in other mining areas, such as the Zaamar gold mining district and the Erdenet copper deposit. The consequences of these violations include: (a) shortage of pastureland, making it impossible to practice livestock husbandry; (b) depletion of drinking water for humans and livestock; and (c) soil erosion and pollution of surface and underground water resources, with risk to the health of humans, wildlife and livestock. Some regions are already in ecological crisis.
BOX 4.8 USE OF MERCURY IN GOLD MINING IN MONGOLIA111 Recent field investigations have revealed the existence of hotspots of mercury pollution in Sumber, Bayangol and Bornuur soums of the Borooo basin. Seventy-six percent of the households in three studied soum-centers have hard-rock gold miners using mercury for gold recovery, and between them, the three soum centers currently consume about 500kg of mercury each year. Four-fifths of miners dump mercury waste in the open air in their fenced-off yards. Consequently some household yard soils have been found to have more than 200 times the permitted amount of mercury. Two to three tons of mercury have accumulated in the bottom sediments on 40 km of the Boroo and Kharaa rivers. Individuals pan the bed and banks of both rivers for mercury to sell it to the hard-rock gold ninjas. This recovered mercury is insufficient to satisfy the rapidly rising demand, and more than a ton a year is imported illegally from China and sold in villages by traders and gold shops. The technology of mining, crushing, milling, sluicing and amalgamating vary, but final mineral processing is not done at the minesites rather in the soum centers, hence each soum center is now a mercury hotspot. Much illegal mining remains primitive and is within 20-50 km of home, but several ninja groups began in 2004 to truck mined quartz-gold ore from the South Gobi Protected Area to the north for processing using mercury. Ecological damage to the Gobi caused by illegal mining and to the Selenge watershed by mercury is therefore linked. 3.2 Environmental rehabilitation efforts
Environmental rehabilitation ought to be an indispensable component of the mining industry. Rehabilitation is classified into two categories: technical and biological. Every mining legal entity submits and obtains approval for the environmental rehabilitation plan and
111
Grayson et al. (2003); Tumenbayar et al. (2001); Tumenbayar (2003).
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environmental monitoring program from the Ministry of Nature and Environment. However, this policy is not functioning effectively in practice. The mining operations of 113 legal mining entities have damaged 7,874 hectares, of which only around 25 percent has been environmentally rehabilitated and submitted to local authorities.112 The failure of rehabilitation practices can be attributed to the following factors: The area not subject to environmental rehabilitation is increasing in size each year; Artisanal miners rework rehabilitated areas and abandon them without any rehabilitation on their part; Rehabilitation operations are often limited to filling in holes with the pile of earth unearthed earlier, so biological rehabilitation is minimal; Most mining legal entities do not comply with laws and regulations on environmental rehabilitation in order to cut costs; Many companies lack adequate equipment, expertise and a sense of responsibility necessary to carry out rehabilitation; and No approved standards have been set for rehabilitation work. 3.1.1 Actions by civil society
Onon Ulziin goliinkhon, Khentii and Dornod aimags Uuguul, Umnugobi aimag Ongi gol, inter-aimag movement The ever-increasing number of such civic movements reflects the growing awareness of the important role that civil society can play in protecting the environment. 3.2.2 Actions by the government
The Constitution of Mongolia states that the land, its subsoil, forests, water, fauna and flora and other natural resources shall be subject to national sovereignty and state protection. What should be done to minimize the adverse environmental impact imposed by the mining sector? Controversial and inadequate articles in the Minerals Law need to be amended, and a legal regulatory framework for artisanal mining (in the form of cooperatives), as well as micro-mine development incorporated as an amendment to the existing Minerals Law; Exploration and mining licenses must be issued only to legal entities, capable of conducting proper exploration and mining. Representatives of local community must be involved in the decision making process; General and detailed environmental impact assessments must be conducted; Advanced technology must be applied in mining operations in order to prevent alteration to the quality of surrounding environment, water, land and air; Basic regulations must be followed to conduct technical and biological rehabilitation activities in a combined and step-by-step manner; The use of state property must be subject to close monitoring with penalties as strict as the cancellation of exploration and mining operations to be taken if legal entities, legal persons and citizens violate the provisions of this law; and The unorganised nature of artisanal mining requires a different approach than organised sector and the government will have to adjust its policies accordingly. It should focus on awareness and training rather than enforcement and active assistance in determining the environmental impact of their activities and rehabilitation requirements.
In response to the perception that the Environmental Protection Law of Mongolia is not being effectively enforced by the State, a network of civil movements has emerged.113 These are comprised of citizens who have lost patience over inadequate state intervention and control and are conducting active measures to protect their nature. Some movements on the forefront include: Khongor nutgiin duudlaga, Bayanhongor aimag Angir nuden Bondookhoi, Uvs aimag Khuvsgul dalain ezed, EG Uur-ekh nutag, Khovsgol aimag Ariun suvarga, Arkhangai aimag Toson zaamar, Tuv aimag Ardiin elch, Selenge aimag
National Consultative meeting in Ulaanbaatar, 2006, on mining, legal framework and environment. 113 Article 3.2.6 of this law defines adverse environmental impact as the result of any action (or inaction) which has a polluting, detrimental, adverse, hazardous or destructive effect on nature and environment and its resources.
112
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BOX 4.9 ONGI RIVER MOVEMENT114 The Ongi River Movement is the first of its kind with a formal membership of around 1,600. Its mission is to determine the causes of depletion of Ongi River and Ulaan Lake. The members comprise of locals from eight soums of Uvurkhangai, Dundgovi and Umnugovi aimags. Launched in 2001, it is the largest local movement with the mission to protect local rivers and streams in Mongolia. The movements activities are organized around building public awareness and participation and influencing social policies and decisions related to the environment. The Ongi River Movement has been successful in closing down 35 out of 37 mining operations in the area and in suspending one of the two operational mines. As part of the Ongi-Buckthorn Project, some 7,200 seedlings were planted in eight soums, and reforestation activity has been carried out with the participation of local herders in the Ongi River Valley. The movement is proactive in its lobbying. It appealed to the President of Mongolia to close down the operations of the Mongol Gazar LLC at Buuruljuut area of Uyanga soum in Uvurkhangai. In response, the companys license was revoked in May 2008.
ANNEX TO CHAPTER FOUR

Figure 4.3 Production of gold (in kg)
Figure 4.4 Production of cathode copper, copper concentrate and molybdenum concentrate (000 tons)
Figure 4.5 Trends in copper prices
Figure 4.6 Trends in molybdenum prices
114
Ongi River Movement, Daily News, May 31, 2008.
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CHAPTER
REVIVING AN INDUSTRIAL BASE OF PRODUCTIVITY:

