In a bid to lower trade barriers and eliminate Customs duties, Mongolia has struck its first major trade deal with Japan, which could pave the way for a broader network of free trade agreements (FTAs) while also boosting its chances of becoming a trade and logistics hub in the years to come.
At the end of July, Mongolia and Japan signed an economic partnership agreement (EPA), which will lift almost all tariffs on goods and services traded between the two countries, according to a joint statement. When the agreement comes into force next year, all Mongolian exports to Japan will be exempt from duties, while Customs will be levied on just 4% of Japanese products coming into the country.
The EPA is Mongolia’s first FTA and should prompt an expansion in mutual imports and exports. Last year, Japan imported just $21m worth of products from Mongolia while exporting $288m, but this is expected to change in the coming years.
“The Economic Partnership Agreement will create a favourable business and investment environment and establish a stable legal framework. I do believe that our two parties can sign and ratify the agreement in the first quarter of 2015,” said Mongolian President Ts. Elbegdorj.
One key element of the agreement is the development of an investor-state dispute settlement (ISDS) framework, which sets out mechanisms for foreign firms operating in Mongolia to seek redress if they believe their business has been unfairly impacted by state policies. In establishing the ISDS scheme, Mongolia hopes that Japanese firms will feel more secure in investing in the country.
There have been concerns in the past that shifts in state policy can leave overseas companies exposed, with changes in the terms governing mining leases being an example often cited. Recent amendments to licensing laws reinforcing the rights of lease holders, along with the ISDS clause in Mongolia’s EPA, suggest it is working to strengthen the country’s appeal as a stable investment destination.
Having been the first to formally reach out to Mongolia with an EPA, the agreement could also propel Japan towards favoured partner status, at least in some fields. With disposable incomes set to grow over the coming years as Mongolia continues to develop its mineral resources, demand for consumer goods, electronics, vehicles and other products should rise sharply.
The EPA could place Japan in pole position to take advantage of any increase in personal spending, while domestically retailers and franchise operators dealing in Japanese goods should also benefit from the lowering of the tax barriers. The advantage gained by Japan could well prompt other countries to step up efforts to open trade ties with Mongolia.
While the agreement with Japan has been sealed, more such deals could be in the pipeline. In late May, Mongolian and Russian officials held talks in Moscow to discuss trade ties, according to an online statement by Russian's Economic Development Ministry.
The focus of discussions was the possibility of Mongolia joining the Russian-led Customs Union that has brought down trade barriers between Russia, Kazakhstan and Belarus, with Armenia and Kyrgyzstan also expected to join the fledgling bloc.
According to Alexei Ulyukayev, Russia’s minister for economic development, increased investments by his country in the Mongolian economy, in particular in transport infrastructure, would help facilitate the creation of a free trade zone amongst the countries.
The union, which came into being in 2010 and is seen as a rival to the European Union, has also seen interest from other countries. Ulyukayev said he discussed possible forms of cooperation with the Turkish Economy Minister, Nihat Zeybekci, at the G20 trade ministers meeting in Sydney, in July, with talks focusing on the formation of a free trade zone.
Corridors of trade
The move towards freeing up trade relations with Russia has been seen as part of Ulaanbaatar’s ongoing strategy to diversify its export markets and maximise trade and business opportunities.
By strengthening ties with Russia, Mongolia would be able to open up a new export corridor to the north as well as boost access to other countries within Moscow’s orbit. This corridor would allow Mongolia to access markets in the booming Asia region and beyond more directly via Russia’s Pacific ports.
Such a corridor could also facilitate imports needed to sustain Mongolia’s development, including the technology and heavy equipment needed to underpin the mining sector, as well as to support the diversification of the economy.
In addition, by reinforcing its own domestic rail network, Mongolia will position itself to be a conduit for trade between Russia and China. This would allow it to benefit from the increasingly close links between the two countries, while also strengthening Mongolia’s own access to expanding markets.