What is the effect of the EPA on Mongolia?

The Japan-Mongolia EPA (Economic Partnership Agreement) will come into effect in spring this year possibly.

 The share of Japan-Mongolia trade is quite small, less than one percent of the volume of Japanese trade. So, at first glance, the agreement will have little effect on Japan’s economy or trade balance at all even after coming into its effect.  This is for two reasons. First, there are great distance between Japan and Mongolia geographically. Second, Mongolia has a unique geopolitical situation, being a land-locked country, surrounded by Russia and the People’s Republic of China. The reality is that virtually all trade to and from Mongolia must go through China or Russia, particularly in the case of commodity such as coal . 

That being said, the EPA is of significance for Mongolia because it contributes to their national aspiration to overcome, through economic means, the land-locked situation vis-à-vis Russia and China. This aspiration seems to have begun in 1991 when Mongolia shifted quickly from a typical communist country tied to the old USSR to a market economy peacefully. Soon after that, Japan began to support Mongolia with ODA (Official Development Assistance) and financial aid together with the World Bank and the U.S. In 1997, Mongolia became a member of the WTO (World Trade Organization) which is the global organization for free trade through lowering tariff and non-tariff barriers.

At the time Mongolia entered the WTO it had almost abolished all tariffs in tradeable goods. As a result, Mongolia’s trade balance and domestic economy drastically changed due to the rapid increase of trade from neighbouring countries – Russia and China were not members of the WTO at the time. Soon after that Mongolia increased import tariffs towards 7% and then 5% under the auspices of the WTO to counterbalance this surge. These days, Mongolia has a free trade country although surrounded by only China and Russia.  

Unfortunately, as Mongolia shifted towards this free trade position, the domestic economy became dependant on China especially in the trade of mineral resources such as coal, iron ore, gold and crude-oil. China operates virtually as a monopolistic buyer of mineral resources from Mongolia and due to its market power can exercise influence over the price of mineral imports. Mongolia seems to be unable to reject China’s price offers because of China’s dominant position. Russia has enough of its own energy resources and aside from some meat imports has no real appetite for minerals in Mongolia. Economically, China should accept Mongolian minerals at the world market price but the reality is quite different. Chinese local buyers on mineral resources are almost all private companies but they control the price of the import of Mongolian coal due to the formation of an import consortium under the patronage of Chinese government. How can we say that free trade is good for all countries if this is the end result?

Mongolia has been looking for a third neighbouring country and Japan is one of them. The EPA might give Japan some priority in trade involving mineral resources such as coal.

Before the March 11 Earthquake in Japan, Japanese electricity depended in large part on nuclear power. But after that disaster, the Japanese government decided to decrease the ratio of nuclear power distribution and use other energy sources such as coal instead. Mongolian coal is of exceptional quality. The EPA can build closer economic ties between Mongolia and Japan, but at the same time, it needs to be remembered that any trade between the two countries must past through China.

Nobuto Iwata

Professor/ Dr.  Aoyama Gakuin University,Tokyo/Japan

Director of WTO Research Center/AGU