The Case of Light Manufactures
83
REVIVING AN INDUSTRIAL BASE OF PRODUCTIVITY
1. THE RISE AND FALL OF LIGHT INDUSTRY
BOX 5.1 DECLINE IN PRODUCTION
Mongolia built up its light industry sector after the Second World War, covering a diverse range of industries from wood processing, glass and textiles to leather and foodprocessing. Production was oriented to both the domestic market (e.g., food) and exports (e.g., manufactures), and light industry accounted for 53 percent of total industrial output in 1990.115 In the initial transition years between 1990 and 1996, the government sought to provide domestic industry the time to adjust to the challenges of world trade. For example, an average import tariff rate of 15 percent ad valorem was applied until 1997 and restrictions were imposed on the export of some agricultural raw materials and scrap metals. The government also implemented a number of loan programmes for domestic industry and provided financing to agriculture and large SOEs.116 However these proved inadequate to prevent the decline of the sector in the 1990s. Different factors affected specific products differently, but overall, three main reasons can be attributed to the overall decline of the industry: (a) loss of subsidies from and guaranteed export markets in COMECON countries; (b) the shrinking of domestic demand; and (c) rise in import competition.117
Compared to 1996, production levels in 1998 had declined by four percent in the food industry, by 14 percent in textiles, by 68 percent in leather tanning, by 22 percent in the manufacture of wood and wooden products as well as non-metallic products. Over the same period, manufacturing of medical and precision materials fell by 62 percent, of TV and radios by 92 percent, of trailers and vehicles by 30 percent. Output of textiles fell in 1994 from 1990 levels by almost 75 percent, while output of clothing fell by a staggering 88 percent. Production of sawn wood in 2002 was only a third of its 1997 level. Similarly in the same time period, output of dwelling frames fell almost to a third of its 1997 level. Output of building door and windows fell almost to half of its 1997 level, output of spun thread fell to 40 percent of its 1997 level, output of carpets fell to 82 percent of its 1997 level, output of felt boots fell to a third of its 1997 level, output of sheep skin ceased fully, output of goat skin fell to 59 percent of its 1997 level, production of leather boots fell to 22 percent of 1997 level and production of leather coats and jackets ceased fully. At same time, output of some types of products increased, such as combed down, furniture and knitted goods and woollen fabrics and felt. Given these structural challenges, it is difficult to predict to what extent the decline of light industry could have been stalled with a certain structure of industrial protection. What is clearer, however, is that the inability of the newly privatized Mongolian industry to withstand a sudden exposure to foreign competition after decades of sheltered manufacturing could have been anticipated, and a reasonable level of tariff protection for key industries might have mitigated the tremendous human development cost. As noted above, the trade regime applied after 1997 did not reflect the parameters set by Mongolias terms of accession to the WTO. This was most striking in tariff policy, where Mongolia bound its MFN tariff at 20 percent, but applied across-the-board rates at much lower levels,
115 Worden (1989); for example, the T&C industries processed wool and produced woolen cloth, blankets, carpets, knitwear, cashmere sweaters and school uniforms. Between 1960 and 1990, the textiles and clothing industry grew rapidly; total output increased almost 10-fold and that of clothing 13-fold. 116 WTO (2005). 117 Imports increased at an average rate of 8 percent per annum between 1997 and 2002, from US$472 million in 1998 to $690 million in 2002. While exports rose to US$524 million in 2002 as well, the deficit was erased only in 2006 following high commodity prices of mineral exports. Mineral exports face few barriers abroad. The increase in export earnings can be attributed to higher prices rather than increased volume.
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even at zero rates for a short period. Mongolia has not made use of the provisions of the WTO on trade remedies (i.e., emergency safeguards, anti-dumping and countervailing measures) to benefit domestic producers injured by import surges. With the collapse of the light manufacturing industry, unemployment soared, particularly hitting women who constituted a large share of the labour force in light industry. Womens employment levels have fallen in absolute terms and in relative terms compared to mens. In 1992, 69,800 men and 64,100 women were employed in manufacturingthe corresponding figures in 1999 were 62,500 men and 36,300 women. Women were the first to be laid off upon closure off the light industries.118 Skilled workers displaced from light industry joined the move of urban dwellers to herding as a survival strategy (where they suffered again during the dzuds) or to dangerous work as artisanal miners.119 Many also drifted into the informal sector in the cities or migrated abroad, while some were reemployed during the temporary boom in the clothing industry from 2000-2004. The overall decline of manufacturing has given rise to the phenomenon of the working poor. The collapse of light industry also resulted in the destruction of human capital built up over the socialist era. In 1989, Mongolia possessed 46 technical colleges and 30 centres for youth technical training, as well a number of programmes for further technical training in Eastern Europe established for Mongolia. These were all designed to provide a large number of workers for over 1,150 state-owned enterprises. Now the challenge is to overcome the mismatch between the skills provided by training institutions and the qualifications sought by competitive private enterprises.120 Paradoxically, recent figure show that the likelihood of finding employment is inversely proportional to the level of education, suggesting that either high skilled jobs are not being created, or there is a profound mismatch between training provided and required skills.121
2. THE NATURE OF STRATEGIC TRADE PROTECTION
2.1 EXCEPTIONAL TARIFF STRUCTURE As part of its terms of accession to the WTO, Mongolia bound all its tariffs under GATT 1994 at a ceiling rate of 20 percent across the board with a few exceptions. This bound rate is comparatively low for developing countries, particularly in agriculture, where the 20 percent rate is among the three lowest across the G33 countries. Mongolias applied tariff rates are much lower. Before WTO accession, Mongolia applied a uniform rate of 15 percent. From May 1, 1997 until July 1, 1999, tariffs were eliminated across the board only to be re-imposed at a uniform level of 5 percent in 1999. This was increased to 7 percent in January 2001 and then decreased again to 5 per cent in January 2002. This import tariff rate is the lowest in Asia. However due to this single rate, there is neither a pattern of tariff escalation, nor a dispersion of tariff rates between sectors. The UNDP has recommended a rationalization of the tariff structure.122 The Government has stated its aim to impose differentiated import duties to promote domestic production, encourage the transfer of advanced technology, as well as to address concerns related to food security. A proposal to introduce such differentiated tariff rates on 24 items in 13 commodity groups was made by the Customs Tariff Council in 2006 but no action has yet been taken. There are few exceptions to the applied MFN tariff rate of 5 percent, notably a few seasonal tariff peaks of 15 percent or zero percent for some vegetables and flour to manage excess supply or shortage. Mongolia still has considerable flexibility to increase tariff rates to protect industries being injured by import competition, without infringing any of its WTO concessions, or even being required to notify the WTO. The WTO Secretariat has also pointed this out.123
118 119
Burn and Oidov (2001). Mongolia HDR (2003), p. 38. 120 Mongolia HDR (2007), p. 22. 121 World Bank (2008).
122 123
Mongolia HDR (2003), p. 2. WT/TPR/S/145, p. 21.
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Figure 5.1 Bound and applied tariff rates for select products
on Subsidies and Countervailing measures permits countries with GDP per capita below US$1000 to maintain export subsidies (listed in its Annex VII).124 Mongolia was also obliged to convert its export restrictions to duties, some of which (e.g., on raw cashmere) were to be phased out. Such restrictions and duties had been applied to ensure adequate supplies of raw materials for domestic industries. The relinquishing of some of these policy options may have weakened the industrial base built over decades. BOX 5.2 WTO TRADE DEFENCE MECHANISMS
2.2 UNDER-USED TRADE DEFENCE MEASURES From the early history of GATT, trade defence measures -- emergency safeguards, antidumping and countervailing duties) were used primarily by the developed countries. Developing and centrally planned economy countries shielded by high tariffs, quantitative restrictions and state trading regimes had less need for such measures. However, with the trend toward rapid liberalization after the 1980s, many developing countries adopted legislation in these areas, in anticipation that under a liberalized regime, domestic producers would find themselves vulnerable to import surges. Mongolia did not follow this example, and its newly opened market was subjected to surges of imports noted above, including dumped and subsidized imports. After 1997, there is no record of the Government having intervened to shield any domestic industry from the shock of import surges. Mongolias reticence in using trade defence measures contrasts sharply with the policies of its main trading partners (see Chapter Eight) which apply considerably more restrictive tariffs and non-tariff barriers than Mongolia. Mongolia has experimented with a range of tariff rates, all of which count among the lowest in Asia. In its terms of accession to the WTO, Mongolia agreed to remove measures intended to stimulate exports and to ensure supplies for domestic industry. For example, Mongolia agreed to eliminate income-tax exemptions based on export performance, before December 31 2002, although the provisions on Special and Differentiated Treatment of the WTO Agreement
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The central WTO trade defence mechanism is the Emergency Action on Import of Particular Products, embodied in GATT Article XIX, and the Agreement on Safeguards, under which members impose tariff or quantitative restrictions in case a product is being imported in such increased quantities, absolute or relative to domestic production, that it causes or threatens to cause serious injury to the domestic industry that produces like or directly competitive products.125 These measures must be applied against all imports of the product, on an MFN basis. In principle, the country taking the action should compensate the affected exporting countries by giving them concessions on other products; in practice, affected countries rarely request such compensation, preferring to exert pressure to eliminate the original safeguard action. Two other provisions of trade defence are aimed at protecting producers against injury from unfair trade actions. These are dumping126 by foreign firms, and subsidization by foreign governments.127 In either case, producers in the importing country who can demonstrate that they are injured by such imports, can request that addition duties, anti-dumping duties
WTO Agreement on Safeguards, Article 2. WTO Agreement on Implementation of Article VI of GATT 1994; Article 2 defines dumping as the practice of private firms of exporting products prices less than the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting county). 127 WTO ASCM; Article 1n (where the government provides a benefit to the producers or exporters of a product).
126
125
or countervailing duties, be levied to offset the margin of dumping or subsidization to the extent necessary to prevent or relieve the injury. In these cases, the action is taken only against the offending countries. Over 100 anti-dumping actions were taken just in the last six months of 2007: the main plaintiffs were India, the United States and Koreatheir primary target was China. The Agreement on Agriculture also permits those members who converted their quantitative restrictions into equivalent tariff rates in the Uruguay Round to apply Special Safeguards based on a trigger quantity/trigger price mechanism, which, unlike the above provisions requires no proof of injury.128 These safeguards are available mainly to developed countries. The developing countries members of the G33, including Mongolia, are pressing for the institution of a roughly similar Special Safeguard Mechanism to protect the livelihoods of small farmers. Free Trade Agreements also include safeguard clauses, usually permitting parties to restore the tariff rates prevailing before the Agreement to protect against injury. Such mechanisms normally expire after a transition period, but parties still retain access to the WTO trade defence provisions. Trade defence mechanisms reflect, in domestic laws, the rights recognized in the WTO Agreements that any domestic industry may seek protection from unfair completion from dumped and subsidized imports and second, where liberalization has been too rapid, or where there has been a rapid change in competitive conditions, to provide industries with a breathing space to adjust. Such measures empower small producers and poorer people to better defend their interests in a globalized world. Trade defence mechanisms should be distinguished from infant industry protection, where higher tariff protection is granted to provide selected industries with the time necessary to accumulate and consolidate technological know-how so as to be competitive over the long haul.
128
The argument used for infant industry protection is that because of the presence of dynamic inefficiencies in new industries, a temporary tariff gives them time to mature and become competitive. The criticism is that it often the infants are protected well into middle age and inefficient industries are protected indefinitely. However, in the case of Mongolia, the human capital would seem to exist, and the industries cannot be considered infants, but rather in convalescence, thus such risks appear lesser.
3. NEW LEGAL INITIATIVES
In the socialist era, foreign trade was under the monopolistic purview of the state. The transition to a market economy created the need for a legal basis for private companies and individuals to engage in foreign trade. One such legal instrument was the 1996 Custom Tariffs Law. The Customs Council, chaired by the Minister of Finance, is tasked with deciding when to levy additional tariffs. The law stipulates that increases up to 50 percent in tariffs must aim to regulate imports of some products and establish an optimal structure of domestic market.129 It also mentions that tariff rates may be altered without specifying any limits, and they could be in place temporarily for a period of six months. Furthermore, Article 8 of the law is clear on the use of anti-dumping and compensating tariffs when imports cause or may cause damages to domestic producers, hinder production or expansion of production of competing domestic products, discriminate against Mongolia and violate its interests. The Customs Council is responsible for justifying the use of such measures, which must be endorsed by the government. However, the WTO Review of Trade Policy in 2005 found that Mongolia imposes neither anti-dumping nor countervailing measures. There is no provision in Mongolias current legislation covering safeguard measures.130 Thus, despite the existence of explicit legal provisions, Mongolia has not invoked any of these articles. One possible explanation for this inaction is that while the Customs Tariff Law
129 130
WTO Agreement on Agriculture, Article 5.
Custom Tariffs Law, Article 7, 1996. WT/TPR/S/145, p. 34.
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allows the business community to be represented in the Customs Council, the law is silent on which companies from which sectors should be elected as members. Further, there was a lack of a coherent industrial development policy that spelled out strategic actions to be taken regarding specific industries. The lack of such guiding policy resulted in an ad-hoc customs policy that was not responsive to strategic needs. This situation could change after 2008. As a result of recent amendments to the Customs Tariff Law effective from July 1, 2008, the clause relating to additional duties has been removed and separate laws on trade remedies (Safeguard Law, Anti-Dumping Law, Subsidy and Countervailing Duty Law) are being drawn up. Thus, Mongolia is in theprocess of enacting several laws that apply these three trade remedies in conformity to the relevant WTO Agreements. Currently, three major trade-related documents have been drafted by the Governmentthe draft on Foreign Trade Policy Guidelines and three drafts of trade regulation laws (the Foreign Trade Law, the Safeguards Law and Anti-dumping Law). The Foreign Trade Policy Guidelines embodies the view that a comprehensive legal environment for regulation of trade should be created in Mongolia, where it is stipulated that foreign trade policy should support domestic industry by means of measures such as customs tariffs, nontariff measures, licensing, quotas and embargos. In addition, the draft Foreign Trade Policy Guidelines of 2008 explicitly mention that trade policy should be concerned with cases when excessive imports can cause harm to domestic industry and the government can undertake anti-dumping and safeguards measures within the WTO framework. Mongolias draft Safeguards Law aims to create a legal mechanism for domestic producers to apply for government protection in cases when imports cause serious injury. This is the first time that such a mechanism has been created and its importance for fine tuning domestic trade policy cannot be overestimated, since the previous Custom Tariffs Law merely provisioned for a part-time Customs Council without elaborating on the full process. The Safeguards Law redresses this and lays down a foundation for an agency to be established to be in charge of protecting domestic producers from injuries imposed by unfair import surges
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and to investigate claims made by domestic producers. The agency would ensure that the Safeguards law, other government regulations, and the WTO provisions are fully complied with. Until now, no such watchdog agency existed. BOX 5.3 THE NEW SAFEGUARDS LAW: WHAT DOES IT CONTAIN?
Article 1 defines the purpose of the law, which is to protect domestic industry and market from extreme surges in imports. Article 3 defines the framework of the law: first, to investigate damages from imports; and second, to implement required measures after an investigation if deemed necessary. Article 4 defines terms such as temporary protection measures, significant injury/ damages, quota, domestic producers, investigation of possibility of significant injuries to domestic producers, potential threat, etc. Section 3 describes how claims can be lodged by producers and how they should be responded by the Safeguards agency within a stipulated time; the type and scale of protection measures to be applied if imports are found to cause significant damage to industry. The applicant company must submit information regarding its output volume, registration license numbers, percentage of sales of its products and competing import products in the domestic market, and its opinion regarding the impact of import surge on competing domestically produced product. Articles 8-11 specify the procedure and duration of investigation. Section 4 deals with protection measures. After investigation, the Safeguards Agency appoints a commission to recommend implementation of temporary protection measures if the investigation found damages to have occurred. These temporary measures include special custom tariffs on injurious imports, a temporary quota or an import embargo. Protection measures will be limited to four years in general, though they might be extended after additional considerations. Both temporary protection measures and protection measures may not be longer than 10 years in total.
The Safeguards Law is expected to create a necessary legal framework for government to engage in a dialogue with domestic producers regarding regulation of trade. It will also create for domestic producers the right to seek protection from injury caused by dumped or subsidized imports or sudden import surges. Since the majority of Mongolian producers are small and medium enterprises, the law will predominantly help SMEs.
4. NEW INDUSTRIAL POLICY
BOX 5.4 ON BACKWARD AND FORWARD LINKAGES The importance of forward and backward inter-industry linkages was articulated by Albert Hirschman in his 1958 classic, The Strategy of Economic Development. He critiqued the view that a coordinated, broadly based investment programthe Big Pushwas necessary to take a poor country out of its low-income trap. Hirschman instead suggested that to get started, a few key sectors should be promoted with strong inter-linkages. For Hirschman, an industry creates a backward linkage when its demand enables an upstream industry to be established at least minimum economic scale. The strength of an industrys backward linkages is to be measured by the probability that it will push other industries over the threshold. Forward linkages are defined by Hirschman as involving an interaction between scale and market size, involving the ability of an industry to reduce the costs of potential downstream users of its products and thus, again, push them over the threshold of profitability.131 If mining is an important sector of an economy, how can such backward and forward linkages be created with the rest of the manufacturing base, so that the benefit accrued is much more than taxes, royalties and dividends. Because large-scale mineral extraction is highly capital-intensive, this is a real challenge, which UNCTAD (2007) posits in these terms: how to add value through extractive activities, how to capture that value locally, and how to make the best use of the revenues generated. The scope for backward linkages is relatively small in extractive industries, especially if the host country does not have the required material or human inputs and it does not influence the procurement policies of foreign firms. It is documented that in developing countries, local sourcing of
The liberalization policies aimed at promoting the efficiency of the Mongolian economy may have had the opposite effect on several industries due to the destruction of human capital engendered by the rapidity of the adjustment process, and the parallel dismantling of tariff protection. In order to survive, skilled industrial workers were obliged to take on employment as underskilled herders, leading to the unsustainable size and reduced quality of herds, or to become artisanal miners working under hazardous conditions and straining the environment. Many joined the informal services sector as petty traders becoming part of the urban underclass or went abroad to work in factories. Female informal workers and migrant workers are most vulnerable to economic downturn, because often they are not protected by labour laws and social safety nets. At the same time, producers were left undefended against dumped and subsidized imports, including the so-called food aid, with the result that industries which might have become sustainable over time were extinguished by foreign competition. Ironically, the only major growth of the industrial sector, the relatively short-lived boom of the clothing industry described in the following Chapter, was stimulated by protectionist measures of the United States and other countries.
131
Hirschmans example was that of cement: multi-wall bags are firms created through backward linkage, and those making cement blocks are created through forward linkages.
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specialized inputs is often only limited to basic activities such as catering, cleaning and construction services. An advantage of involving trans-national companies in the financing of mining projects is that it does not generate foreign debt, and such financing comes bundled with technological and managerial expertise. But these have to be managed, for the academic literature is flooded with the concepts of the rentier state, Dutch Disease, and resource curse that almost always have their origins in the mismanagement of the bounty. The onus of optimally utilizing the benefits from extractive industries is on the state. It must channel them into productive investments so that the country creates a pool of educated and skilled human resources. The revenue can be maximized by negotiating appropriately, from local procurement policies to the nature of infrastructure investments in public utilities and transport networks. A proactive government could also ensure that the firms not impose a heavy toll on the environment but instead use modern technologies.
Source: Krugman (1995); Hirschman (1958), UNCTAD (2007).
employment.132 These linkages can serve as a conduit for the state-of-the-art technology applied in the minerals sector to permeate throughout the manufacturing and services sectors. BOX 5.5 REVIVING THE LEATHER INDUSTRY
Leather is a product of the traditional livestock sector of Mongolia, and it remains an industry that has not lost its human capital base totally. Mongolia continues to export leather, mostly in the form of hides and skins. Processing is carried out mainly by the 60 or so SMEs employing around 5,000 workers. However, these factories are operating at only a fraction of installed capacity, and production is hampered by outdated technology. The high cost of imported chemicals has been a handicap to productivity. The waste water produced in leather processing causes considerable environmental damage. Without the introduction of modern technology and a geographical regrouping of firms, growth in the leather industry will not be sustainable. Many of the problems in quality need addressing at the early stages of production like the slaughterhouses. They are also part of an overall policy of upgrading meat production and revitalizing the soum centres to empower the herders to benefit from international trade. In this regard, market access for leather exports is key. Leather products are protected by high tariffs in most developed countries. The US and Canadian GSP schemes largely exclude leather goods, while in Japan GSP preferences take the form of positive rates and are subject to TRQs. Tariffs on leather are high in China (14-25 percent range), and lower in the Republic of Korea (8-16 percent).133 The proliferation of regional trade preferences is eroding Mongolias conditions of access in the main markets. For example, China grants a 50 percent tariff preference on leather goods to APTA partners, and has entered into a free trade deal with ASEAN countries.
Any future industrial policy of Mongolia thus needs to meet two core challenges of: 1) reviving the human capital base needed for industrialization in sectors with viable domestic demand or export-orientation, and 2) forging durable forward and backward linkages with the booming mining sector. As demonstrated by the dramatic but temporary resurgence of the textiles and clothing industry, Mongolia still has elements of a human capital foundation necessary to support the resurgence of certain industrial sectors. They could provide employment opportunities, particularly for those workers, mainly women, who were displaced from the T&C sector after 2005. However, future industrial policy needs to build upon the linkages with the minerals sector. The Mongolia HDR 2007 recommended that budgetary funds from mining be used to strengthen manufacturers and services with forward and backward linkages to the minerals sector as a means of stimulating
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132 133
Mongolia HDR (2007), p. 66. See UNCTAD (2000).
Essential components of such an industrial policy would be a reform of the education sector to upgrade skills en-masse and to induce back migrs who have obtained industrial skills abroad. Tariff adjustment may prove necessary, to depart from the across theboard 5 percent rate, and to grant free entry for essential intermediate imports. Trade laws and regulations should include consultative mechanisms that empower stakeholders and civil society to defend their interests in the trade policy formulation process, particularly prior to entering into trade negotiations. Stakeholders need a credible forum to express their views regarding the need and nature of strategic trade protection. This would have the added advantage of bolstering faith in the countrys democratic processes.134 In this area there is probably the need for technical assistance from international organizations or countries experienced in the use of such measures. Furthermore, there should be an effort to diffuse information on WTO rights and obligations and the related domestic laws with a view to empowering stakeholders to exert a greater influence on trade policy formulation and implementation. There appears to be widespread misconceptions as to extent to which the extreme trade liberalization measures in place are actually required by the WTO.
ANNEX TO CHAPTER FIVE
MONGOLIANS ABROAD The decline of employment in the manufacturing sector has been a cause of outward migration by Mongolians in recent years.135 Of the 110,000 or so Mongolians currently living abroad in over 30 countries, 23,000 are migrant workers under some form of a labour agreement, 8,000 are students, 17,000 are immigrants and the rest are believed to be undocumented. The largest destination of such migrants is Korea, where it is estimated that 30,000 Mongolians live and are mostly employed in heavy industry, restaurants, trading companies and grocery stores. Mongolians wishing to migrate to Korea for work are required to obtain a score of at least 120 on the Korean Language proficiency test. In 2007, over 14,000 Mongolian candidates sat for this test and more than half failed. An estimated 25,000 Mongolians (many of Kazakh ethnicity) are living in Russia and Kazakhstan.136 The number of Mongolians in China is believed to be large but not determined. Another major destination is the Czech Republic, where the number of migrant Mongolians exceeded 7,500 in 2008. They work in factories producing auto parts, tanneries, textile and clothing and lately, agriculture. Other important European destinations for Mongolian workers are Germany (7,000), the United Kingdom (5,000), Ireland (1,500), France (1,000) and Poland (1,000). There are an estimated more than 10,000 Mongolians living in the United States. A study of a sample of Mongolians living in Denver, San Francisco and Los Angeles revealed that almost all (98.6 percent) worked and studied previously in Mongolia. At least every four in five Mongolian migrants in the US have a bachelors degree
135
134
Mongolia HDR (2003), p. 2.
Remittances have increased from US$10 million per annum in the late 1990s to US$174.3 million in 2007. 136 Mongolia HDR (2003), p. 43.
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or higher. Yet, many do not have work permits, and thus are engaged in relatively low-paid jobs. Mongolia has signed a Memorandum of Understanding with Korea to hire foreign workers under its Employment Permit System (EPS). This is a government-to-government hiring scheme that protects foreign workers welfare and rights. It sets a quota for the number of workers to be admitted into Korea and the specific industries in which foreign workers are allowed. A three-year employment period is set with an initial one-year labor contract, which is renewable annually. In this system, the national laws of Korea also apply to the migrant workers. With the signing of the Social Security Agreement between Mongolia and the Republic of Korea in May 2006, Mongolians living in Korea became eligible to benefit from pension insurance. A Social Insurance Office was established in Seoul in August 2007, and as of November 1, 2007, 3,416 Mongolians in Korea contributed MNT 273 million to the pension fund. The success of this agreement with Korea suggests that similar agreements could be sought in other countries where Mongolians work in large numbers. The growth in remittances from Mongolians abroad has been the main motivating factor for migration regardless of educational background. Cash remittances grew from US$10 million in 1990 to a peak of US$200 million in 2004; it stood at US$174.3 million in 2007. While the scale of brain drain from Mongolia has been significant (relative to its national population), it can be argued that a reserve of human capital is being built up abroad. An appropriate policy response would be to offer incentives to tap the reservoir of skills that these migrants have accumulated. The temporary movement of persons is a subject for negotiations in the Doha Round (GATS Mode 4) and is often covered by more specific provisions in bilateral agreements specific to labour movement or within the framework of FTAs. The development community has
adopted a concept of circular migration, under which migrant workers accumulate experience and competence which when they return to their home country are put at work for their own benefit and the benefit of their country. However, this can be achieved only if countries adopt proactive policies to facilitate the re-insertion of the migrants.
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CHAPTER
LEARNING FROM A PROTECTIONIST BUBBLE THAT BURST:

The Case of Textiles and Clothing
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LEARNING FROM A PROTECTIONIST BUBBLE THAT BURST
1. THE STATE OF TEXTILES AND CLOTHING (T&C) AND HUMAN DEVELOPMENT The expansion of the T&C sector during the final years of the WTO Agreement on Textiles and Clothing (1995-2004) was based on a peculiar situation in the international trading system and was not sustainable in a world of freer competition. However, Mongolia still possess the necessary human capital, and the raw material and processing facilities that provide the potential to increase productivity from the herder to the clothing exporter that would enable the poorer segments of the sector to draw greater benefits from international trade. 1.1 GAINS FROM THE RISE OF THE INDUSTRY Between 1960 and 1990, Mongolia built up a large specialized T&C industry, which by 1990, was the largest industrial employer with more than 20,000 workers. Like other light manufacturing industries, however, the T&C industry virtually collapsed during the post-1990 transition. The respite came when the United States extended full WTO treatment to Mongolia in 1999 (two years after its accession in 1997) and exportoriented foreign investment companies began to pour into the Mongolian T&C sector, seeking to avoid quotas that had been imposed by the United States and other developed countries against competitive suppliers, particularly China, under the GATT Multi-fibre Arrangement (MFA). All quotas were slated for elimination on January 1, 2005, under the WTO Agreement on Textiles and Clothing (ATC). The years until that deadline provided an opportunity for business, particularly due to the fact that the Agreement had been back loaded, in that nearly half the T&C imports (by volume) were not required to be liberalized until the final deadline. Thus, in the late 1990s, Mongolia built up a Ready-Made Garment (RMG) sector based on FDI from East Asian countries, especially China, Hong Kong SAR, Chinese Taipei and Korea, which had filled out their quotas to developed countries. Most RMG products were cotton apparel made from cotton fabric imported from China. In 2004, these articles accounted for 22.7 percent of total exports. This quota-propelled industry reached
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its peak between 2000 and 2003, employing up to 30,000 workers.137 By 2001, the number of foreign-invested factories had increased to 77 out of total 82 factories.138 These new employment opportunities had important human development aspects: First, most of employees were women. According to one report, sewing-machine operators-workers commanded a total monthly pay package, including food and transportation, equivalent to about US$110.139 This empowered women economically. Second, a number of subcontractor companies operated in the rural areas, contributing to an increase of employment opportunities there. Since an average Mongolian family has about 4.5 members, the industry supported livelihood of about 80,000 citizens. This boom was made possible by two main factors. Mongolian exports were unrestrained in the US market, while those of its major competitors were not. The country also possessed a pool of trained workers (from the T&C industry prior to 1990) that could be rapidly deployed to service orders for large US retail chains like Wal-Mart, QVC shopping, J.C. Penney and Target.140 These opportunities were exploited by transnational companies that not only produced themselves, but also allocated a large number of orders to Mongolian domestic companies. The industry emerged as the third largest recipient of FDI after mining and services.141
ADB (2006). MIT et al. (2006). 139 Lynch (2005). 140 Other brand names that imported from Mongolia included Ann Taylor, Sears, Liz Claiborne, Adidas, Dawson Forte Cashmere Co., London Fog, Gap and Old Navy. 141 Foreign investment in light industry actually exceeded that in mining in 2000, reaching US$26 million compared to US$18 million in mining.
138
137
BOX 6.1 HUMAN DEVELOPMENT DIMENSIONS OF T&C Because the production of ready-made garments (RMG) is labour-intensive, the industry has created millions of jobs in developing countries, especially for young women with limited education attainment. In Asian LDCs like Bangladesh, Cambodia, Nepal and Lao PDR, women accounted for at least 80 percent of the RMG workforce on average. For the majority of workers, this is their first paid job. Despite rough work environment, low pay and long-working hours, the industry provides regular income to women, many of whom would otherwise be excluded from participating in the formal economy. The job in the RMG industry becomes a vital component for the familys financial security as the majority of the workers remit a significant proportion of their salary to families in rural areas. Remittances are used to buy necessities, pay education fees for workers siblings and/or children, invest in agricultural inputs and construct or renovate houses, among others.
Source: UNDP (2005)
1.2 LOSSES FROM THE FALL OF THE INDUSTRY On January 1, 2005, the WTO Agreement on Textiles and Clothing (ATC) was fully implemented by abolishing all the remaining quotas. China benefitted from this liberalization as it had acceded to the WTO in 2001. The elimination of quotas completely changed the pre-2005 situation in the global garment industry and trade. The purchasing companies shifted their orders from Mongolia to China, Vietnam, and other Southeast Asian countries, where production, transportation costs and other competitive conditions were more favourable. By the end of 2005, Mongolian exports of garments to the United States fell by over 40 percent in value (from US$229 million to US$134.7 million).142 This resulted in a decline in the number of workers employed in the clothing sector to around 11,000 by the end of 2005. By 2007, the share of T&C in total exports stood at a mere 1 percent indicating both an absolute and relative decline of the industry as other exportdependent industries rose.
Figure 6.1 Clothing exports (in US$ 000)
Table 6.1 Investments in garment industry by country

