Trading places: External demand is driving a spike in trade

Largely trade-oriented, the Mongolian economy is powered by growing mineral exports and oiled by imports of capital and consumer goods. Volumes have risen over the past two years as the mining sector has geared up, while external demand and prices both remain strong.

MINERAL MIGHT: In 2010 Mongolia’s total foreign trade turnover surged by 51.8% to reach $6.11bn, with exports rising 54.3% to $2.9bn and imports 49.7% to $3.2bn, according to the National Statistical Office.

Mineral products dominate exports, accounting for 81% of the total – up from 42.7% in 2005 and 35.2% in 2000. The rise in coal exports has been the main driver of this increase. Coal accounted for 30.3% of export earnings in 2010, with some 16.76m tonnes heading abroad, more than twice the 7.11m tonnes of 2009 and up more than five-fold on the 3.27m tonnes seen as recently as 2007. Copper concentrate is the second most important export commodity, accounting for 26.5% of exports, followed by iron ores (8.7%), textiles and textile articles (7.4%), unwrought or semi-manufactured gold (6.1%), crude oil (5.3%), zinc concentrate (4.6%), and live animals and other animal products (not including hides, fur, leather and food) at 2.4%.

Mineral products were the largest import category, making up 23.6% of the total, mostly due to crude oil, which accounted for 21.1% of import value. Other major groups were machinery and electronic goods (21.3%), vehicles and their components (19%), food products (7.5%), base metals (6.4%), chemicals and chemical products (5.3%), and plastic and rubber products (3.4%).

TRADE PARTNERS: Mongolia’s single biggest trade partner is China, which accounted for some $3.44bn of total turnover throughout 2010. The second-largest is Russia, with $1.13bn (18.5%) that same year. Mongolia’s two neighbours thus account for almost three-quarters of its trade by value.

Other trading partners with which Mongolia had a turnover valued at more than $100m in 2010 were South Korea ($212.3m), Japan ($199.2m), the US ($164.9m), Canada ($163.9m) and Germany ($109.3m).

A full 84.8% of Mongolia’s exports went to China in 2010, at a total value of $2.47bn. The second-largest export market was Canada, with 4.9% ($141.6m), followed by Russia (2.8%, $82.7m), the UK (2.3%, $67.4m), Italy (1.1%, $31.8m) and South Korea (1%, $30.5m). The proportion of exports destined for China has grown along with the latter’s hunger for commodities.

On the other side of the trade equation, the largest import partner is Russia, with a value of $1.05bn, or 32.7% of the total, in 2010. Imports from China accounted for $971m (30.3%). Other leading importers were Japan ($196.5m, 6.1%), South Korea ($181.8m, 5.7%), the US ($158.9m, 5%), and Germany ($87.2m, 2.7%).

CONTINUED GROWTH: The recent increase in trade has continued in 2011, powered by high domestic growth, growing demands from the local mining industry and increasing output of commodities. In the first eleven months of the year, Mongolia's external trade turnover grew by 89.4% on the same period of 2010, reaching $4.8bn with imports up 2.1 times to $3.1bn and exports rising 68.7% to $1.75bn China continued to be the dominant trading partner, accounting for 59.9% of total turnover in 2011, followed by Russia with 15%. Coal was the leading export, contributing 41.8% of exports, followed by copper concentrate (22.3%), iron ore (9%) and crude oil (5.3%).

As the Bank of Mongolia (BOM) has noted, imports grew 2.1 times faster than exports in the first three quarters of 2011, taking the trade deficit to $1.47bn. However, the trade condition index, which uses 2000 as a base year and comprises products that account for 90% of exports and 88% of imports, reached 1.8 as the price of coal exports rose while the cost of imports including foodstuffs fell, due both to the softening of the global economy and the rise of the tugrik. The average price of Mongolia’s top-10 export products rose 57.9% year-on-year by the end of the third quarter of 2011, as global commodity prices remained high. Frontier Securities, a Mongolian investment firm, forecasts that coal exports reached a record $2bn by end-2011, having reached $1.54bn in the first three quarters, up 178.3% on 2010. Copper commodity exports grew by 32% to $745m. The surge in imports has been driven by three major product groups: imports of heavy machinery and mechanisms and spare parts rose 133.5%, or $860m; those of petroleum products by 75% ($799m); and imports of vehicles rose by 214% ($800m).

