The world’s neighbour: Reaching out beyond bordering nations

Although landlocked between China and Russia, Mongolia’s priority is to cultivate trade and investment links with its “third neighbours” – a phrase first coined in 1990 by US Secretary of State James Baker to describe Mongolia’s relations with the US. A WTO member since 1997, Mongolia has since lowered barriers to trade. With a growing array of cooperation and liberalisation agreements, the authorities are seeking to diversify trading partners and improve terms of trade, and their trade tariffs are among the lowest in the world.

Preferential Access

Under the generalised system of preferences, Mongolia has benefitted from preferential access to key markets including the EU, US, Japan, Canada and Australia since 2006 and, since 2010, Russia, Kazakhstan and Belarus, among other European markets. The agreement provides duty-free access for over 5000 products to these markets, including all of Mongolia’s exports, although it imposes a 5% export tax on minerals at origin. Likewise, Mongolia’s liberal import regime, crucial for such an import-dependent economy, levies a flat 5% Customs duty on imports.

With a trade-weighted most-favoured nation average tariff of only 5.2%, compared to 9.72% in China for instance, Mongolia’s trade regime is amongst the world’s most open. In a bid to diversify partners however, over the past decade authorities have concluded cooperation agreements to develop closer trade and investment links.

Western Partners

While Mongolia’s trade with China has grown on the back of rising consumer goods, food and machinery imports, alongside 93% of its mineral exports, the authorities have continued reaching out to third countries. Chief among these is the EU, which signed a Partnership and Cooperation Agreement with Mongolia, supported by €60m over seven years, in April 2013 to enhance their partnership in finance, agriculture, transport, mining and upgrading local standards to EU norms. Although the EU accounted for 5.5% of Mongolia’s trade in 2012, the aim is to expand Mongolian exports of high-value goods, like cashmere and meat. Having concluded a Trade and Investment Framework Agreement with the US in 2004, the two nations signed a Transparency Agreement in September 2013 that aims to expand private-sector input in policy-making and increase transparency.

Asian Neighbours

As Mongolia accedes to the UN-backed Asia-Pacific Trade Agreement, aimed at fostering mutual trade concessions and harmonise rules of origin and quality standards, in early 2014 it will gain preferential access for its exports to major emerging markets like India, China and South Korea. Mongolia already holds an agreement with China for the re-export of 30% of its mineral exports to the south to markets like Japan and South Korea.

Meanwhile, official negotiations towards its first Economic Partnership Agreement, a free trade agreement (FTA) with Japan, were launched in 2012 with the fifth round of talks completed in December 2013. Mongolia has long planned to increase coking-coal and other mineral exports to Japan and South Korea, with whom it does not hold any preferential trade agreement. Stronger trade connections with Japan could be particularly rewarding if current debates about the country’s nuclear power facilities leads to a surge of activity at coal-fired plants. Despite the potential of its mineral exports, Mongolia also hopes to increase exports of higher-value agricultural and manufactured goods such as textiles.

Key to expanding Mongolia’s exports, particularly of bulky minerals like coal, is expanding transport infrastructure links and reducing transit dependence on China. Mongolia already has a rail-link to the North Korean port of Rason through Russian railways. Ahead of a presidential visit to North Korea in November 2013, the two countries signed several agreements in transport and roads to expand bilateral trade and exports via Rason. While transit through North Korea remains restricted by the kingdom’s international isolation, expanding rail and road links to the north would provide much-needed diversification for logistics operators.

While its geographic location imposes natural transportation constraints, Mongolia has employed active trade diplomacy over the past decade. Developing its domestic infrastructure to improve regional connectivity will be key to ceasing the potential for new trading links. The prospect of concluding its first FTA with Japan reflects the recognition that trade diversification is key to improve trade terms and diversify the economic base.

Close Neighbours

While an FTA with Russia has been tabled since 2011, relations continue to focus on three ventures in rail, copper and fluorspar/iron ore, through partnerships with Ulaanbataar Railway, Erdenet Copper and Mongolrostsvetmet, respectively. Mongolian fuel imports are dominated by a single Russian company, Rosneft, which accounts for the bulk of imports from Russia.

Meanwhile, trade with China has grown from $2.4bn in 2009 to $6.6bn in 2012. Despite temporary interruptions of coking-coal exports in early 2013, Prime Minister N. Altankhuyag has sought to build on the strategic partnership concluded in June 2011 in a visit to Beijing in October 2013. “My recent visit to China demonstrated the will of both countries to boost economic and commercial prospects in future,” Altankhuyag told OBG. Several agreements were signed, including one to supply 1bn tonnes of coal to Shenhua over 20 years and an associated railway from Tavan Tolgoi to the border, developing a coal-to-gas plant with Sinopec and cultural exchange programmes. Mongolia also pledged support for the Chinese-backed Silk Road Economic Belt, involving central Asian countries. A key impediment to trade remains the inefficient rail interconnection to the Chinese network. The Greater Tumen Initiative, a UN-supported initiative to expand infrastructure and cross-border trade involving Mongolia, Russia, China, South and North Koreas, is one forum through which regional connectivity is discussed.

Private Partners

Mongolia’s abundant natural resources have attracted a number of international mining companies, and the subsequent economic boom has received interest from other foreign firms wishing to support, and benefit from, the country’s development. Perhaps most important among these foreign investors is Anglo-Australian mining giant Rio Tinto, which manages the massive gold and copper mine, Oyu Tolgoi (OT). Development of the first stage of the project is estimated to cost a total of MNT7.8trn ($4.68bn), and once the mine is fully operation, it is expected to boost GDP by 35%.

Other foreign mining companies include Canada-based Centerra Gold, which operates the country’s main productive gold mine; and Australia-listed Fe Ore and Haranga Resources, which each plan to produce iron ore starting in 2015. International firms are also active in the construction industry, with South Korea’s Halla Group winning the tender to construct Ulaanbaatar’s new city administration building and Danish firm FLS midth, awarded a $112m contract to construct a cement plant.

Relations with foreign companies have not always proceeded smoothly. The Mongolian government and Rio Tinto have had an ongoing disagreement over investment terms related to the development of phase two of OT. In early 2013, the government voided an engineering-procurement-construction contract between the Mongolian Mining Corporation and Samsung, and instead took over the contract with the wholly state-owned Mongolian Railway. In another example of contract cancellation, in August 2013, government officials confirmed the termination of a deal with South Korea’s BaekSuk Engineering and Construction, under which the company had been building a 253-km road project. The decision was reportedly made due to the project’s slow progress.