1996 Number of foreign-owned companies Average value of foreign direct investment for a company (US$000) Foreign direct investment, by country China Hong Kong (SAR) Taiwan (POC) Korea, Republic of US United Kingdom Virgin Islands Russia Germany 576.1 619.9 10.7 15 396.8 5,882.7 1,623.4 242.5 300.2 2,509.9 2000 86 458.8 27,496.1 7,807.6 7,203.2 8,127.2 3,045.7 752.0 48.0 500.0 12.4 2002 80 439.1 263.9 4.9 115.8 103.2 40.0 Source: Customs statistics, 1996-2007
The foreign investors who established factories in Mongolia at the beginning of 2000, and even received tax benefits linked to export performance, were fully aware that the quotas would be abolished four years later and they might have had to shift their production. No polices were, however, put in place to prepare for the inevitable adjustment that the industry would face in 2005. In fact, there were expectations that Mongolia would continue to
142 The volume of US imports also went down by 30.6 percent in one year after the expiry of quotas; see Adhikari and Yamamoto (2006).
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benefit from other such global policy distortions. This specifically included the safeguard measures, justified under the terms of accession of China to the WTO that the US had in place against a possible surge of imports from that country. The investors were thus expected to not relocate to China immediately. Although the US did apply such safeguards, US import data from Mongolia for the first nine months of 2006 made it clear that the decline had begun. Compared to the corresponding period of 2005, there was a slight rebound in the export of knitted RMG products by 3.1 percent in terms of volume but a nearly 25 percent decline for woven RMG products. A combination of factors contributed to the non-sustainability of the modern T&C industry. Energy and transportation costs have risen in the past few years, as have relative wages within Mongolia because of the mining boom. Markets had not been diversified, and there was excessive reliance on the US market. Indigenous producers had been highly dependent on intermediaries, partly because of government policies that favoured export-oriented foreign investment. While some of these problems existed in the pre-2005 period as well, the quota-rents were high enough to cover for inefficiencies.
Figure 6.2 Value of US T&C imports from Mongolia, 19952005 (in US$ million)143
market (e.g., womens undergarments). Another is that of Cambodia, which used its respect of labour rights (imposed in its terms of accession to the WTO) as a sales advantage. Thailand, on the other hand, became a major supplier of fabrics to ASEAN countries taking advantage of the cumulative rules of origin provision in the EU GSP. The imposition of temporary safeguards against China over this period (2005-2007 for EU and 2005-2008 for the US) may have contributed to some of this success. But generally, countries that prepared for the eventual elimination of quotas fared better than those that did not. It is not that Mongolia did nothing. In 2003, it issued Decree No. 207 and approved a program to develop the T&C industry by identifying new markets, developing external relations, establishing a favourable legal environment and improving management and productivity. But these have proved inadequate.
Table 6.2 Share of T&C in the Mongolian manufacturing sector (in MNT millions)
Gross Product Total clothof manufacing producturing tion (1995 compar(1995 prices) ative price) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 58,523.6 67,739.2 45,440.4 67,769.2 64,511.2 75,747.9 94,159.1 100,468.1 92,683.52 68,771.72 86,765.31 103,368.4 2,461 1,659.3 1,752.2 1,997.4 2306 41,88.9 10,348.3 138,63.0 112,88.81 3,826.91 3,595.8 2,423.3 Share (%) Growth of clothing rate of total sector in clothing manufacproduction turing and sales 4.2 2.4 3.9 2.9 3.6 5.5 11.0 13.8 12.2 5.6 4.1 2.3 -66.0 -32.6 5.6 14.0 15.5 81.7 147.0 34.0 -18.6 -66.1 -6.0 -32.6
With the anticipation of the end of quotas, government industrial policies aimed at enhancing productivity might have softened the losses from the eventual collapse of the industry. Other Asian countries such as Bangladesh and Cambodia were seen to have taken such measures. Post2005 their exports to the US expanded even in the absence of any preferential treatment. In the EU, where they receive tariff preferences as LDCs, they continued to do well. One example of an adjustment strategy was that followed by Sri Lanka, which shifted production to complicated niche items in high demand in the United States
143
Source: National Statistics Data 1996-2007.
1. CONDITIONS FOR THE SECTORS REVIVAL
Adhikari and Yamamoto (2006).
The dramatic rise and fall of the T&C sector prods policymakers to think hard about a realistic assessment of Mongolias potentials. The overall strategy of the government to revive the T&C sector should: a) enhance and deepen international market access; b) improve domestic competitiveness and trade facilitation;
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and c) mitigate adverse human development consequences.144 In this regard, some of the important issues are as follows: Is there a supportive policy framework for investments and exports of T&C? Is there entrepreneurial capacity? Can the sector be competitive in terms of input costs especially wages? Can Mongolia carve its own niche in specialized products? 2.1 POLICY INITIATIVES The Decree No. 207 issued by the government in 2003 planned two additional phases of support, from 2005 to 2008, and from 2009-2015, to raise the countrys competitiveness. Within this framework, the measures announced were as follows: In March 2005, up to 50 percent of social insurance taxes paid by the T&C employers would be compensated based on production outputs.145 Around 35 companies applied and received the social contribution tax repayment worth MNT 633 million at the beginning of 2006; On March 18, 2005, the Parliament of Mongolia decided to exempt raw materials, spare parts, primary and accessory materials imported for the purposes of T&C sector from import taxes and VAT. This resulted in an estimated savings of US$7.8 million in taxes for the employers; The government stepped up its effort to find alternative markets. It applied for GSP+ status for EU exports and obtained tariff reduction from July 1, 2005; From January 1, 2007, a more favourable tax environment for domestic producers was created with the reduction of the corporate income tax to 10 percent for annual incomes of up to MNT 3 billion a year and to 25 percent for annual incomes above MNT 3 billion a year; and An initiative was undertaken to negotiate a free trade agreement with the US. These have been necessary but insufficient. Existing opportunities remain under-utilized, such as the concessions under the GSP+ scheme of the EU for T&C. While it is difficult to predict
144 145
what extra set of government measures could support the industry, some of the gaps mentioned are: a) better information and research on the needs of foreign markets; b) greater funding aimed at creating design centres, and enhancing productivity; c) enforcement of ISO standards; and d) consolidation of buyers-and-sellers networks. 2.2 INDUSTRY CAPACITY Before 1990, when the national production network of T&C factories was in place, Mongolia had an adequate number of engineers, technicians and skilled workers. This trained workforce was displaced as the domestic industry collapsed and demand was met through imports. While human capital existing in this sector allowed Mongolia to seize the quota-led market opportunities in the export of clothing after the late 1990s, the decline of the industry this decade has implied a sharp contraction in total employment, by 36 percent between 2004 and 2006 alone. Efforts to revive and develop a new cadre of skilled workers, especially in knit-wear, are linked with broader education and macro-economic policies and are clearly long-term in nature. Over the medium-term, the government could take measures to building Mongolias reputation for quality clothing based on cashmere woven fabric. 2.3 WAGES AND OTHER INPUT COSTS With the development of the mining industry in Mongolia, wages of workers employed in productive sectors have been increasing. In 2005, the minimum livelihood level or minimum salary per month was fixed by the Government at MNT 40,000 (or around US$33). In 2008, this was raised to MNT 108,000 (around US$92). When this is compared to wages elsewhere in Asia, Mongolia is less attractive to investors seeking to save on wage bills. In 2006, Cambodia fixed its basic monthly salary at US$45; Lao PDR at about US$26; and from May 2007 onward, Sri Lanka at US$54.5.146 Although there is no official wage data for the T&C industry in Mongolia, a total monthly pay package, including food and transportation, is reported at about US$110-$150.147
146 147
Draws on UNDP (2005b). Government Resolution No. 32.
Yamamoto (2008). Lecraw et al. (2005).
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Clothing industries in developing countries typically rely on a substantial share of intermediate import. Thus, for them to be competitive, the difference between CM prices (including costs for cutting out patterns, sewing, packaging, labelling) and the minimum wage have to be within a reasonable bound. If this margin shrinks because of higher transportation or input costs, the firms production structure is not viable. There are other kinds of indirect costs (including pre-production, design assists, efficient communication and special knowledge such as fabric sourcing) that countries can seek to minimize through specialization and networking, while building up advantages by negotiating a duty-free access to a major market or catering to close proximity consumers. The government could also adopt measures to reduce input costs on power, transport and key raw materials. There are, however, limits to how much these can offset the more fundamental handicaps embodied in the direct input costs. Mongolia could make an extra effort to be known for the production of quality niche products (as in Sri Lanka) or a record of verifiable compliance with international labour and environmental standards, as in Cambodia. Through marketing efforts, reputations must be earned for quality, reliability, and compliance with product and process standards. These could be intensified through trade fairs and export promotion, aimed at building relationships with consumers who increasingly care not only about costs but also ethics and consumer conscience. Working conditions in the factories should be improved in a way that becomes a selling point as well as a motivating factor that boosts worker productivity. Wages for manufacturing workers, according to the ILO Labour Statistics Database (LABORSTA), show that the ratio of womens income to mens income was 1.17 in 2000, i.e., on average women received higher monthly salaries than men in manufacturing. This ratio has declined since. It was 0.91 in 2004 and 0.77 in 2005. Since working hours are not available, womens lower income may be driven either by lower hourly wages and/or fewer working hours. In Mongolia, more women than men enrol in school at all levels from primary to tertiary, therefore it is difficult to explain the sudden decline in womens income relative to men as being driven by productivity differences.
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BOX 6.2 TIME AND OTHER DRIVERS OF INTERNATIONAL COMPETITIVENESS While low wages can still give developing countries a competitive edge in world markets, delivery and response times now play a crucial role in determining competitiveness. The comparative advantage of developing countries in the assembly process, i.e. in low-wage sewing, does not necessarily translate into a comparative advantage in managing the entire supply chain when all services-related dimensions are taken into consideration. Countries that aspire to maintain an exportled strategy in textiles and clothing need to complement their industrial cluster of expertise in manufacturing by developing their expertise in the higher value-added segments of the supply chain. National suppliers need to place greater emphasis on the education and training of servicesrelated skills, such as design, material sourcing, quality control, logistics and retail distribution.148
2.4 PRODUCT CHOICE The exports from Mongolia that declined most sharply in 2005 were those items on which quotas expired at the end of 2004, and for which there are significant competitors. Table 6.3 shows the top US T&C imports into the US from Mongolia, based on their value in 2004. Four out of five items (except knitted jerseys and pullovers of man-made fibres were heavily constrained by quotas in the US market, therefore, increased competition was predicted. Three out of the top five items experienced a significant decline they are all RMGs of knitted jerseys and pullovers of cotton, cashmere and man-made fibres, whose export value plunged by 35.1, 91.6 and 54.8 percent, respectively. Two other products, womens and girls woven cotton trousers and knitted cotton T-shirts, are also common RMGs produced by many other countries. Cotton is imported from China, and Mongolia does the most labour intensive parts of production such as sewing.
148
OECD (2004).
In contrast, knitted goods of cashmere and wool are top-end products with high-value addition. Table 4 shows rough estimates of average unit price (AUP) of knitted and woven (sewing) exports. Mongolia, with disadvantages of being landlocked and having a relatively small domestic market, continues to face tough competition from other Asian countries with sea ports and an abundant supply of labour. Mongolia could thus find it easier to compete in niche products associated with pure cashmere and wool, or their blends. Mongolia has not been successful in establishing vertical integration for export markets for its traditional products of wool and cashmere. As a result, exports of such products take the form of combed wool and cashmere, not yarns and clothing. More than half of foreign exchange generated from cashmere-related trade consists of exports of raw cashmere to China. The price of raw cashmere is less stable than that of manufactured cashmere products. Therefore, it is more beneficial for Mongolia to process the raw cashmere and export finished products. This effort to create and capture more value within the border would help employment creation, especially for women. As part of Mongolias terms of accession to the WTO, it agreed to replace the ban with an export duty bound at 30 percent ad valorem, which has now been extended until 2012 under a WTO waiver. However, this policy of ostensibly benefiting domestic processors has not had a meaningful impact (see Chapter Three).
Table 6.3 Top five T&C imports from Mongolia into the US, 2004-05
Commodity (HS code)
Of the 85 factories registered in 2003, 42 operated in primary stages of cashmere processing (e.g., washing and combing), 37 in knitted processing, and only six factories in what can be considered sophisticated production (MIT 2006a). Utilization of production capability is lowin 2003, the washing, combing, spinning and weaving process of production operated under 70, 55, 90 and 30 percent of production capacity, respectively. It has been estimated that if all raw cashmere produced in Mongolia were fully processed into finished knitted and woven products before export, they would generate about US$206 million more than the 2005 level of the countrys entire T&C exports, and employment in the processing industry would more than double.149 Similarly, the wool sector also lacks vertical integration. Unlike cashmere, wool is dominated by domestic firms. In 2004, more than US$6 million worth of sheep wool was exported94 percent of it to Chinawhile exports of final products such as carpets declined. Like cashmere, processing of wool products is much lower than full utilization level. Processing of washing, spinning, weaving and felt/felt boots are running at 70, 3.3, 27.7 and 40 percent of production capability in 2003, respectively. During the peak period of T&C production in Mongolia, 90 percent of clothing exports comprised of nine products, mainly mens and womens suits. Clothing factories specialized in relatively simple designs requiring less sophisticated skill on the part of workers. As the foreign companies had, perhaps, no intention of remaining in Mongolia post-2005, there was little effort put into upgrading the expertise and skills of Mongolian workers. Despite the neglect, for a sector eyeing a revival, a strategy that focuses on building upon this experience of specializing in products with less complicated designs could kick-start export growth.
2004
2005
% Change 04-05 -35.1 -9.7 -91.6
Knitted cotton jerseys, pullovers, cardigans waist53,072,983 coats and similar articles (611020) Womens or girls woven cotton trousers (620462)
34,443,733 35,084,568 2,887,544
38,832,389
Knitted cashmere jerseys, pullovers, cardigans waist34,369,618 coats and similar articles (611012) Knitted man-made fibres jerseys, pullovers, cardigans waistcoats and similar articles (611030) Knitted cotton T-shirts, singlets and other vests (610910)
21,323,058
9,637,070
-54.8
5,860,528
2,580,009
-56.0
Source: Adhikari and Yamamoto (2006).

149
Lecraw et al. (2005).
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Table 6.4 Main clothing products exported (in US$000)

