China’s agreement

Mongolia now faces only the time dilemma when it would sign the FTA with China.

The People`s Republic of China has signed a free trade agreement (FTA) with 16 countries in the last 15 years, a period of its immense economic growth. Furthermore, eight more FTAs are under consideration with countries including Mongolia.

In May 2017, the Ministry of Foreign Affairs of Mongolia and Ministry of Commerce of China jointly signed the memorandum of understanding to launch the joint feasibility study on FTA. Earlier, the feasibility study was conducted on FTA with China, but at that time, it was concluded FTA could not generate enough profit in terms of economic benefit and might have a potential risk to the food and light industry of Mongolia. However, China is our main trade partner and within the framework of the “Belt and Road” initiative, the question we now have to answer is when FTA would be signed instead of whether Mongolia should or should not sign FTA. The objective of the “Belt and Road” initiative is to connect countries in five main directions, namely government policy, infrastructure, investment, culture and education and indeed, a trade network that includes FTAs and other trade facilitators.

First FTA
We haven’t completely figured out what a FTA is though it is not a brand new concept to us. The reason is that  Mongolia signed a FTA with Japan in 2015. That very first FTA was more of an experience for us rather than a mutually beneficial agreement. However, some analysts say considerable time and activities are needed in order to fully determine the effects and results of the FTA. “Well grounded conclusion shall be made on the absence of actual output from the FTA with Japan” pointed out the study of the National Institute of Security Studies (NISS) in 2018.

Within the agreement, Mongolia exempted 5700 types of goods in 97 groups from customs duties while for the Japanese side, the figures are 9300 types of goods in 97 groups respectively. Total of 7.2 million USD (equal to 17.2 billion MNT) of imported goods worth 210.1 million USD from Japan has been exempted from customs duties since the agreement entered into force, specifically from June 7, 2016, to March 31, 2018.

Japan deepened even further to reach 348.3 million USD, a 30.9 percent increase compared to 2017.

Customs statistics of 2017 reveal that the export amount of Mongolia to Japan increased by 5.6 percent compared to last year to reach 14.8 million USD, even though types of exported goods have not been expanded significantly. On the contrary, the trade deficit with Japan deepened even further to reach 348.3 million USD, a 30.9 percent increase compared to 2017. Trade turnover of the two countries increased by 72.1 percent in the last 2 years compared to
previous years, however, imported goods from Japan prevailed in the turnover, which contributed to the trade deficit. Goods that have been included in the agreement amounted 40 percent of import from Japan. Mostly, these goods have been passenger cars, heavy mining machinery, and their spare parts.

The lessons we learned from the agreement are that governmental and non-governmental organizations failed to organize adequate preparation work to establish a free trade agreement with Japan, specified in the NISS study. Issues, such as resources and reserves of goods to be exported and whether national producers and exporters had the necessary preparation to take advantages of FTA that would allow them to enter Japanese market should have been thoroughly examined in advance. Another mistake that shall be mentioned is that Mongolia hasn`t formulated a policy that supports the development of certain industries to reduce the trade deficit. Establishment of full-scale
FTA requires at least 5-10 years of preparation works, shows practices of many nations. Comprehensive discussions among interest groups and chamber of commerce and industry and well-researched studies in each business sector must be conducted. In Mongolia`s case, we spent only two years to prepare for the FTA and the outcome was the polar opposite of which we hoped for. Establishment of the free trade agreement with Japan contained political motive to strengthen the relationship of two countries rather than trade purpose, emphasized some analysts.

Friendly strategy
The Chinese Government deems FTAs as a new platform to further opening up to the outside and speed up domestic reforms, an effective approach to integrate into the global economy and strengthen economic cooperation with other countries as well as particularly an important supplement to the multilateral trading system.

When we analyze FTAs that has China signed with its trade partners, they contain three main objectives: 1) FTAs signed with Hong Kong, Macao, and ASEAN to ensure regional security 2) FTAs signed with Australia, Chile, Iceland and New Zealand to guarantee a source of raw materials that should meet its demand for agriculture, industry and electricity for long term 3) FTAs with countries that have no close geographic or economic relationships in order to avoid protection policy of the interest groups of small countries and become alliance to international community.
“Mongolia should first perceive in which group it might belong to,” says O.Erdene-Urnukh, analyst of the Ulaanbaatar analytic research institute. Currently, China has 8 FTAs under consideration with Columbia, Fiji, Nepal, Papua New Guinea, Canada, Bangladesh, Switzerland, and Mongolia.