POLICY DRIVER: Mongolia’s bilateral and multilateral trade relations are overseen by the Department of Foreign Trade and Economic Cooperation of the Ministry of Foreign Affairs and Trade (MFAT). The department formulates and implements trade policy, and was shifted to MFAT from the Ministry of Industry and Trade in 2008, reflecting Mongolia’s economically driven foreign policy. However, as trade affects the remits of every area of government, other ministries actively support the department, particularly the ministries of Mineral Resources and Energy, and Transport. “Our first priority is to integrate Mongolian foreign trade policy into the regional and global trade system,” said S. Javkhlanbaatar, the department’s deputy director.

OPEN BORDERS: Mongolia has embraced a liberal trade policy, the benefits of which are clear from soaring volumes. Export taxes have been abolished on most goods, while imports are generally subject to a 5% tariff. On the other hand, trade officials admit that the private sector’s complaints about bureaucratic hurdles to trade are justified. Javkhlanbaatar estimates it takes 28 days to obtain permits necessary to export goods. “While trade is pretty liberalised compared to most countries, we need to work on cutting red tape,” Z. Batsuuri, the second secretary at the department, told OBG. “There are too many procedures in the importing process, though we have started implementing a one-stop shop to reduce bureaucracy.”

DEALS: Currently, most multilateral trade issues are handled under the structures of the World Trade Organisation (WTO), which Mongolia joined in 1997. However, with the Doha round of WTO negotiations having little impact, the Trade and Economic Cooperation Department is working to developing bilateral ties. This is presenting some challenges for the authorities, as Mongolia has only limited experience in negotiating and implementing trade agreements, and its institutional capacity for doing so is relatively low. This is changing with time, particularly through the department, which benefits from young, multilingual staff.

Mongolia is currently involved in formal trade and economic cooperation negotiations with a range of countries and blocs. Most are in relatively early stages. Talks on an Economic Partnership Agreement (EPA) with Japan are due to start by early-2012 following the completion of initial studies. A preliminary framework agreement with the EU, covering a comprehensive range of issues, is being put into place, with the aim of promoting economic cooperation. Mongolia signed a Trade and Investment Facilitation Agreement with the US in 2004, and is currently taking the first steps toward forming a free trade agreement (FTA), though this will take several years to draw up and implement.

APTA AND BEYOND: The most advanced negotiations, and perhaps the most important, regard Mongolia’s membership in the Asia-Pacific Trade Agreement (APTA), a grouping which includes China, India and Korea. This is set to be the first preferential regional trade agreement that Mongolia will sign. Discussions with existing members were ongoing in late-2011, and membership is expected by the end of 2012.

Javkhlanbaatar said joining APTA would be a milestone for the development of trade in Mongolia, particularly for the government’s priority of integrating the country into the international trade system. Customs, rules of origin and quality standards will be subject to a degree of regional harmonisation, helping bring Mongolian exporters in line with international norms. This, and the impetus of increased regional competition, is expected to encourage local firms to improve their standards and stimulate innovation. While APTA accession will have little effect on the country’s already low tariff regime, it will give Mongolian companies preferential access to other member markets.

Favourable trade relations with China and Russia are very important for Mongolia, but the country is also pursuing a “third neighbour” policy with other key partners, including Japan, South Korea, the US and the EU. These markets are likely to be the target of the high-value manufacturing and agricultural industries that Mongolia is nurturing. They also provide something of a counterbalance to any form of dependence on the two geographical neighbours. At present the foremost priorities remain integration into the global trade system and the reduction of bottlenecks, with the smooth operating of mining in mind. But over the coming years, Mongolia’s trade strategy is likely to become more closely linked to its diversification efforts.

“Export-oriented trade policies have a direct relation to domestic issues,” Javkhlanbaatar said. “Specifically, we need to develop non-mining products that compete on the world market, which will involve investment in manufacturing capacity, quality and value addition. Economic diversification entails export diversification.”