Code Product description Overcoats, cloaks, anoraks, jackets, capes (men) Overcoats, cloaks, anoraks, jackets, capes (women) 2003 2004 2005 2006 2007
BOX 6.3 FTA WITH THE UNITED STATES: YARN-FORWARD RULES OF ORIGIN In Mongolia, as in several other Asian developing countries, the T&C sector is in the forefront of those lobbying the government to enter into a free trade agreement with the US. Duty free access to the US market is seen as one way of acquiring some competitive edge in competing with Chinese exports to that market (unlike other countries, the US does not grant GSP benefits in this sector). Beginning in the mid-1990s, the US has negotiated a series of FTAs with developing countries. At first, many of these countries experienced spectacular growth in their clothing exports. However, with the end of the ATC, these FTA partners quickly began to lose their share in the US market to non-preferential suppliers. Once the quota discrimination was removed, the margin of tariff preference was not sufficient to provide a meaningful competitive advantage. This weaker competitive position was exacerbated by the yarn-forward rules of origin in US FTAs, which state that to benefit from duty-free entry into the United States, clothing has to have been produced from yarn and fabric originating either in the exporting country or in the United States. This provides a captive market for US exporters of such yarn and fabric. Importers in the United States are unanimous in their condemnation of the yarn-forward rules. For example, the submission by the relevant sectoral advisory committee (ITAC5) on the US-Bahrain FTA is eloquent on the impact of the yarn forward rule: all retailers participating in the survey reported that yarn-forward rules of origin have affected their sourcing operations by accelerating the shift in apparel trade away from preferential trading partner countries, such as Mexico, that are subject to this rule to certain large Asian suppliersalthough segments of the US textile industry have strongly advocated a yarn-forward rule of origin in FTAs, experience has shown that such a rule has the opposite effect and has resulted in an accelerated shift of apparel sourcing to China. US FTA partners are
6201
3,424.5
1,607.6
65.3
33.8
40.5
6202
468.7
296.4
44.4
3.6
22.4
Suits, ensembles, 6203 jackets, overalls, 11,742.8 13,474.7 10,037.2 7,972.8 5,627.0 trousers (men) Suits, ensembles, vests, dresses, 6204 31,449.2 33,460.8 27,710.5 20,520.8 14,654.3 skirts, trousers, overalls (women) 6205 Shirts (men) 6206 Shirts (women) 6207 6208 6209 Underwear (men) Underwear (women) Childrens garment and clothing accessories 9,555.6 595.7 2,132.6 2,480.1 9,278.3 13,654.5 10,390.2 3,772.5 519.1 658.0 2,936.5 331.7 151.1 390.3 780.6 40.4 1.9 57.7 334.9
0.5
3.2
0.0*
0.2
Source: Customs Statistics 2003-07.
3. TRADE FLOWS AND DESTINATIONS
3.1 EXPORT OF T&C Since 1999, when the United States removed its application of WTO Article XIII against Mongolia, it rapidly became the dominant export destination for Mongolian clothing, exceeding 90 percent after 2003. However, neither the Government of Mongolia, nor the private sector were able to fully exploit the opportunities presented during this boom period, as they relied on foreign intermediaries and failed to establish direct and independent relations with the large retail chains. This absence of direct and durable relationships was one of the factors that contributed to a swift decline of the sector in the post-quota period.
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usually permitted to phase in the yarnforward rules: tariff preference levels (TPLs) are established, like TRQs, under which inputs can be sourced from third countries and still benefit from duty-free entry into the United States. However, these TPLs are phased out over a period of time. If a future Mongolia-US FTA contained yardforward rules of origin, it could encourage vertical integration in the cashmere industry, provided the fabric weaving capacity is strengthened. But they would also preclude any renaissance of the RMG cotton sector. In fact, noils, or waste of wool or fine animal hairs, and cashmere blends with 30 percent cashmere and 70 percent or more by weight of silk are currently eligible under the US GSP scheme. Even without the FTA, Mongolia could seek ways to make better use of these preferences, for an FTA with a major country would entail giving concessions on several areas, like services and intellectual property that are vital for human development-friendly policymaking.
Limited experience of dealing with orders from the EUthe EU importers also have more interest in cashmere textiles than RMG. As noted in Chapter Three above, the US GSP covers a few wool or fine animal hairs items, but excludes virtually all other items in the T&C sector. Mongolia is seeking to negotiate a FTA with the US to gain preferential access in this sector. However, rules of origin may frustrate the benefits of any such agreement. 3.2 IMPORT OF T&C While the overwhelming focus of newly formed clothing companies is on exports, some companies cater to the domestic market. They rely on bulk purchases from government agencies for staff uniforms, etc. As domestically produced clothing is often deemed inferior (in terms of design and choice) to imports, there has been a sharp increase in clothing imports. As shown in Figure 6.3, this includes a notable increase in the import of second-hand items. Between 1997 and 2003, import of such goods increased by seven times; by 2007, they had constituted the largest category of imported clothing. There are basic health and hygiene implications of imports of this nature. Currently, there is no quality control or involvement of specialized laboratories and inspection agencies in this trade. Until 2006, clothing exports from Mongolia exceeded imports.150 During the period of 2000-2001, when the clothing sector was booming exports exceeded imports by a wide margin (figure 6.4). Even though a large share of these revenues accrued to foreign owners, intermediaries, sub-contractors and Mongolian employees benefited. To encourage T&C production for the domestic market, it may be necessary to raise tariffs on ready-made garments, especially second-hand clothing, or apply WTO consistent trade defence measures. Government procurement policy could also favour domestic producers of clothing. Foreign investors keen on producing cotton and woven fabrics should be given incentives to plan and operate for the long-haul by locating
150
In the next most important market, the EU, Mongolia is a beneficiary of the GSP+ scheme under which duty free access has been granted for about 7,200 products. Although most of Mongolias textiles and clothing products are covered under this preferential scheme, Mongolian exporters have had difficulty in exploiting this opportunity due to the following: Standards and quality requirements of the EU countries on imports are high; Orders from EU countries, in comparison to those from the US, are for smaller shipments. This often proves costly for one company to produce and transport. Additionally, there is an insufficient delivery chain between the manufacturer and freight forwarders in Mongolia which can directly link customers with manufacturers; Costs of obtaining a certificate of origin for export of GSP+ eligible products to the EU countries amount to nearly one-tenth of total cost of the products, which is a real burden; and
Volumes transacted by small traders are often not captured in official statistics, therefore the exact share of imported garments is difficult to determine. Official records show that 75 percent of total imports are raw materials and only 10 percent are ready-made products.
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in business-friendly enclaves such as border free zones, industrial and technological parks. Investment policies should aim at the creation of SMEs that produce and tailor national costumes in rural areas, which would also contribute to the revitalization of soum centres.
Figure 6.3 Imports of second-hand garments (in US$000)
BOX 6.4 TALES OF QUOTA-BABIES

The Magic Suit Company was established in 1998 with 100 percent US-investment to take advantage of quota-free access to the US market. It began by employing 30 workers, which increased up to 400 during the period of 2000-2006. The company manufactured mens suits. During the first two years, the company produced 50,000 pieces per year, which doubled by 2005. With the end of the quotas, this otherwise productive company faced hardship. At first, the cut-make-trim (CMT) price was fixed at US$9.00 per suit and US$1.5 per suit was paid for transportation. With the elimination of quotas, the receiving party stopped absorbing the transportation costs. Wages accounted for around 40 percent of production costs, and with wages rising relative to those in China, the company found it difficult to compete and thus shut down in 2008. Similarly, the Suljee Company, which until 1990 produced textiles and employed around 1,700 people, shifted to clothing during the transition era. At its peak, the company supplied up to three million pieces of products for companies like Gap and WalMart. After the elimination of quotas, this company was unable to stave off competition from countries like Vietnam and China. By 2008 this company had all but collapsed with only 15 workers employed. Similarly, the owner of the Da Dong Company, a 100 percent Chinese-owned entity, collapsed in August 2006, directly leading to a loss of 300 jobs. The fly-by-night nature of the company was illustrated by the fact that the owners were able to flee without even paying the final weeks wages to workers. Following this incident, the President of the Association of T&C Industries stated, the sector is in decline. From 100 factories employing 30,000 workers, we are now down to 16 firms employing around 5,000. It is impossible now to find people willing to work for MNT 70,000100,000. When clothing quotas existed, Mongolia was exporting to the US market 27-28 million pieces of clothing products per year-in 2006, this had dropped sharply.
Source: Unuudriin Mongol, August 28, 2006.
Source: Customs statistics, 1996-2007.
Figure 6.4 Clothing exports and imports (in US$000)
Source: Customs statistics, 1996-2007.
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CHAPTER
ALLEVIATING THE BURDEN OF GEOGRAPHY:

The Case of Transit
103
ALLEVIATING THE BURDEN OF GEOGRAPHY
1. THE STATE OF TRANSIT AND DEVELOPMENT
Mongolia lies sandwiched between China and Russia and is one of 31 landlocked developing countries in the world. Everything else being equal, being landlocked raises the cost of doing trade. Since the time of Adam Smith in the late 18th century, scholars have posited that coastal regions or areas with access to navigable waterways develop faster than those without. The main hypothesis is that landlocked countries are at a disadvantage when it comes to transporting goods, people and ideas. Access to markets, trade, and transfer of technology are crucial ingredients for economic development, and when transport costs inhibit enterprises from accessing foreign markets or inputs, these ingredients are under-utilized, limiting the potentials for development.151 According to the United Nations High Representative Office for Least-Developed, Landlocked, and Small Island Countries (UNOHRLLC), transportation accounts for, on average, as much as one-third of the total cost of imports in landlocked developing countries, compared to 4 percent in other developing countries.152 Transport costs frustrate the ability of poorer people to derive gains from globalization. The cost of basic foodstuffs, as well as capital equipment needed for productivity enhancements are high (see Annex for rough estimates).153 Everything else held constant, the prices of exports are higher. These automatic price increases induced by remoteness, limited consumer choices and a lack of competitiveness restrain the range of opportunities for employment generation, adversely affecting human development potential in the country. Geography, however, is not destiny. Countries can orient themselves to lessening the burden. Landlockedness becomes less of an issue if Mongolia specializes in products that are distinct and highly differentiated, drawing on advantages that are not based wholly on the relative cost of production.
See Hausmann (2001); Gallup and Sachs (1999, 2001). Chowdhury and Erdenebileg (2006). 153 For example, approximately 30 percent of total Mongolian imports come from China. When the commodities come to Ulaanbaatar city from Erlian, China, the price of fruits and other edible products, as well as construction materials usually increases two to three-fold.
152 151
That landlockedness suppresses prospects of growth and translates into human development underachievement is now evident. What is less clear is how can this be redressed? The policy challenge is to assuage these burdens and facilitate countries efforts to integrate by reducing a variety of costs. At the regional level, promotion of regional public goods, say infrastructure networks, or harmonised trade facilitation policies and procedures between landlocked and coastal countries is apt. At the global level, the legal and operational significance of Article V of GATT on Freedom of Transit needs to be better understood by landlocked countries seeking to become more active traders. Overall, the challenges of being landlocked have to be addressed by Mongolia at three levels: (a) improving the physical infrastructure to increase the capacity and efficiency of transportation; (b) streamlining the national administration to eliminate time-consuming bottlenecks and to reduce possibilities for corruption; and (c) negotiating at the bilateral, regional and multilateral levels to reduce or eliminate such measures as excessively high transportation charges, other fees, transit formalities, inspections, controls and man-made barriers to transit trade. Mongolia is actively involved in such international initiatives, while building up its own national infrastructure.
2. NATIONAL PROBLEMS AND INITIATIVES
The sustained growth of Mongolias external trade since the early 1990s has required a commensurate increase in demand for transport services such as rail, road, air and water. Mongolias trade is almost entirely dependent on a single rail link-running through the country from the northern border with Russia to the southern border with China. The rail carries 95 percent of national freight. The shortest and widely used corridor to third-country markets is through the port of Tianjin in China. The total distance between Ulaanbaatar and Tianjin port is 1,686 km. A second, widely used corridor is Brest via Russia, a border railway station between Russia and Belarus, whose distance is 7,340 km. Mongolian Railway has been a joint venture with Russia since 1938. There is no viable
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water transportation in Mongolia, and the road network of around 6,280 kms is generally poor (only one-third of which is tarred). There are an insufficient number of rail cars to transport goods. The waiting time for the goods to be loaded is high at both the domestic border points and international port like Tianjin. Therefore, freight is usually forwarded by road, and loaded on to a train at Zamyn Uud port. However, the trans-shipment facility at Zamyn Uud has a daily capacity to load and unload five freight trains on wide gauge and two freight trains on narrow gauge, which does not adequately meet the demand. Further, the difference in the gauge of Mongolian and Chinese railways adds to inefficiency because either the axles on the wagons need to be changed, or the containers need to be transferred from one wagon to another. Trucks typically carry much more than a permissible load of freight and wait for trains to trans-ship the load for an average of 3-4 weeks depending on the type of the goods, whether they are perishable or not. There is no parking facility or temporary warehouse at Zamyn Uud port, therefore, the drivers hire watchers to guard their trucks, paying between MNT 7,000 and 10,000 per night. At any point in time, approximately 200 trucks wait for trains to transship the freight. All these amount to an estimated waiting cost of MNT 510,000-780,000 on average at Zamyn Uud. These costs inevitably get passed on to consumers in Ulaanbaatar. Further, congestion of trucks at border points offers a fertile ground for corrupt transactions involving customs officials. Private freight forwarders have also complained about the lack of enforcement of competition law in rail transport. The Mongolian Law on railway transportation, adopted on July 5, 2007, permits all types of business entities to invest in, and operate a locomotive along with the railroad cars. As Ulaanbaatar Railway owns the International Freight Forwarding Company (IFFC), which is not subject to income taxes, it enjoys multiple advantages over freight forwarders. A reform agenda in this area would thus need to look into a range of policies, from ending the current railway monopoly to repealing specific measures that prohibit transit freights coming in on trucks to Zamyn Uud.
Over the past few years, the speed of document processing has increased at border points. While customs procedures have become more expedient, there is insufficient coordination with other government agencies. Many Mongolian exports are of animal origin and are required to undergo laboratory tests (say, to determine the quality of cashmere to levy export taxes). Exporters have complained that certain tests are duplicated, and labs often require large quantities of samples. Another bottleneck arises in connection with the issuance of export licences by the State Professional Agency. While a Certificate of Origin from MNCCI, may be obtained in only a few hours, the exporter also is required to obtain a Certificate of Export from State Professional Agency of Mongolia (where the application process takes about a week), as well as a Certificate of Quality from Standardization and Metrology Agency of Mongolia. No foreign country requires these certificates from Mongoliathey are for the purposes of collecting export statistics. BOX 7.1 AGREEMENTS MONGOLIA HAS SIGNED
International: Convention on Road Traffic (1968); Convention on Road Signs and Signals (1968); Convention on the International Transport of Goods under Cover of TIR Carnets (1975); Convention on the Contract for the International Carriage of Goods by Road (CMR) (1956); Convention on Transit Trade of Landlocked States (New York Transit Convention, 1965); and Convention on the Law of the Sea (1982). Bilateral: The Agreement on Road Transportation between the Governments of Mongolia and the Peoples Republic of China, 1991; The Agreement on International Road Transport between the Governments of Mongolia and the Russian Federation, 1996; The Agreement between the Governments of Mongolia and the Russian Federation on Reaching Seaport through the Territory of the Russian Federation; and The Agreement on the Transit Freight from China to Mongolia, 1991.
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Additional impediments to exports arise from the requirement that for exports to Europe, the Certificate of Origin has to have a container number, since the European countries use the number to verify the origin of freight. However, to have the number the container must be located in Ulaanbaatar. Thus it takes well over a week from the time of obtaining the Certificate of Origin until the issuance of other required certificates mentioned above, during which time the container stays in Ulaanbaatar and companies are charged extra for those additional days. This situation is reflected in an EBRD/WB Doing Business report that ranked Mongolia 168 out of 178 economies in terms of competitiveness in 2008. In 2005, the Government issued Decree 66 to establish a National Committee for Coordinating Transit Transportation Issues, which became the National Committee for Simplification of Procedures for Transport and Trade in December 2006. This committee aims to increase the volume of foreign and domestic trade, as well as developing international transportation, reducing obstacles to trade while protecting national security.
Figure 7.1 Proposed asian highway network
Source: http://www.unescap.org/ttdw/publications/tis%5Fpubs/ pub%5F2303/mongoliab5.pdf
Another regional movement that Mongolia is paying attention to is the Asian Highway Network, which is supported by UNESCAP. The network aims to build at least 87 different routes on the Asian continent. There are three routes crossing the territory of MongoliaAH3, AH4 and AH32 (see map). Both the rail and road plans are expected to bring down trade costs and partially relieve Mongolia of the handicaps associated with landlockedness. As Mongolias infrastructure improves, it can become an important transit country between Asia and Europe. Railways will play a major role in Mongolias emergence as a transit nation. It offers a cheaper option to the alternative routes of the Silk Road, as well as the Baigal-to-Manjurina route, reducing the distance by 748km. The volume of goods transiting Mongolia is already on the rise. The expansion of trade between China and the EU is increasing the volume of goods that are transiting through Mongolia. In December 2006, Russia lifted some of its import restrictions on consumer goods from China, which resulted in an increase of transit transportation through Mongolia, which connects Russia and China with approximately 1,100 km of railway and has a capacity to tranship goods within 30 to 34 hours. Private companies have taken their own initiatives to improve transit traffic. Tuushin Co. started an express train route for container transportation from Asia to Europe, namely from Khukh Khot, China, to Frankfurt, Germany, within 18 days. The route, which is called the Mongolian Vector, replaces the existing sea route from China to Europe, which takes 50 to 60 days. Another popular route is between Ulaanbaatar and Brest.
3. INTERNATIONAL INITIATIVES
There is another way at looking at Mongolias location. It actually provides the fastest landlink between Asia and Europe. With this idea in mind, the Transit Mongolia Programme has been developed but not yet ratified by the government. The objective of the programme is to make the country an international hub for transportation, including transit in the long run and for Mongolia to become a bridge between Europe and Asia in the short run. The United States Governments Millennium Challenge Corporation has provided a grant of US$188 million for a railroad project intended to improve efficiency and capacity of the rail system. Mongolia has signed the Agreement on TransAsian Railway Networks, which has brought together 18 of the 41 countries that participated at an international conference of Transportation and Railway Ministers in 2006 at the initiative of UNESCAP. The proposed 80,900 km railway network aims to connect the Pacific seaboard of Asia to the doorsteps of Europe.
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The trip duration has decreased to 10 to 13 days from the usual 38 to 40 days. 3.1 TRIPARTITE INITIATIVES While Mongolia is a signatory to many international agreements and conventions, China is not. China has not signed the Convention on International Carriage of Goods by Road of 1956, the New York Convention of 1965, or the TIR (Transports Internationaux Routiers) Convention, which Mongolia signed in 2002. While Russia is a member of the TIR Convention, China is not, limiting the use of TIR documents only for trade with Russia. Transit is effectively a concession system that facilitates trade between customs territories by waiving customs duties or taxes payable on goods originating or destined for a third country when they are in transit across the territory of a defined customs area. Facilitating transit is as much about infrastructure as it is about signing and enforcing legal agreements. With support from UNCTAD, Mongolia initiated negotiations for a Tripartite Transportation Agreement with Russia and China.154 Mongolia has been proactive in these negotiations because it is likely to be the biggest relative beneficiary. It has primarily sought to improve the following: Tianjin is the main foreign port that Mongolia uses. The 2001 transit transportation agreement between the Mongolia and China stipulates that only Chinese trucks are allowed to transport Mongolian transit freight across Chinese territory. Mongolia wishes this revised to allow Mongolian trucks to transport freight across Chinese territory; The transit agreement between the governments of Mongolia and Russia allows Mongolian freight to enjoy domestic transportation service fees, which do not exceed the rates agreed in international conventions, and treaties to which both countries are signatories. However, in practice, Russia charges Mongolian shipments higher than for domestic freight. Mongolia has insisted that it receive national treatment; The fee for transportation between Tianjin port and Zamyn Uud varies from month to month, sometimes from week to week. The logistics companies find this unpredictability
and frequent change unhelpful and wish to see information available on the internet as well as in enquiry points briefed on tariffs and charges, customs procedure, etc.; and The Transit Transportation Coordination Council, comprising the three countries, would be established with the purpose of formulating general principles and provisions governing transit transport. The three countries also need to harmonize their systems of processing customs declarations so that one of the countrys customs certification would be enough to have the transit freight cross the border until reaching the targeted destination, e.g. sea ports.
3.2 WTO INITIATIVES The WTOs Doha Ministerial Declaration, adopted on November 14, 2001, includes a provision on trade facilitation: recognizing the case for further expediting the movement, release and clearance of goods, including goods in transit and the need for enhanced technical assistance and capacity building in this area the Council for Trade in Goods shall review and as appropriate, clarify and improve relevant aspects of Articles V, VIII and X of GATT 1994 and identify trade facilitation needs and priorities of members, in particular developing and least developed countries. The 2004 high level meeting in Geneva, adopted a July Package, which included a formal agreement by all WTO members to launch negotiations on trade facilitation aimed at enforcing Article V of GATT 1994. Written proposals have been put on the table by Canada, the EU and Korea.
154 The negotiating process has stopped at present over disagreements on text and the role of a third party.
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BOX 7.2 FACILITATING TRADE
Studies show that procedural burdens, nontransparency, inefficiency and corruption facing cross-border movement of goods are so large in developing countries that they easily outweigh gains from relaxation of rigid protection on many tariff lines. What are the most common elements of a reform program on trade facilitation? The GreaterMekong Sub-region (GMS) Program that started in 1992 has been implementing sub-regional projects, one of which is the Cross-Border Transport Agreement (CBTA). This agreement is a compact multilateral instrument that covers all the relevant aspects of cross-border transport facilitation as follows: Single-stop/single-window customs inspection; Cross-border movement of persons (i.e., visas for persons engaged in transport operations); Transit traffic regimes, including exemptions from physical customs inspection, bond deposit, escort, and agriculture and veterinary inspection; Requirements that road vehicles will have to meet to be eligible for cross-border traffic; Exchange of commercial traffic rights; and Infrastructure, including road and bridge design standards, road signs, and signals.
The Hong Kong WTO Ministerial Conference in 2005 fully supported the July 2004 package and adopted the Hong Kong Ministerial Declaration, which includes an annex on trade facilitation. In the annex, certain measures were identified towards improving and clarifying GATT Articles V, VIII and X. Regarding the transit of goods, the annex recognized the following activities to be effective in enforcing GATT Article V:
Strengthened non-discrimination; Disciplines on fees and charges; Disciplines
on transit formalities documentation requirements;
and
Improved coordination and cooperation; and Operationalization and clarification of terms.
Mongolia actively participates in the negotiations on trade facilitation, particularly transit issues, and has submitted proposals aimed at improving the availability and publication of information, national treatment in setting transit freight rates, as well as special and differential treatment, having concessional rate of transit freight rate and fast track document processing. These proposals were submitted jointly with other countries and enjoy considerable support. The outcome of these negotiations would be binding on China and likely on Russia, which is currently in the process of accession to the WTO. The implementation of Chinas GATS commitments on rail and road transport might also be used by Mongolia to address transit problems. It has been suggested that Mongolia should invest in a dedicated quay in Tianjin harbour, open Mongolian customs offices in Tianjin and invest in wagons and locomotives for the exclusive use of transportation between Tianjin and the Mongolian border.
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Table 7.1 Chinas WTO commitments on road/rail transport and maritime auxiliary services
Maritime Transport Services Limitations on market access and national treatment for mode 1 unbound due Auxiliary Services to lack of technical feasibility. No limita(a) Maritime cargotions on mode 2. Mode 3 market access handing services permitted only through joint ventures, (c) Customs clearance with foreign majority ownership permitservices for maritime ted. No national treatment limitations transport for mode 3. Mode 4 for both market access and national treatment unbound except for horizontal commitments. (d) Container station Same as above. and depot services No market access or national treatment restrictions for modes 1 and 2. Mode 3 market access through joint ventures, (e) Maritime agency with foreign equity limited to 49 perservices cent. No national treatment limitation for mode 3. Mode 4 for both market access and national treatment unbound except for horizontal commitments. No limitations on market access or national treatment for modes 1 and 2. Market access through mode 3 only (f) Rail Transport through joint ventures with foreign Services investment restricted to 49 percent. For - Freight transportarail transport majority ownership and tion by rail fully foreign owned subsidiaries to be (g) Road Transport permitted with three and six years after Services accession (one and three years respec- Freight transportatively for road transport). No national tion by road in trucks treatment restrictions for mode 3 and or cars mode 4 for market access and national treatment unbound except for horizontal commitments. Market access and national treatment for mode 1 unbound; no limitations on mode 2. Market access through (h) Services Auxilmode 3 only through joint ventures with iary to all Modes of foreign equity up to 49 percent; foreign Transport majority ownership to be permitted - Storage and warewithin one year of accession and no housing services limitations within three years of accession. No mode 3 limitations on national treatment. Mode 4 unbound except for horizontal commitments No market access and national treat(i) Freight forwardment limitations for modes 1 and 2. ing agency services Market access limitations for mode 3. (excluding freight None for national treatment. Mode 4 inspection) unbound except for horizontal commitments
The UN-OHRLLC has also sought to set norms to resolve transit problems faced by landlocked developing countries. In 2003, an international conference held in Kazakhstan adopted the Almaty Programme of Action. In 2005, the first meeting of LLDC Ministers responsible for trade, held in Paraguay adopted the Asuncin Platform for the Doha Development Round to harmonize the positions of LLDCs in the Doha Round of multilateral trade negotiations. Another meeting was organized in Ouagadougou, Burkina Faso, in June 2007, with the objective of evaluating infrastructure development of transit transport in landlocked and transit developing countries. In August 28-31, 2007, Mongolia hosted a Global Event of Landlocked Developing and Transit Countries on Trade and Trade Facilitation as a follow-up to the Almaty Conference. The Global Event adopted the Ulaanbaatar Declaration, which stated that landlocked developing countries should unite their efforts towards reflecting their special needs in trade facilitation including market access, special and differential treatment, Aid for Trade (AFT), and requesting technical support from international organizations. At the end of the conference, the President of Mongolia pledged to establish a Research Centre for Landlocked Developing Countries in Ulaanbaatar. BOX 7.3 MONGOLIAS PROPOSALS IN THE WTO The term Traffic in Transit shall be clarified; There shall be freedom of transit through the territory of each Member state via the routes most convenient for international transit; Members shall not apply discriminatory measures to goods in transit: National Treatment: In regard to all fees and charges imposed on transit traffic, including transportation charges, Members of the WTO shall apply treatment no less favourable than that offered to domestic transport. MFN: Members of the WTO shall apply treatment no less favourable than the treatment accorded to traffic in transit to or from any third country.
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Treatment following transit: Each Member shall accord to products, which have been in transit through the territory of any other Member, treatment no less favourable than that which would have been accorded to such products had they been transported from their place of origin to their destination without going through the territory of such other member; Members shall publish information on all transit fees and charges; Members shall review periodically fees and charges; Traffic in transit shall be exempt from any duties and fees except reasonable fees and charges for transportation or those related with administrative expenses entailed by transit; Members shall publish all transit formalities and documentation requirements, and regional transit agreements or arrangements; Each Member shall periodically review its transit formalities and documentation requirements; There shall be reduction, limitation and simplification of customs procedures inspections or controls; Special border crossing facilities for transit shall be established; Special transit formalities and documentation requirements shall be designed and applied; The administrative burden for traffic in transit shall be reduced; Members should promote bilateral and regional agreements or arrangements on transit transport. The efficient implementation of such agreements should be closely incorporated with monitoring of transit traffic; There shall be improved coordination and cooperation amongst Authorities; and There shall be improved coordination and cooperation between Authorities and the Private Sector.
ANNEX TO CHAPTER SEVEN NOTE ON TRANSPORT AND TRANSIT COSTS Landlocked countries do not have territorial access to sea, and the burden of borders further limits the movement of goods and capital. Low capacity of trans-shipment terminals causes congestion and delays. These translate into increased demurrage fees and lower profitability by freight forwarders. Even the delay in the shipping of containers back and forth between the Mongolian border and the Chinese port adds to operation costs as well as prices of materials being held up. In August 2007, when the Chinese Railway made a temporary moratorium to block shipments to and through Mongolia for a week or so, the price of cement rose by one-third. Already without the delays, it costs an estimated MNT 650,000 to 800,000, on average, to carry 60 tons of cement from Zamyn Uud to Ulaanbaatar by road. Further, inefficient border management breeds corruption. To ease bureaucratic delays, it is estimated that unofficial payments to the tune of US$400 for handling a 40 ton container are customary. In 2007, the number of containers crowded at Zamyn Uud was about 450-520 per day during the high season (May-October) and 180 to 200 per day during the normal season (November-April). There are around 40 companies in Mongolia engaged in freight forwarding services for exports and imports. For the purpose of calculating real costs, different types of export and import goods have been selected, using rates of the freight forwarding companies. The rates are estimated according to distance and vary with the type of ownership of containers and wagons. If freight forwarders are able to provide their own wagons or containers, transportation costs are lower.
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Table 7.2 Estimated transport costs