In 2017, trade turnover between Mongolia and China reached 6.68 billion USD, showing a 35.8 percent growth compared to 2016 and the trade profits increased by more than 1 billion USD compared to the previous year to reach 3.85 billion USD. Developed countries, Japan, South Korea, and China all intend to establish a permanent import stream by signing FTAs with countries, including Mongolia, that own vast mineral resources. Such a strategy might push Mongolia into the type of country that only produces raw materials. On the flip side, the infrastructure and
logistics sector shall be developed.

The main reason why China is aggressively pursuing the FTA strategy is closely associated with  its excessive domestic production and export volume drop. Moreover, China encourages Central Banks of countries which it established a FTA to enter into a bilateral currency swap agreement with the objective to popularize the yuan and boost trade volume.

When analyzed, China doesn`t have a single FTA model, instead, they prefer to take account of the characteristics of the country they intend to sign the FTA and modify the agreement to accommodate those features. Some countries that have signed FTA with China implement free trade policy, while others have strict restriction and protection policy. It shall be noted the common method China implements to start FTA negotiation is they step up free trade zone cooperation. In 2015, “General plan on Zamiin Uud-Erenhot border cooperation zone” was signed. In these days when China-Mongolia joint feasibility study on FTA has already started, it is understood that the development process of the free zone shall intensify. Besides, in connection with Mongolia`s declaration of its intention to establish FTA with the Eurasian Economic Union, negotiation with China on the FTA is sure to speed up.

What we must do
China is the world`s largest exporter and the second largest importer of goods and its economy has been one of the world`s fastest growing with an average of more than 10 percent in the last 30 years. As mentioned earlier, Mongolia now faces only the time dilemma when it would sign the FTA with China. Mongolia shall not play by China`s rules, instead, it must establish a legal environment and necessary regulations to sign mutually beneficial and the winwin agreement says, analysts. “Tariff regulations have been improved, though same cannot be said about non-tariff regulations” expressed L.Undargaa, analyst and professor at Mongolia University of Social Sciences. She added that in order to safeguard the interests of domestic businesses and producers, protection strategy shall be applied to the FTA. About 79 percent of 86 thousand companies operating in Mongolia are small and medium enterprises and
ensuring their financial stability is far more important than exporting a particular type of good. As for protection methods, safeguarding, dumping and neutralizing subsidies are commonly used practices in international trade. Bill on dumping was submitted to the Parliament in 2016, however, the bill was not approved and has been returned for more processing. The dumping allows export by a country or company at a price that is lower in the foreign market than the price charged in the domestic market. In other words, Chinese products, when imported to Mongolia shall
have cheaper prices than the price of similar products in Mongolia. Therefore, the Law on Dumping shall allow Mongolia to export products at a lower price than the price of the products of the country which it sells.

The next step should be a comprehensive study on how many and what kind of goods in what specific terms shall be exported to China. The overwhelming trend in China signals that demand for coal, synthetic gas, iron and mutton could increase. We must keep in mind that China is expected to put a cap on coal import as early as 2030, therefore agriculture products shall be our main export in the coming years. Take for instance Chinese customs duty, which is around 12-23 percent for mutton, could be fully exempted by the agreement. Australia, the main competitor of Mongolia in this sector had already established FTA with China and it could have a negative impact on the competitiveness of Mongolian mutton said L.Undargaa. She also reminded that Mongolia must establish infrastructure, national action plan, and policy in order to manufacture products and goods that meet the standards of the country which we plan to establish FTA.

Countries that signed FTA with China all have Ministry of Commerce which is another issue we must focus on and experts note that Mongolia must establish a government institution that coordinates commerce and trade matters to conduct effective and mutually beneficial FTA negotiations. Mongolia needs time and proper preparation to establish FTA not only with China but with South Korea and ASEAN. Professionalism, sound decision, and agreement behind meeting tables are essential for us to avoid a possible trade deficit at the least and to ensure economic stability at the most.

This article was published in the 154th issue of Mongolian Economy magazine in July of 2019.