Destination Time (days) Min Max China Beijing 7 Erlian Hong Kong East Asia Singapore Pusan (Korea) Yokohama (Japan) Penang (Malaysia) Moscow Russia Irkutsk Ulaan-Ude Bonn, Germany (via Tianjin) Bonn, Germany (via Brest) Sofia, Bulgaria European (via Tianjin) Union Warsaw, Poland (via Tianjin) Rotterdam, Holland Genoa, Italy US Seattle 3 12 16 10 12 15 15 9 7 40 Tianjin 4 11 5 6 17 27 18 21 31 24 14 7 58 Transport cost (TEU) US$ 2000 920 540 900 2,100 1,650 1,050 1,550 1,950 980 680 480 3,000 2003 1000 650 1050 2006 1050 780 1100
Table 7.3 Transport cost of selected exports in 2006

Qty (1000 tons) Fluorspar concentrate Russia US China Total Italy 1,600 1,640 1,950 1,950 1,050 1,165 750 550 870 650 China Japan Total China Total 180.7 45.7 37.6 355.0 448.8 701.3 57.8 1427.5 599.5 599.5 18,700,000 6,600,000 2,400,000 350,000,000 28,700,000 36,800,000 3,700,000 81,700,000 635,300,000 635,400,000 87.50 237.50 73.40 102.50 80.0 185.0 70.00 14,456.0 8,454.5 2,632.0 25,542.5 46,675.2 51,475.4 5,924.5 104,075.1 62348.0 62,348.0 Value (000 US$) Transport Total transcost per port cost ton (US$) (000 US$)
2,100 2,150 1,720 1,790 1,150 1,150
De-haired Cashmere
Copper concentrate
3,080 3,100
25 40 25 30 32 30
34 51 41 45 45 42
3,850 2,980 2,450 1,900 EUR 2,000 EUR 2,900
4,000 4,100 3,150 3,150 2,500 2,610 1,940 EUR 2,000 EUR 1,990 EUR 2,080 EUR
Grand total of selected goods Share of selected goods in total exports Share of transport costs in selected product imports
1,067,100,000 69,200,000
191,965.6
17.9 percent
2,900 2,950
It has been estimated that the transport costs for imports are about 10 percent of the value of imports. This is also the rate obtained when transport costs are calculated using the CIF/FOB margins. Transport costs for exports are about 18 percent of their value. Export per capita in Mongolia is approximately US$265, which is more than three times lower than the average for maritime countries.
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CHAPTER
SEEKING PARTNERS FOR PROSPERITY:

The Case of Trade Negotiations
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SEEKING PARTNERS FOR PROSPERITY
1. THE CONTEXT OF MULTILATERAL TRADE NEGOTIATIONS
The preceding chapters have identified areas in which human development goals can be furthered by trade measures. In many cases, such measures relate to the practices of Mongolias trading partners. Trade negotiations provide a framework for Mongolia to seek modifications in the trade measures of these partners. Mongolias trade relations with the rest of the world are governed by the instruments of the WTO and the commitments it accepted as terms of accession to that organization. Mongolia has applied a trade and investment regime much more liberal than that required by these obligations and concessions. It has participated actively in the Doha Round of multilateral trade negotiations, where it has acted in alliance with like-minded countries to attain trade objectives that would be more difficult to obtain in a bilateral context. Mongolia has submitted proposals in concert with other members on issues crucial to its own economy, notably trade facilitation, aimed at tightening the WTO rules governing freedom of transit, and with the members of the G33 grouping to obtain greater flexibility in the agricultural trade regime to further rural development and food security. Mongolia has also supported the efforts to reduce the massive subsidization of agricultural production and trade. Initiatives are being taken to restart the multilateral round with the hope that it could be concluded in 2009, with the passage of new US trade legislation.155 However, the failure of the multilateral round to move forward deprives Mongolia of a framework where it could obtain the support of useful allies in achieving its major trade objectives. Mongolia will have to continue to live with a trading system distorted by agricultural subsidies and thus arm itself with the appropriate trade defence measures. Mongolia is free to raise duties to the bound rates of 20 percent when necessary, but these are low compared to the protection available to most other countries, both developed and developing. Given the high prices prevailing on world markets, resort to safeguard mechanisms on agriculture have seemed unnecessary in recent years, but prices are now beginning to fall.
155
Furthermore, as there would seem little probability of lowering tariffs through multilateral negotiations in the near future, Mongolias objective of participating in bilateral and regional FTA has become more urgent, and efforts to obtain greater coverage of Mongolian products in GSP schemes takes on a higher priority. The consultation and dispute settlement mechanisms of the WTO and its individual agreements permit Mongolia to challenge measures that it may deem to be unjustifiably restricting its exports. Mongolia has not yet made use of these mechanisms. The negotiation of the terms of the Accession to the WTO of the Russian Federation are of crucial importance to Mongolia given the potential of Russia as a market for Mongolian exports and the considerable impact of Russian tariff and non-tariff barriers on Mongolian trade.
2. THE CONTEXT OF FREE TRADE AGREEMENTS
Mongolia is the only WTO member that is not yet a party to a regional or bilateral FTA, customs union or a preferential trade agreement. As of July 2007, there were nearly 400 regional trade agreements notified to the GATT/WTO, half of which were in force.156 According to the WTO (GATT Article XXIV), a free trade agreement should result in the elimination of duties and other restrictive regulations of commerce on substantially all the trade between the constituent territories. WTO rules stipulate that members entering into an FTA should present a plan and schedule under which this elimination would normally be achieved within ten years. The extension of the network of FTAs by its main trading partners is thus eroding Mongolias preferences where they exist and placing Mongolian exporters in the position of facing negative margins of preference where they do not. The government has announced its intention to enter into FTAs agreements on a bilateral or regional basis. The following paragraphs look at the situation Mongolia faces with this challenge and the implications of FTAs.
For example, the agriculture negotiations resumed to establish a future work programme on September 29, 2008
156
http://www.wto.org/english/tratop_e/region_e/region_e.htm
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Early concern over the proliferation of FTAs was that these agreements were taking a hub and spoke pattern around the major trading countries, establishing spheres of influence. While uninitiated observers saw nothing but a confused spaghetti bowl of agreements, in reality major countries were pursuing clear geopolitical objectives. The proliferation of overlapping agreements is leading to a greater degree of trade liberalization than seems possible under the WTO. Nevertheless, the various differences in the approaches of the major trading countries to the structure and content of FTAs are causing a general incoherency in the international trading system. Many exports of developing countries qualify for duty-free entry in the developed markets under the unilateral preferences of GSP. Furthermore, bound MFN tariff rates in the OECD countries are quite low and have been eliminated in many sectors of interest to developing countries. The current NAMA negotiations in the Doha Round are aiming at an extension of sectoral free trade to a longer list of products.157 This suggests that to some countries an FTA with a developed country may minimize trade value. However, the GSP schemes are not permanent, countries can be graduated and many products exported by developing countries like agriculture, textiles and clothing are often excluded. FTAs can also deal with strict technical and sanitary regulations and other non-tariff barriers, and bilateral issues specific to the countries such as transit and movement of labour. In addition, many perceive that FTAs with developed countries will potentially increase inflows of FDI. The average tariffs in most developing countries are generally higher than in developed countries. FTAs among developing countries may result in meaningful tariff reductions and substantial margins of preference.158 The network of FTAs in Asia has given a new dynamism to longstanding efforts at regional integration. South-South FTAs can also provide innovative, pro-development provisions that would be difficult to apply at the multilateral level.
157 UNDP (2005a), p. 11; the Uruguay Round resulted in zero tariffs in the developed countries in the sectors of agricultural equipment, beer, construction equipment, distilled spirits, furniture, medical equipment paper, pharmaceuticals, steel and toys. 158 UNDP (2005a), p. 12.
The outcome depends largely on the power relationships between the parties and the extent to which all stakeholders could exert an influence on the negotiation process.159 One of the main driving forces pressing developing countries to enter into FTAs with developed countries is the fear of exclusion. A developing country that becomes the first mover by entering into an FTA with a major developed country is perceived to have gained a competitive advantage. As most developed countries follow a template agreement, once this has been consolidated in an FTA with the first mover, deviations from the agreement to take account of the special needs of individual partners are difficult to achieve, which may create potential obstacles for latecomers that are less developed or have different economic and social structures.160 However, recently developing countries are becoming much more assertive in this respect, and are trying to find their own templates, insisting on key points of interest.161 In static models, preferential trade agreements are deemed inefficient if the trade diversion outweighs trade creation, with the former notion describing a situation where a partner switches its imports from the lowest-cost world supplier to a higher-cost FTA partner. Diversion can be further exacerbated by rules of origin tailored for such purpose. However, this could provide an advantage for less competitive producers and an opportunity to gain experience and increase productivity. For many countries this would be a stronger motivation than purely theoretical arguments against preferential trade deals. Unlike WTO negotiations that are becoming much more transparent, FTA negotiations are often shrouded in secrecy, and political considerations are more prominent. This may permit a few interested stakeholders to influence their governments to concede on aspects that could have serious development implications. Uninformed stakeholders could lose out in the long-run. Thus, FTA negotiations need to be transparent and subject to public discussion.
159 160
Gibbs (2008). UNDP (2005a), p. 13. 161 See UNCTAD (2008).
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BOX 8.1 RULES OF ORIGIN The value of a preferential tariff arrangement depends on the margin of preference, the presence of other non-tariff barriers to trade and the extent to which rules of origin require local processing. The impact of the rules of origin on world trade has increased both because of the proliferation of FTAs and the increasing fragmentation of production processes. Where a product is not produced or grown exclusively in the exporting country, its origin can be determined by using three possible criteria: (a) CTH - changes in tariff heading (the product has been processed to the extent that it fits into another four digit tariff heading); (b) value added (the processing in the exporting country has added a specific portion of value added to imported inputs usually between 35 and 60 percent); or (c) product-specific processing requirements (the processing required to acquire origin is set out specifically in technical terms). Often these methods are combined. Each method has an economic impact, often peculiar to specific sectors. There is no single rule of origin found in FTAs. Value added criteria tend to discriminate against countries with low labour costs. The product-specific approach is complex, with a range of formulae and tests applying to thousands of different products in the parties tariff schedules, they reflect the political strength of the industries concerned. No rules of origin are trade neutral. No matter how they are defined, they will influence production and investment decisions. An additional barrier to trade is presented simply by the use of different rules of origin in different FTAs.163 Thus, one customs administration can be obliged to apply many different rules of origin to assess whether the same product qualifies for preferential treatment, depending on its source.
The principles of special and differential treatment, and less than full reciprocity, recognized in the WTO, are often absent in North-South FTAs. Furthermore, the WTO Multilateral Agreements (e.g. TRIPS and GATS) give developing countries the right to certain flexibilities and options in interpreting and in implementing obligations in these areas. However, some FTAs remove these WTO rights, significantly reducing the policy space for developing countries to pursue development and socio-economic goals. Many North-South FTAs include rules on investment, government procurement and competition law, labour and environment standards which have so far been rejected by developing countries as subjects for WTO rules. On the other hand, FTAs can provide a framework for dealing with often complex issues affecting the mutual trade of partners that are specific to the countries concerned and would be difficult to address at the multilateral level. In many cases, where tariffs on mutual trade are low, this is the main force behind FTA initiatives. Such aspects can cover technical regulations, health and sanitary standards, certification procedures, transit and customs procedures, movement of labour, investment rules and cooperation in various areas, such as environmental protection, tourism, etc.
3. FTAS IN ASIA
The first attempt at regional integration in Asia was the 1975 Bangkok Agreement which established a framework for the exchange of tariff preference. While this agreement (now Asia Pacific Trade Agreement, APTA) has largely been overtaken by the proliferation of bilateral and sub-regional FTAs, it still provides for meaningful margins of tariff preferences among the parties which include China, Republic of Korea, India, Bangladesh, Sri Lanka and Lao PDR.164 ASEAN has negotiated FTAs with China, India, Japan and Korea. However, as discussed below, it has been the intensive activity of China in negotiating FTAs that has most changed the trade map of Asia. A de facto Asian regional FTA is almost a reality. Furthermore, many Asian countries including the Republic of Korea and most of the ASEAN and SAARC members are also parties to the Global
164
163
in rules of origin as a major impediment to business in its submission against FTAs.
See also Bonapace and Mikic (2007).
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System of Trade Preferences among Developing Countries.165 Within this framework Asian intraregional trade has grown at a yearly rate of 18 percent in the decade of 1995-2005.166 How does Mongolia fit into all this? As a landlocked country between Russia and China, trade relations with neighbours must take priority. However, other countries, within and outside Asia, constitute potential lucrative markets for Mongolian exports. The following paragraphs examine the salient features of the trade regimes of Mongolias main trading partners: China, Russia, Korea and Japan, as well as the United States, and the EU, with a view to highlighting HD consistent goals in possible negotiations with these countries.167 3.1 CHINA Chinas active role in negotiating FTAs since its accession to the WTO has given a new dynamism to the process of regional integration in Asia. Its first FTAs were with Hong Kong and Macau in 2003, followed by a framework agreement with ASEAN. China has entered into an FTA with New Zealand its first FTA with an OECD country, as well as with Chile, its first extra-regional partner, while it is in talks with Australia, Peru, the Southern African Customs Union (SACU), the Gulf Cooperation Council (GCC), and Iceland. China is also a member of the APTA and grants significant margins of tariff preferences to its partners in this Agreement, including for textile products of export interest to Mongolia. China also grants tariff preferences to 41 LDCs. In sum, Mongolia is one of the very few developing countries in Asia that does not enjoy some sort of preferential treatment in the Chinese market. China is by far Mongolias largest export market: in 2007, 72 percent of Mongolian exports worth US$1.4 billion went to China, largely concentrated in mining products. They are constantly increasing and in many cases limited only by Mongolian supply capacity. China was the origin of 31 percent of Mongolian imports in 2007 (US$665 million).
Mongolian exports to China face an average tariff of 12 percent for agricultural products and 7 percent for non-agricultural products. China maintains MFN tariffs on imports of livestock products such as 12 percent on frozen beef, as well as an escalated tariff structure that discourages export of manufactured goods.168 For example, tariffs on unprocessed leather are considerably lower than on processed leather products. Mineral ores enter duty-free while more processed forms of metal are dutiable. Some key elements of Chinese FTAs that are of concern to Mongolia are described below: a. Recognition of China as a market economy: China insists that its FTA partners agree not to apply those provisions contained in its terms of accession to the WTO which permit WTO members to discriminate against China, notably through non-market economy criteria for anti-dumping actions; b. Tariff Elimination: Chinas FTAs usually contain a three-stage list for tariff elimination, beginning with the initial agreement on an early harvest list of items for which tariffs are to be removed immediatelythe second and third lists contains items for which tariffs will be eliminated in stages depending upon their sensitivity. There are few exceptions from duty-free treatmentthe FTAs with ASEAN, Chile and New Zealand cover more than 95 percent of mutual trade. Thus, as the network of Chinas FTAs extends, Mongolian exports will increasingly face negative margins of preference with respect to competitors. As no exports from Mongolia presently enter dutyfree, these negative margins will apply to all products exported to China. Mongolia could draw up a proposed early harvest list that would cover those exports to China where negative preference would arise. It should be noted that 11 HS 6-digit tariff items cover 95 percent of Mongolias exports to China; c. Safeguard Mechanisms: In Chinas FTAs, the parties retain their rights to the WTO trade defense mechanisms and bilateral safeguard measures are provide for But these cannot
168
165 166
See www.unctadxi.org.gstp See UNCTAD (2008). Although Mongolia is not a member of any FTA its exports to Asia grew by an annual rate of 57 percent over this same period. 167 Draw on GTZ/USAID (2006).
Chinas applied MFN duties are subject to negative escalation between unprocessed and semi-processed products, and positive escalation between semi-processed and fully processed products according to the WTO document (WT/TPR/S/199), p. 51.
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be applied after the ten-year period, and are limited by applied, not bound tariffs. Mongolia might need a special safeguard mechanism in any FTA with China. Furthermore such mechanism might have to apply also on the export side to avoid Chinese demand causing injurious shortages in Mongolia; d. Tariff-rate quotas: China maintains TRQs on wheat, corn, rice, sugar, wool, wool tops, cotton and chemical fertilizers.169 The TRQ inquota rate is 1 percent and the over-quota rate is 38 percent. In 2006, the quota was filled at 97.6 percent.170 The application of TRQs can also serve to discriminate in favour of Chinas FTA partners.171 e. Import licensing: China eliminated all quantitative restriction on imports on January 1, 2005, and the products formerly subject to quantitative restrictions were moved into the category of automatic import licensing. Import licenses are divided into three categories: import license, automatic import license and tariff-rate quota license. f. Standards and SPS: Under the WTO TBT and SPS Agreements, China must ensure that its regulatory authorities apply the same standards, technical regulations and conformity assessment procedures, and charge the same fees, processing periods and complaint procedures for both imported and domestic goods. To more effectively meet these obligations, China merged its domestic standards and conformity assessment agency and entry-exit inspection and quarantine agency into one new organization, AQSIQ. However, despite these efforts, Chinas procedures for certification have been noted as particularly onerous. SPS regulations often seem imposed with insufficient scientific grounds and lack transparency. Often these measures are not notified to the WTO in a timely manner.
169 The allocation of TRQs for wool and wool tops is on a first come, first served basis (WT/TPR/S/199), p. 53. 170 WT/TPR/S/199, p. 222. 171 For example, in its FTA with New Zealand, China agrees to establish a country specific duty-free TRQ for wool and wool tops rising to 37,000 tons in 2017. Tariffs on yarns and fabrics of wool and fine animal hair and wool carpets will be eliminated by 2012leather and leather clothing from New Zealand will enter China duty-free in 2016. Furthermore, New Zealand will obtain duty-free treatment for milk and other dairy products, thus enjoying a 10 to 20 percent margin of preference over Mongolian exporters.
Chinas FTAs contain provisions on SPS and technical regulations aimed at facilitating compliance and streamlining procedures for conformity assessment, as well as mechanisms for surveillance and consultations. For example, the China-New Zealand FTA contains detailed articles on SPS and on Technical Barriers to Trade including the establishment of a Joint Management Committee. This aspect would be valuable to Mongolia given the problems mentioned above in meeting export standards for various products, as well as the problem of sub-standard food products being imported from China; g. Transit and trade facilitation: The transit issues with China have been described in Chapter Seven. Chinas FTAs contain trade facilitation provisions and an FTA would provide a contractual framework to address issues set out in Mongolias submissions to the WTO. These would need to be supplemented by provisions dealing with custom clearance procedures. h. Trade in Services: As noted in the preceding chapter, some of the transit issues could be addressed in the context of the implementation of Chinas existing GATS commitments, while the multilateral negotiations could provide an opportunity for obtaining further commitments, such as on the movement of persons, particularly the right of Mongolian drivers to drive their trucks to Tianjin port and to other export destinations within China. Services commitments in Chinese FTAs are additional to the GATS schedules, but based on the same WTO positive list format. In some FTAs, the services commitments are included in a separate agreement. These include special provisions governing the movement of businesspersons and traders, which would seem to be vital for Mongolia. Commitments on transportation services could serve to solve some of the problems faced by Mongolian companies and their drivers. Provisions to facilitate border tourism also could be included; and i. Other Areas of Cooperation: Chinas FTAs also contain provisions on intellectual property for combating the flow of counterfeit goods across borders. Important for Mongolia,
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they also include mutual recognition of Geographical Indications. Specific provisions could be included for cooperation to combat smuggling and to introduce more order into the cashmere trade. In summary, an FTA with China should not be seen as only an exercise in mutual reduction of tariffs, but as an umbrella agreement to address a wide range of issues arising in bilateral trade relations. 3.2 THE RUSSIAN FEDERATION Before 1990, the USSR was Mongolias main trading partner. Today, Mongolia runs a large trade deficit with Russia. Russia was the source of 34 percent of Mongolias imports in 2007, but the destination for a mere 3 percent of exports. Mongolia has actively participated in the negotiation of Russias terms of accession to the WTO. In 2006, Mongolian exports to Russia totaled US$37.6 million, 95 percent of which entered under the GSP. The main export items were minerals (such as fluorspar, wolfram and ores) and agricultural products (beef and horse meat). Mongolia has sought to expand the coverage of GSP to include light manufactured goods on which Russias tariffs are considerably higher than those of the OECD countries. Mongolian exports of agricultural products to Russia faced average duties of 22 percent and 13 percent for non-agricultural exports.172 These included: knitted apparel (25 percent); other apparel (26 percent); carpets (23 percent); other textiles (23 percent); footwear (33 percent); and leather products (38 percent).173 Imports from those members of the Commonwealth of Independent States (CIS) that have signed FTAs with Russia (Belarus, Kazakhstan and Ukraine) enter duty-free. Russia is involved in preliminary discussions aimed at entering into FTAs with various trading partners, including the Republic of Korea and India.
BOX 8.2 RUSSIAS NEGOTIATIONS FOR ACCESSION TO THE WTO Russia has completed negotiations with all WTO members that wished to hold bilateral talks, excluding Georgia and Ukraine. The current issue preoccupying members of the Working Party are to be assured that Russia strictly complies with the obligations of the WTO Agreements on Technical Barriers to Trade and on Sanitary and Phyto-sanitary Regulations. Many problems have been highlighted in these areas, including those facing Mongolia, such as veterinary control. In addition, the Working Party has focused on the delays in customs clearance procedures, the need to apply Russian trade regulations in a uniform manner throughout its territory and the need for Russia to conform to the freedom of transit rules of the WTO. These are all matters of interest to Mongolia. Indeed, Mongolia has conducted numerous negotiations with Russia since 1999 in the framework of its accession to the WTO. The eighth bipartite talks on tariff and nontariff issues were held in Geneva in April 2005, which specifically discussed tariffs on 100 out of 600 potential export goods. Agreement was reached on an average of a 13 percent tariff for all goods and a 12 percent tariff for goods of agricultural origin. The TRQ on beef would be bound at an inquota rate of 15 percent (but not less than 0.20/kg) the over quota rate at 60 per cent (but not less than 0.80/kg.) A transition period to reach the negotiated tariff was set at 2.2 years. The Russian Federation pledges to reduce its average import tariff (setting the average import duty at 7.5 percent) during a transition period after joining the WTO. Bilateral negotiations will continue on export duties, customs procedures and aspects of SPS regulations.
172 173
WTO Tariff Profiles (2008). Tarr et al. (2005).
The Russian Federation continues to grant GSP preferences to developing countries, including Mongolia. However, positive rates are applied providing only a 25 percent margin of preference for items covered. Generally, ad valorem equivalent tariffs faced by Mongolian exports to Russia range between zero and a 60
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percent peak which applies to vodka, which is subject to additional specific duties. Russia also applies significant duties on imports of semiprocessed metal products. Excise taxes are applied to a selection of goods, such as alcohol, alcohol beverages, tobacco and articles thereof, jewellery, gasoline and automobiles.174 a. Export Duties: After eliminating export duties in 1996, Russian re-imposed provisional duties in January 1999 on exports of coal, petroleum, natural gas, processed oil, nondenatured alcohol, certain chemicals, nonferrous metals, timbers, leathers, soybeans, rapeseeds, sunflower seeds, etc. Between June and August 2008, the Russian export tax on petroleum products rose from US$398.10 to US$495.90 per metric ton rising by an increase of more than 24 percent, then falling to US$372 per ton on October 1, 2008. The Russian Government reviews the export duty on crude oil and petroleum products every two months, depending on changes in the Urals blend price on world markets. High prices for petroleum products in Mongolia are negatively affecting human development, particularly punishing herders and the rural population in general. The Russian export tariff on wheat and maslin was raised to 40 percent ad valorem but not less than 105 per metric ton, a prohibitive level effective from January 28, 2008, to April 30, 2008 (but subsequently removed for exports to Mongolia). Negotiations with Russia in the WTO or in a possible FTA should provide for the elimination of Russian export duties, particularly on energy products. b. Import licenses: Import licenses are required only for a limited number of goods, such as medicines, white spirits, hazardous waste and some food products. However, licenses to import many of these products are limited to companies that have been granted activity licenses to produce or distribute in Russia. c. Tariff-rate quotas on meat imports: The barriers faced by Mongolian exporters in exporting meat products to Russia have been discussed in Chapter Two. The demand for meat in
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Russia is growing; red meat imports reached US$3.48 billion from January-September 2007, compared to US$2.84 billion during the same period a year earlier. Russian beef imports increased 25 percent during the first nine months of 2007 in relation to 2006.175 Tariff-rate quotas on beef, pork and poultry meat imports will remain in their established frameworks until 2009. Russia has agreed to reduce the in-quota rate on beef to 15 percent and the over-quota rate to 60 per cent upon joining the WTO. d. Sanitary and phyto-sanitary requirements: SPS requirements present a major barrier to exports to Russia, particularly of the traditional Mongolian export of meat. While phytosanitary certificates are customarily required for agricultural products, Russias Federal Service for Veterinary and Phytosanitary Surveillance (VPSS) also requires such certificates for furniture and various processed agricultural products. Controls set on meat exports by the Russian Federation Veterinary Organization (on the basis of prevalence of severe infectious animal diseases) has contributed to the decrease in Mongolian exports. The requirement that veterinary licenses be obtained from centralized authorities in Moscow is a burden to both importing and exporting companies. Any agreement with Russia should provide for installation of Russian testing and certification laboratories to conduct conformity tests in Mongolia, and to provide Mongolian producers with technical assistance to enable them to meet Russian requirements. e. Technical regulations: Most factories in Mongolia were built according to Russian standards. The Ministry of Trade and Industry of Mongolia and the Russian National Committee for Standardizing and Regulation established an agreement to evaluate the quality of export and import goods in 1996. However, Russian standards have changed in recent years, and co-operation between these two organizations has ceased. Current Russian standards for all export products from Mongolia (e.g., carpets, cashmere, leather, and fur) are very strict.
175
The Russian Decree No. 518 dated 15 August 2007, halved the import duty related to clothing made out of natural furs (mink, folks, rabbit furs, sheep skin, etc).
USDA (2008).
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More than 60 percent of all products require mandatory Russian Certificate of Conformity. As Russia nears accession to the WTO, there have been a number of agreements on amendments between the Ministry of Trade and Industry of Mongolia and the National Committee for Standardizing and Regulation of the Russian Federation.176 f. Trade in services (tourism): There are significant possibilities for cooperation in the tourism sector between Russia and Mongolia. Tourism at Lake Baikal in Russia and Lake Khovsgol in Mongolia has increased dramatically. Travel between the two tourist attractions is uncomplicated as it is only 330kms from Irkutsk on Lake Baikal to Khankh on Lake Khovsgol. However, there is no international border crossing in the region. Irkutsk officials maintain that tourism could increase by two to three times if the border between Monde and Khankh became international. Cooperation on tourism with Russia will create jobs involving the local population in tours and transportation, lodging and food. This calls for agreements to facilitate the movement of persons (both tour guides and staff of tourist enterprises, plus tourists from third countries). g. Transit and trade facilitation: The signing of the tripartite agreement between Mongolia, Russia and China is pending. When the Russian Federation accedes to the WTO it will be obliged to adhere strictly to GATT Article V, however, any FTA with Russia could deal with more specific transit issues.177 Any agreement on trade facilitation dealing with customs procedures should address the problems faced by small traders who engage in border trade. Such trade provides a useful supplement to the incomes of poor people. However, they are subjected to complicated and lengthy customs inspection procedures, often arbitrary duties are imposed with the possibility that their goods may be confiscated for minor technicalities.
Due to a lack of discipline small traders wishing to sell their goods across the border in Siberia have become easy victims of corrupt customs officials and criminals.178 h. Trade Promotion: Mongolia could encourage exports to Russia through improved relations between their chambers of commerce, business, and non-governmental organizations, and intensified trade promotion activities, such as the establishment of Mongolian Trade Centers in the cities of Ulan Ude and Irkutsk, participation in food product exhibitions in Russia, especially Siberia, and actions to upgrade the quality and variety of meat products. In summary, the opening of the Russian market to Mongolian meat exporters would provide significant gains to herders and the rural economy in general. This requires liberalization of the tariff-rate quota system and improved procedures for certification of veterinary and health regulations, including the location of Russian testing laboratories in Mongolia and provisions for technical assistance. Agreements in the area of tourism and border trade could also provide meaningful opportunities for rural people. The elimination of duties on the export of Russian energy products could provide a stimulus to productivity in Mongolia and reduce inequalities in the Mongolian society. Russian accession and conformity to the WTO rules would be a major step in this direction. In considering an FTA with Russia, the additional benefits, such as new export opportunities not only to Russia but to European countries through the inclusion of a detailed agreement on transit would have to be considered.
3.3 THE REPUBLIC OF KOREA Korea is a growing trading partner: Mongolias main exports to Korea are molybdenum ores and concentrates (an insignificant share of approximately 0.5 percent of the total Korean imports of molybdenum) and unwrought or semi-manufactured gold.
178
176 The Mongolian-Korean joint venture Crown received two officials from the Russian Department of Standards to obtain permission for export of their automobile fuel filters to Russia. 177 Within the framework of liberalization of mutual trade between Mongolia and Russia since 2005, the parties are working on coordination of rates for railway freight forwarding.
See Russias Accession to the WTO: Fact Finding Analysis on Mongolian-Russian Non-Tariff Barriers and Standards in Trade, GTZ Export-Oriented Industrial and Trade Policy Project, Mongolia, Ulaanbaatar, December 2005.
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Mongolias import from Korea is mainly composed of consumer products. Korea is also the privileged destination of Mongolian migrant workers, as noted in Chapter Five. Korea has recently become active in FTA negotiations, having entered into such agreements with ASEAN, Chile, and EFTA; it is in the process of talks with Canada; and is involved in preliminary talks with the EU, Mexico, MERCOSUR, Australia, India, Japan,179 and China.180 The FTA signed with the US has not yet been ratified by either side, and is the object of violent protests in Korea, particularly on the part of beef farmers. Korea is party to APTA and accords tariff preferences with margins up to 50 percent on leather and cashmere items to the parties to that agreement. This means that Mongolian exporters to Korea of various textiles products, including cashmere, face a negative margin of preference in the Korean market in the range of 30-50 per cent. Furthermore, Korea has exchanged preferences with 43 countries under the Global System of Trade Preference and accords duty-free treatment to 50 LDCs. a. Tariff and non-tariff barriers: The Korean tariff schedule is highly differentiated, with 90 different rates. Agricultural products are protected more with an average tariff of around 62 percent versus 9 percent for nonagricultural products (some rates are over 800 percent).181 Despite this, Korea remains a major importer of agricultural products. Mongolian exports are subject to the Korean MFN tariff at relatively low ratesminerals face duties of 3-5 percent and raw cashmere faces only 1 percent. However, textiles are charged at 13 percent. Mongolia does not receive preferences in Korea, and the extension of the network of Korean FTAs and tariff preferences is creating negative margins of preference against Mongolian exporters. Korea has been allowed to retain an import quota on rice under a special provision of the WTO Agreement on Agriculture. b. Of Mongolias future potential exports, vodka and beef have been identified as possibilities.182
179 The FTA negotiation with Japan has recently been resumed after having been effectively suspended since November 2004. 180 To study the possibility of a new FTA, the Republic of Korea planned to hold a one-year industry/academia/government joint study program with China from the beginning of 2007 (www.bilaterals.org). 181 2008 Trade Policy Review (WT/TPR/204). 182 GTZ/USAID (2006).
However, the Korean tariff is 40 percent for beef and 20 percent for vodka. With regard to beef, Koreas prospective FTA partners will be competitive. If the United States FTA enters into effect, imports from the US will enjoy a duty-free tariff quota of 360,000 tons. Canada, currently negotiating with Korea, is seeking comparable improvement in access. Australia, currently the largest supplier of beef to Korea, will press for a similar arrangement. Korea maintains high tariffs and TRQs on milk products, ranging from 89 percent to 176 per cent with in-quota rates between 20-40 per cent.183 c. Movement of Persons: Korean FTAs contain provisions on the movement of persons, mainly the temporary entry of business persons and traders; they do not cover the detailed provisions included in the MOUs that Korea has signed with seven countries, including Mongolia.184 As noted in Chapter Five, as many as 30,000 Mongolians are currently resident in Korea. An FTA with Korea could facilitate an expansion of the provision in a way that brings benefits to Mongolia and not solidify long-term brain drain. d. Investment: Korean FTAs contain TRIMs-plus investment provisions, prohibiting a series of performance requirements. However, as for example in the Korea-Chile FTA certain exceptions are granted.185 e. Trade facilitation: Korea has taken many steps to facilitate trade by streamlining import procedures, reducing technical barriers to trade, and reducing import licensing requirements to a minimum number of products.186 However, origin labelling is mandatory for food and many other imports. Food packaging standards to reduce domestic waste can be quite stringent.187 It should be noted that Korean FTAs also include strong trade facilitation provisions.
183 184
Choi and Sumner (2000). Stella Go (2007). 185 Paragraph 4 of Article 10.7 of the Korea-Chile FTA states that nothing in paragraph 3 shall be construed to prevent a Party from conditioning the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party, in compliance with a requirement to locate production, provide a service, train or employ workers, construct or expand particular facilities, or carry out research and development in its territory. 186 For example, adopting the Sea and Air One-Stop Trans-shipment System and the 24-Hour Clearance System for express cargo. 187 For example, empty space of packaging is limited to 10 to 35 percent of the container, and the use of PVC packaging on certain food products is prohibited.
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In summary, Korea would seem to have considerable potential as a market for Mongolian products. However, as Mongolia does not enjoy tariff preferences in Korea, the expanding network of Korean FTAs, and the increase of products benefitting from APTA preferences will place Mongolian exporters at disadvantage. Serious consideration should be given to seeking an FTA with Korea. There is room for tradeoffs between facilitating Korean investment in Mongolia and providing assurance of supply of raw materials, in return for access to markets and consolidation of the access for workers in the framework of an FTA. 3.4 JAPAN Japan, traditionally a staunch defender of the MFN principle, responded to the formation of NAFTA by negotiating an FTA with Mexico (and later Chile) to protect its market interests in the Americas. Pursuant to its stated goal to establish a free and mature economic sphere across East Asia, whereby goods, services, persons and capital can move more freely, Japan has entered into a framework FTA with ASEAN within which more intrusive Economic Partnership Agreements (EPAs) are negotiated with individual ASEAN countries. Japan has negotiated an FTA with Switzerland, and is also engaged, at different levels of intensity, with the GCC countries, India and Australia. Japan`s approach to FTAs is to incorporate a wide range of issues, with focus on investment (national treatment and elimination of performance requirements) and energy supply security and industrial raw materials (See example of Japan-Indonesia EPA).
BOX 8.3 ELEMENTS OF JAPAN-INDONESIA EPA Improvement of Access to Goods Market: - Tariff elimination in at least 90 percent of two-way trade. Improvement of Access to Services Market: - Further liberalization of finance, construction, tourism, manufacturing industry related services and other areas; and - Protection of the advancement conditions granted to Japanese companies regarding telecommunications, marine transport and distribution. Improvement of Investment Environment: - Maintenance and improvement of transparency of the rules for investment, customs procedure, intellectual property, competition and government procurement. Reinforcement of Bilateral Cooperation: - Maintenance of investment environment, stable supply, policy dialogue and cooperation; - Smooth entry and temporary stay in the other country for intra-corporate transfers personnel, investors, persons engaged in special activities subject to contracts, etc.; and - Acceptance of prospective nurses and care workers, etc.
Mongolian exports to Japan (mainly cashmere and ores) have stagnated and the trade deficit is widening. Imports from Japan are mainly motor vehicles and parts. a. Tariff and non-tariff barriers: Over 98 percent of Japans tariff is bound at a simple average of 5.1 percent. Although its average duty for agricultural products is 22.7 percent, 95 percent of Mongolias agricultural exports to Japan enter duty-free.188 Mongolian exports of raw cashmere and minerals such as molybdenum and copper benefit from zero-tariff access to the Japanese market.
188
WTO World Tariff Profiles (2008).
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Slightly processed exports such as readymade cashmere jerseys, pullovers, shawls and scarves face tariffs in the 10 percent range. Japan has high SPS requirements on food itemsit currently prohibits beef and poultry imports due to BSE and avian flu. Premium organic products like meat could thus become a Mongolian niche for exports to Japan if they could conform to SPS regulations. Japans FTAs contain provisions on TBT and SPS. b. Investment and Services: A central concern to Japan in negotiating FTAs is access for investment. It thus insists on the elimination of performance requirements, across-theboard national treatment commitments, energy supply security and industrial raw materials. For example, the Agreement with Indonesia includes a detailed chapter on Energy and Mineral Resources, with specific provisions requiring consultation prior to policy changes, strict discipline over export licensing, and cooperation with respect to environmental protection and transfer of technology. Japans FTA commitments on trade in services are made in a positive list format. However, these are usually subject to national treatment commitments. They also include specific commitments for the entry and qualification of service suppliers, such as medical care givers in the FTA with the Philippines and Indonesia. An FTA with Japan would involve commitments with respect to investment and security of supply of mineral and energy products. The advantage is that, unlike Bilateral Investment Treaties (BITs), commitments in favour of investors can be traded for reciprocal commitments on markets access. However, this involves the disadvantage that such investment commitments are bound in the FTA. Opposition to FTAs with Japan in other countries such as Indonesia and Philippines have focussed on the concession made to Japanese investors.189 Any FTA with Japan should contain provisions for meaningful assistance in meeting Japanese standards and duty-free entry for meat and dairy products.
3.5 THE UNITED STATES
Upon Mongolias accession to the WTO in 1997, the US invoked the non-application clause (Article XIII) and did not apply WTO treatment to Mongolia until over two years later. However, from that date, exports to the US, mainly of clothing, expanded rapidly as has been described in Chapter Six. With the final elimination of quotas in 2005, these exports have declined dramatically, and the United States is now relatively less important as an export market for Mongolia. In 2004, Mongolia signed a Trade and Investment Framework Agreement (TIFA) with the United States, which is viewed as a crucial step towards an FTA. Furthermore, the Mongolian government has proposed the initiation of FTA to some members of the US Congress, which yielded a positive response. The US traditionally assumed the role of defender of the MFN clause of GATT. However, a major shift in US policy occurred in 1984 when the Trade and Tariff Act provided the US Administration with authority to enter into FTAs, opening the way for a first FTA with Israel, and in 1988 with Canada, its largest trading partner. Since the 1990s, with the formation of NAFTA, the US has implemented or negotiated around 17 FTAs.190
189
See, for example, Hawidi (2007).
190
http://www.ustr.gov/Trade_Agreements/Bilateral/Section_Index.html
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BOX 8.4 THE US FTA TEMPLATE Coverage of all products, with the exception of some sensitive products like sugar; TRIPS-plus provisions, including limitations on compulsory licensing, patentability of plant varieties, prohibition of parallel imports, precedence of trademarks over geographical indications, extension of patent protection and data exclusivity, etc.; Negative list for commitments on trade in services, broad coverage for service commitments with priority for telecommunications, e-commerce, financial services (often the subject of separate chapters), as well as audiovisuals, legal and professional services; Investment provisions, which cover goods and services, subject to negative list, compensation for expropriation (broadly defined), investor-state dispute settlement provisions and prohibition of performance requirements; Yarn-forward rules of origin for textiles and clothing and absence of regional cumulation provisions; Provisions of competition law; Provisions on labour rights and environment; and No commitments on anti-dumping or agricultural subsidies (although some on export subsidies). The US follows a more or less standard template aimed at achieving clearly defined objectives. These are: (a) politicalthat of encouraging partners to support US foreign policy initiatives. It is notable that some US FTAs involve very minor trading partners, where political concerns are paramount; (b) economicaimed at eliminating negative margins of preference and other actual or potential discrimination against US exports resulting from FTAs entered into by competitors, as well as to create captive markets, primarily for its producers of textile yarns and fabrics; and (c) systemicaimed at imposing disciplines in FTAs that could not be negotiated in the WTO, thus setting up a parallel track for pursuing its trade agenda, notably with respect to trade in
services (negative list), investment, electronic commerce, and intellectual property rights (e.g., the inclusion of TRIPS-plus obligations). The trade partner is also expected to support the US in the WTO with respect to issues where it is opposed by other major trading countries, notably the EU (e.g., trademarks vs. GIs, no duties on electronic commerce, acceptance of GMOs, opposition to state trading in agriculture, etc.). In 2006, the US accounted for 5.4 percent of Mongolias trade.191 The most important products imported from the US are wheat, machinery and vehicles (mostly destined for the mining sector). Mongolias exports to the US are concentrated on a few products. Gold accounts for 40 percent, and the rest are textiles and clothing. The top 30 Mongolian exports account for 95 percent of the total exports to the US. None of these products enjoys GSP treatment. Only 0.5 percent of all US imports from the country enter under GSP. Improved coverage of Mongolian products in the US GSP can be pursued by making submissions to the GSP Sub-Committee of the International Trade Commission, chaired by the USTR.192 For example, at the request of the Climax Molybdenum Company, GSP benefits were denied Mongolia on the import of molybdenum ores and roasted concentrates.193 Mongolia has submitted proposals in the TIFA framework to enlarge coverage of the US GSP to include around 73 products including textiles and knitwear products, leather goods, meat products, organic food products, molybdenum concentrates, copper cathodes, uncombed wool, and de-haired and combed cashmere of goats and cashmere tops. Market for Textiles and Clothing: An FTA is viewed by some as a way for the US to again become a significant market for Mongolian cotton and synthetic fibre textile products by providing Mongolian exports with margins of tariff preferences over non-preferential suppliers such as China. However, the determining factor would be the rules of origin. As noted in Chapter Six, preferential suppliers to the US have not fared well since 2005 and the yarn-forward rules of origin, if applied strictly, would nullify
National Statistical Yearbook (2007). See UNCTAD GSP Handbook on the Scheme of the United States of America, TD/DITC/TSB/Misc.58/Rev.1. 193 http://minerals.usgs.gov/minerals
192 191
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any preferential benefits to Mongolian clothing exporters (other than cashmere). The US has been generous in this respect with some small countries, but the scope for the US negotiators to extend such flexibility to Mongolia would seem rather limited.194 Furthermore, textiles and clothing, including leather products face rather complicated and costly custom procedures liquidation of custom duties may take 210 days or longer. 195 Standards: SPS measures require import permits issued by the Plant Health Inspection Service, and all food items for consumption in the US must be registered with Food and Drug Administration (FDA). Thus, such regulations would become an obstacle to Mongolian exports of food products unless the FTA included specific provisions to provide technical and financial assistance to Mongolian producers to enable them to meet US health and safety standards. Agriculture: US FTAs normally provide for safeguards in agricultural trade, but they are required to be eliminated over the ten-year transition period, after which all products are duty-free without exception. However, the agreement with Morocco permits it the possibility of applying safeguards on some food products indefinitely, and exempting other products from duty-free treatment. This example might be pertinent in any FTA with the US given Mongolias food security objectives.196 Investment: The US template includes six core principles on investment: (a) prohibition of a variety of performance requirements permitted by the TRIMs and GATS; (b) national treatment and the right of establishment (pre-establishment national treatment), unless excluded in a negative list; (c) the right to expropriation compensation; (d) selection of top management; (e) assured access to investor-state arbitration; (f) the right to free transfer of all funds related
to the investment, e.g., interest, dividends, proceeds for exports, needed imports, and so forth.197 The same provisions also appear in US BITs. Some US FTAs do not include a separate Investment chapter on the basis that a BIT already exists. The prohibition of performance requirements otherwise permitted by the WTO TRIMs Agreement (e.g., transfer of technology, export performance) or those on investment in services which are actually encouraged by the GATS could have an adverse impact on policy in the mining sector to encourage the contribution to human development objectives. Another element with particular implications for Mongolia is the controversial investor/state dispute settlement mechanism that is seen as undermining national sovereignty by enabling private investors to obtain compensation for opportunities lost due to action by governments at different levels to protect the environment or attain other social goals.198 Trade in Services: Unlike the models followed by China or Japan, the US FTAs do not build on the WTO GATS commitments, but adopt a totally opposed approach, based on a negative list, carving out commercial presence commitments and transferring them to the investment section. In practical terms, this means that no policy space remains to deal with new technologically advanced services when they emerge. Intellectual Property Rights: The TRIPS-plus aspects of US FTAs include (a) constraining the scope to impose compulsory licensing, even those applied to pharmaceuticals for health purposes; (b) extending patent or copyright protection for periods longer than that provided in the TRIPS Agreement; (c) permitting patent holders to block parallel imports; (d) requiring the patenting of plants and/or animals and undermining measures intended to prevent bio-piracy;199 and (e) permitting trademarks to be used in lieu of GIs. These provisions have come under heavy criticism, both internationally and in the US, as they are deemed to restrict the access of the poor to essential medicines and to nullify the rights of developing countries under the WTO TRIPS Agreement and the Declaration
197
http://www.intracen.org/tfs/docs/publications/ruleori2.pdf GTZ/USAID (2006). The negotiating authority imposes special procedures for the approval of the liberalization of sensitive agricultural products (i.e., mainly those subject to TRQs) including sugar, which is highly protected, as well as certain fruits, vegetables, and dairy products. The US previously interpreted the substantially all trade criterion of GATT Article XXIV as meaning all trade, and insisted that all products be made duty-free in an FTA. This interpretation came under strain, when it began to negotiate FTAs with some major sugar suppliersrecent FTAs have moved step by step towards the exclusion of sugar.
195 196
194
Remarks by Randall K. Quarles, Asst. Sec., US Treasury Department, before the US Chamber of Commerce and the Association of American Chambers of Commerce in Latin America, May 5, 2005. 198 For more on this issue, see N. Gal-Or (2005). 199 Rodriguez Cervantes (2006. (http://www.grain.org/briefings_files/ftatk-03-2006-en.pdf)
126
on TRIPS and Public Health (by restricting the use of compulsory licensing and prevent parallel imports of patented products).200 In summary, an FTA with the US would seem to be of little commercial value unless it is willing to grant Mongolia exceptionally favourable treatment with respect to rules of origin on clothing and assist Mongolia to meet SPS regulations. US FTAs have been known to be particularly intrusive into the policy space of developing countries. However, this may change with the approach of the new Administration, which may give priority to pursuing a multilateral approach.
ESCAP in Ulaanbaatar in 2006. Any developing country member of ESCAP may accede to APTA by negotiating a list of preferential tariff concessions with members. APTA is currently involved in its fourth round of negotiations. The previous rounds resulted in a significant increase in the number of items and trade covered by tariff preference. Membership in APTA could partially address Mongolias immediate concern over negative preferential tariff margins in China and the Republic of Korea.203
4. WAY FORWARD ON TRADE NEGOTIATIONS
3.6 THE EUROPEAN UNION The EU refrained from negotiating FTAs from 1997 until 2006, when a new Commission policy document set out a strategy for negotiating a new generation of FTAs. Priority is given to partners with market potential, high protection and preferences given to competitors. According to these criteria, ASEAN, Korea and Mercosur are targeted, followed by Russia and India. The EU GSP-plus scheme provides Mongolian exports with tariff preferences, and has been renewed until 2011. GSP exports have grown by 40 percent since the GSP-plus scheme was implemented. The EU is the largest market for Mongolian agricultural exports, and 99 percent of agricultural items enter duty-free.201 This is true for only 19 percent of non-agricultural products, including certain cashmere items.
Trade can only provide a means of empowering the poorest segments of the Mongolian population if Mongolian exporters can acquire favourable access to their major markets for key export products. In the least they ought not face tariff disadvantages relative to competitors. The fact that exports of products produced by the traditional sectors in Mongolia are subject to relatively high tariffs and more stringent non-tariff barriers than minerals, for example, exacerbates disparities in terms of human development within Mongolia. The extension of the network of FTAs and preferences in Asia is increasingly placing Mongolian exporters at such a disadvantage. The lack of progress in the WTO Doha Round of multilateral negotiations and the standstill in Russias accession to the WTO exacerbate this situation, and render Mongolias non-participation in even FTAs less tenable. The trade and human development linkages identified in the preceding chapters are even more acute in the context of FTAs, where free trade is the ultimate objective. The need to ensure food security, to protect the livelihoods of small farmers and herders, to empower poor people to export their products, to address the transit problems arising from Mongolias landlocked position, to ensure the policy space to require the mining sector to contribute to human development must be reflected in any FTA signed by Mongolia.
3.7 APTA As noted above, the Asia Pacific Trade Agreement provides the framework for an exchange of tariff preferences among the member countries, including China, Republic of Korea, India, Bangladesh, Sri Lanka and Lao PDR.202 Mongolia has demonstrated some interest in APTA, and a national seminar on APTA was organized by UNUNDP (2005a), p. 76. Given the strong criticism of these provisions coming from within the Democratic Party, it would seem likely that the new United States Administration will change the template for FTAs, as least for TRIPS. 201 WTO World Tariff Profiles (2008). 202 APTA is covered by the Enabling Clause of 1979, which permits developing countries to exchange preferences without meeting the stricter criteria of covering essentially all trade of GATT Article XXIV.
200
203
See http://www.unescap.org/tid/apta
127
The main considerations facing Mongolia in trade negotiations could be summarized as follows: a. Obtain duty-free entry for key exports from the rural sector, such as meat, milk, wheat and cashmere and leather products; b. Achieve meaningful cooperation arrangements for meeting technical and SPS standards, and to facilitate the certification procedures; c. Obtain duty-free treatment for processed mineral products; d. Ensure that duty-free access is not frustrated by rules of origin; e. Retain the possibility of applying performance requirements to ensure that FDI is consistent with human development objectives, including the establishment of forward and backward linkages in the mining sector; f. Achieve meaningful transit arrangements, where applicable, including custom procedures and the related movement of persons; and g. Retain the possibility of imposing safeguard measures when confronted with import surges (an FTA would eliminate the flexibility now enjoyed by Mongolia to reapply its bound 20 percent tariffs). The results of an FTA could have major social, economic and political ramifications and implications, both positive and negative for human development in Mongolia. It is thus crucial that the Mongolian government effectively prepare for such negotiations by setting out a National Comprehensive Development Program that touches upon all sectors of the economy. The objective of having a national position on FTAs should be evaluated and formulated within the context of the Mongolian National Comprehensive Development Program. Such strategy would link trade policy measure to human development goals, identifying foreign trade barriers that should be targeted as well as where domestic policy space should be preserved. With each of the major potential FTA partners, Mongolia should assess the benefits and costs in terms of trade flows and human development goals. The consequences of mutual tariff elimination should be understood and priority
128
targets for liberalization in export markets should be set. In addition, judgments should be exercised on the less quantifiable impacts of FTAs on the possible constriction of policy space and flexibilities necessary to ensure access to health, knowledge, food security and technology transfer. In each case the approach taken by the trading partner in previous FTA negotiations should be studied. For each proposed negotiation, the government should prepare a White Paper setting out its preliminary findings that would be discussed in hearings with stakeholders and civil society groups. The preliminary checklist of questions that deserve answering before agreements are ratified is included in the Annex. For such consultations to be meaningful, however, information on trade issues and the link between the provisions of trade agreements and human development have to more widely disseminated and understood among various sectors of the population.
ANNEX TO CHAPTER EIGHT CHECK LIST FOR ASSESSING THE WORTH OF FTAS
Does the FTA provide meaningful market access advantages for Mongolian exports in the market of the partner country? Are all key export products (e.g., cashmere, meat, milk, refined metals) or services included? Do the tariff reductions, or margins of preference, have real commercial value? Are rules of origin too constraining relative to the margins of preference? Are they such that many exports may not benefit as to reduce the scope for benefiting from the preferential access? Will non tariff barriers (e.g. SPS) still impede exports? Are there provisions for financial and technical assistance to overcome SPS and TBT barriers, information exchange, guidelines for verification, certification and import checks that can provide greater security for exporters?204 Could the mutual trade be seriously distorted by export or production subsidies on agricultural products?205 Are there provisions for food aid if necessary?208 Does the FTA provide for cooperation in investment, cultural services, tourism, transportation, etc.? Does the FTA provide for measures to promote trade and investment (incentives, trade fairs) and address problems of competition (e.g. tourism), or to upgrade the competitiveness of enterprises in the partner country?209
Are there provisions in the FTA that could negatively affect the ability of Mongolia to pursue human development goals? Do the provisions on intellectual property impose commitments that eliminate flexibilities provided by the TRIPS Agreement, in particular in the areas of access to medicines, patenting of life forms and plant varieties, biodiversity and disclosure requirements, copyright and access to information and broadcasting? Do the Investment provisions undermine the GATS and TRIMs Agreements? Would the provisions on investment, trade in services and electronic commerce undermine government measures to promote social and cultural goals (e.g. universal coverage, cultural integrity)? Are the provisions on agricultural trade sufficient to effectively protect small farmers and promote food security by excepting some agricultural products from free trade, providing for the continuation of safeguards, even after the transitional period? Are obligations on government procurement included? Could exporters reasonably expect to compete for government contracts in the partner country? Are there WTO-plus provisions on subsidies, such as commitments to eliminate dual price systems for energy that are permitted under the WTO? Are any provisions on environmental and labour standards and competition policy inconsistent with national goals?
Does the FTA provide opportunities to deal with issues not easily amenable to multilateral solutions? Are there effective provisions on transit (including through commitments on services) where applicable? Are commitments relating to movement of persons included, such as access at an occupational level, or measures for protection of migrant workers?206 Will the recognition of standards, testing facilities and professional qualifications be facilitated?207
See Rudloff and Simon (2004). Some attempts have been made. For example, the Canada-Chile FTA prohibits anti-dumping duties on mutual trade. Chile-USA, Morocco-USA and Peru-USA provide for the elimination of export subsidies in mutual trade so long as action is taken to confront export subsidies from third countries. See www.ustr.gov/Trade_Agreements/bilateral/Morocco_TPA www.ustr.gov/Trade_Agreements/bilateral/Peru_TPA and www.ustr.gov/ Trade_Agreements/bilateral/Chile_TPA. 206 The last issue to be resolved in the negotiations of a Philippines-Japan FTA was the quota for the entry of nurses and respect for their professional qualifications. For a description of the issues involved see http:// pascn.pids.gov.ph/jpepa/docs/tullao-revised_sept%209.PDF). 207 See, for example, the approach of Singapore: www.fta.gov.sq
205
204
208 See draft Economic Partnership Agreement between the EU and the COMESA countries, 4th draft EPA/8th RNF/24-8-2006 (available at www.bilaterals.org). 209 An example is the Mise Niveau programme financed by the EU in its Mediterranean partners. See Lakhoua, Faycal, (1998). (http://www. worldbank.org/mdf/mdf2/papers/benefit/finance/lakhoua.pdf)
129
ANNEX TO CHAPTER EIGHT

Table 8.1 GSP+ scheme utilization in the EU (US$000)
Country Belgium Denmark Holland Germany Hungary Slovenia Portugal Spain Italy France UK Poland Finland Romania Austria Czech Ireland Bulgaria Slovakia Sweden Luxemburg Grand total 2005 876.7 1.6 4,552.3 9,541.5 0.1 2006 917.7 9.1 2,695.5 6,630.0 18.9 2007 503.9 10.9 1,345.0 4,458.4 32.8 1.1 2.9 65.1 8,157.5 5,830.5 1,687.9 18.1 3.0 9.4 831.2 75.2 8.4 1.0 75.4 4.6 24.6
Frozen beef (in 2006) JAPAN, Total Molybdenum ores and concentrates Wool & fine or coarse animal hair, carded & combed (mostly cashmere)
Ton
18.4
16,8 14,400.0
12
None
12
Ton
213,023
7,133.4
None
10
Ton
48.8
3,715.3
None
958
Refined copper and copper alTon loys, unwrought KOREA, REP. OF, Total Molybdenum ores and concentrates Gold, unwrought or semi-manufactured RUSSIA, Total Beef Horse meat Fluorspar concentrate Molybdenum concentrate Zinc ores and concentrates Knitted garments Wool blankets Fur articles UNITED STATES, Total Gold in other semi-manufactured form Ton n-monetary (inc. gold plated w/ platinum) Fluorspar, containing by weight 97% or Ton less of calcium fluoride
360.6
2,253.6 40,600.0
none
10
5.0 2,070.3 205.1 591.9 0.4 96.7 36.9 21.7
22.0 11,188.1 1,118.0 1,573.8 5.0
Ton
1,129.9
29,235.2
35
Ton
0.413
8,407.8 57,300.0
35
Ton Ton Ton Ton Ton Piece Piece Piece
3,684.0 7,068.0 99,614.0 18.5 1,857.6 10,580 4,021 415
6,066.4 9,750.3 7,405.4 631.3 2,670.8 176.3 104.1 86.8 64,500.0
15 15 5 5 5 30 30 30
11.25 11.25 3.75 3.75 3.75 22.5 22.5 22.5
30 15 10 5 10 15-17.5 15 10
240.5
15.5 6.7 18.1
14.7 25.1
Source: Ministry of Industry and Trade of Mongolia.
TABLE 8.2 TARIFF

TREATMENT OF MAJOR EXPORTS BY
0,2
43,561
1.4
2.73
MONGOLIAS
Pref. tariffs (% ) Final bound rate (%)
TRADING PARTNERS IN
2007
Amount US$ 000
1,400,100.0
35,100
6,288
Country/Products CHINA, Total Copper ores and concentrates Zinc ores and concentrates Coal nes, whether or not pulverised Hair of Kashmir cashmere goats Petroleum oil and oils Hair of Kashmir cashmere goats, carded or combed Skins of sheep or lambs Copper cathodes and sections of cathodes Molybdenum ores and concentrates Iron ores
Unit
Quantity
MFN tariff (%)
Women/girls trousers and Piece 616,841 shorts, of cotton, not knitted Hair of Kashmir cashmere Ton goats, carded or combed
2,691
8.15
15.5
8.15 6.8 cent/ kg+ 5.5% 16.5
Ton Ton
607,712.7 130,447.8
811,405 172,792 114,981
0 1 5
None None None
0 0 6
18,5
1,387
5.6
Ton 3,215,349.2
T-shirts, singlets and other vests, Piece 717,188 of cotton, knitted Molybdenum oxides and hydroxides
1,335
16.5
15.5
Ton Ton
2,255.1 110,919.8
64,734 53,304
9 0
None None
38-9 0
Ton
36
1,331
3.2
3.2 17.8 cent/ kg on molyb. content 0
Ton
826.7
47,920
None
Molybdenum ores and concentrates nes
Ton
54,9
905
17.8 cent/ kg on 0 molyb. content 0 0
Ton
3,508.8
22,651
12
None
7-9
Ton
2,765.8
19,556
None
Tungsten ores and concentrates
Ton
93,7
848
Ton Ton
961.4 239,937.1
17,790 16,496
0 0
None None
0 0
Mens/boys trousers and Piece 310,226 shorts, of cotton, not knitted
713
12.6
8.97
130
Molybdenum concentrates, roasted Aircraft parts nes
Ton
18
630
12.8 / kg on 4.8 cent/ molyb. kg+0.6% content + 1.8% 0 0
12.8 / kg on molyb. content + 1.8% 0
Ton
0,755
418
Jerseys, pullovers, cardigans, waistcoats and Piece 8,187 similar articles, of hair Mens/boys jackets and blazers, of other Piece 18,416 textile materials, not knitted Womens/girls blouses and shirts, of cotton, knitted
397
10
3.6-15.5
10
345
14.2
0.4-15.5
14.2
Piece 140,482
344
19.7
4.0-15.5
19.7
T-shirts, singlets and other vests, of other Piece 256,652 textile materials, knitted Mens/boys trousers and shorts, of Piece 109,604 synthetic fibres, not knitted Lactose and lactose syrup, <99% lactose on dry matter Mens/boys shirts, of cotton, knitted Mens/boys shirts, of manmade fibres, not knitted
312
14.1
0-15.5
14.1
289
11.5
5.7-15.5
11.5
Ton
254,3
254
6.4
3.2-4.9
6.4
Piece 111,797
250
19.7
4.0-15.5
19.7
Piece 64,638
156
12.2
5.3-15.5
12.2
Sources: http://www.wto.org/english/thewto_e/whatis_e/tif_e/org6_e.htm http://www.wto.org/english/news_e/news07_e/tariff_profiles_june07_e.htm Ministry of Industry and Trade, Foreign Trade Statistics, Mongolian Customs General Administration, 2007. WTO Accession of China (tariff schedule).
131
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World Bank. 2002. Mongolia Public Expenditure and Financial Management Review: Bridging the Public Expenditure Management Gap. Report No. 24439-MOG, Washington D.C., June. World Bank. 2006. Managing Through a Global Downturn. East Asia Update. Washington D.C., November. World Bank. 2006. Mongolia Public Financing of Education in Mongolia. Report No. 36979-MN, Washington D.C., September. World Bank. 2003. From Goats to Coats: Institutional Reform in Mongolias Cashmere Sector. Report No. 26240-MOG. Washington D.C. World Bank. 2008. Mongolia Quarterly Report. http://bcmmongolia.org WTO. 2005. Trade Policy Review. WTO. 2005. Mongolias WTO Accession: Expectations and Realities of WTO Membership. In Gallagher, P., et al. Editors. Managing the Challenges of WTO Participation: 45 Case Studies. WTO. 2008. World Tariff Profiles www.wto.org/ english/res_e/booksp_e/tariff_profiles08_e.pdf Yamamoto, Yumiko. 2008. Gendered Impacts of the Expiry of WTO Agreement on Textiles and Clothing on Developing Economies in the AsiaPacific: Assessment and Policies. UNDP Regional Centre in Colombo. Zweig, David and Jianhai, Bi. 2005. Chinas Global Hunt for Energy. Foreign Affairs, 84/5. http://esa.un.org/techcoop/policyNotes.asp http://minerals.usgs.gov/minerals http://www.agriffchina.com/e-agriffchina/ memberdetail.jsp?id=43650 http://www.bilaterals.org http://www.intracen.org/tfs/docs/publications/ ruleori2.pdf http://www.unctadxi.org.gstp http://www.unwto.org/quality/news/en/news. php?op=6
http://www.ustr.gov/Trade_Agreements/ Bilateral/Section_Index.html http://www.unescap.org/tid/apta http://www.wto.org/english/tratop_e/region_e/ region_e.htm http://laborsta.ilo.org, ILO LABORSTA data base http://www.igc.org.uk/en/grainsupdate, International Grains Council
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Trade Policy and Human Development IN Mongolia

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What are the main topics discussed in the document?

What are the main topics discussed in the document?

What are some of the key challenges faced by Mongolia's agriculture and livestock sectors?

What are some of the key challenges faced by Mongolia's agriculture and livestock sectors?

Ministry of Foreign Affairs and Trade in Mongolia United Nations Development Program in Mongolia

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

Way Forward After a Decade in the World Trade Organization

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

1 2 3 4 5 6 7 8 1.1 1.2 1.3 1.4 1.5

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

2. THE EVOLUTION OF MONGOLIAS PRODUCTION AND TRADE

2006 7.9 3715 6.0 3.2 1536.5 410.2

2007 9.9 4557.5 15.1 2.8 2401.1 423.6

1360.4 1354.1 1237.0 982.3 123.4 3.3

1851.2 1845.7 1749.2 1361.5 102.0 2.2

World Bank (2002), p. 5. McKinley (2004).

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

Figure 1. Share of trade partners in total trade

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

Table 4. Shift in sources of imports

24% 22% 16% 6% 6% 6% 5% 85%

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

Source: Economic Freedom Index of Mongolia, Open Society Forum.

3. HUMAN DEVELOPMENT CHALLENGES IN MONGOLIA19

This section is excerpted from Chapter 1, Mongolia HDR (2007).

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

Source: Second MDG Report of Mongolia for 2005-2006.

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

3.2 POVERTY AND INEQUALITY

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

Mongolian Statistical Yearbook (2007). Bikales et al. (2000).

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

4. CONCEPTUAL LINKAGES BETWEEN TRADE AND HUMAN DEVELOPMENT (HD)24

Draws on Gibbs and Wagl (2003).

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

2007 2.062.0 789.4 140.7 157.0 308.2 122.6 3998.8

2003 34.1% 21.6% 5.1 5.3% 9.3% 11.7%

2004 35.5% 19.2% 5.7 3.7% 15.7% 10.7%

2005 36.5% 19.8% 3.6% 5.7% 11.2% 8.6%

2006 47.9% 19.6% 3.5% 3.4% 7.5% 5.4%

2007 51.6% 19.7% 3.5% 3.9% 7.7% 3.1%

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

5. DEPLOYING TRADE POLICY TO AUGMENT HUMAN DEVELOPMENT

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

Communaut Europenne Mongolie Document de Stratgie 2007-2013. EC/CN.4/2005/47/Add. 2, March 8, 2005.

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA

Mongolia HDR (2007). Mongolia HDR (2007).

TRADE POLICY AND HUMAN DEVELOPMENT IN MONGOLIA