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MANAGING THE CHALLENGES OF WTO PARTICIPATION: CASE STUDY 29

Mongolia’s WTO Accession: Expectations and Realities of WTO Membership

Damedin Tsogtbaatar*

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 Disclaimer:
Opinions expressed in the case studies and any errors or omissions therein are the responsibility of their authors and not of the editors of this volume or of the institutions with which they are affiliated. The authors of the case studies wish to disassociate the institutions with which they are associated from opinions expressed in the case studies and from any errors or omission therein.

Case Studies main page
Introduction

   

ON THIS PAGE: 
I. The problem in context
An ill-prepared accession
Implementation: a one-sided approach
II. The local and external players and their roles
> III. Challenges faced and the outcome
> IV. Lessons for others (the players’ views)


I. The problem in context    back to top

An ill-prepared accession

Initiating the accession to the WTO was apparently among the first genuinely independent foreign political moves by Mongolia in the multilateral arena. But, after decades of COMECON (Council for Mutual Economic Assistance) membership, the pragmatic, realistic and money-driven mentality of the GATT was not quite familiar to the Mongolians, including their negotiators, at the launch of Mongolia’s accession process. This lack of knowledge and understanding, coupled with a newly emerged private sector, led to a lack of political will to mobilize resources and stir a broad-based debate at national level so that the country as a whole could understand what the GATT/WTO accession could bring to the nation. As a result there was no serious economic analysis as to the consequences (be they positive or negative) of accession, except for the political objective of joining the club (i) before its two big neighbours (Russia and China); and (ii) with a view to showing the rest of the world that it was serious in its intention of embracing the market economy unreservedly.

However, the GATT/WTO was not exactly the right institution to join with a political objective of national image-building.

By taking such an ‘easy’ approach during the accession negotiations Mongolia did not reserve for itself sufficient transition period rights and exceptions, such as most developing member countries aim to secure. This approach also did not equip Mongolia to withstand the pressure mounted on it as to the acceptance of far-reaching concessions. Moreover, in return for its concessions, Mongolia received benefits which it could not make best use of in the near future. The chief reason for this was the fact that Mongolia carried out negotiations with such countries as the United States, Canada or Mexico, with which at the moment of launching the negotiations Mongolia had virtually no trade relations. Hence, for Mongolia, undergoing arduous economic reforms, there was only a remote possibility of taking the best advantage of the concessions made by those countries, whereas the six-year accession process, along with the self-induced liberalization, made Mongolia’s economy in general freer and more open, of which any country, whether it was a member of the WTO or not, could take full advantage, including Mongolia’s two biggest trading partners — Russia (which remains outside the WTO) and China (at that time not a member of the WTO).

 

Implementation: a one-sided approach    back to top

Although the accession was not perfect, since it was a fait accompli the country ought to have focused on building the strategy through which it could still benefit from WTO membership. However, the same old lack of understanding and knowledge of the WTO observed during the accession period persevered unchanged in the post-accession period, thus causing the lack of political will (this time) to make the best use of the WTO. Besides, the domestic industry sector remained too weak and immature to be able to change the flawed attitude of the government. As a result of these factors the Mongolian government took up the unbalanced policy of focusing predominantly on bringing national trade regulations into compliance with the WTO regime; from the perspective of the WTO this is praiseworthy, but not quite so from the perspective of the industries of a developing country. In other words Mongolia, instead of keeping the balance between its own WTO-compliance efforts and the search for the ways to increase market access for its products in other countries (WTO members or non-members in the WTO queue), chose, ironically, a rather Buddhist path of self-perfection and good WTO-consistent behaviour, without regard to whether other countries were doing the same. In the real world of hard cash and profit such ‘excellence’ and ‘idealism’ gave immediate and unconditional advantage to imported goods, that is foreign producers, while there was no ‘compensation’ gained as a result in the form of increased market access for Mongolian exports.

It should be noted that the above argument is not put forward as a criticism of the Buddhist behaviour of Mongolia per se. It is only the one-sided, unbalanced nature of the approach and the under-exploitation of the full potential of WTO membership that is being questioned here. Otherwise the pro-WTO measures helped the Mongolian economy to become more modern and competitive. Since a brief review of the pro-WTO measures may shed light on their actual impact on the Mongolian economy as well as the pattern of the participation of the Mongolian economy in the WTO, a selective tour of the most visible measures is offered here.

Government Resolution No. 14(1) and Prime Minister’s Decree No. 6(2) were among the first decisions taken by the Mongolian government in response to the beginning of the WTO era in Mongolia. Resolution No. 14 allocated the WTO agreements to the appropriate ministries and agencies, while Decree No. 6 listed the laws and regulations that had to be modified and amended in order to bring them into conformity with the WTO.

Decree No. 6 was an ambitious attempt by the government to introduce comprehensive changes at one sweep into the trading regime of Mongolia, including, inter alia, the development of a double-column (MFN and non-MFN) customs tariff system, review of the customs valuation rules, reform of the internal taxation system, simplification of export and import procedures, elimination of bans on certain products and modification of the intellectual property protection regime. However, as the government set about implementing the decree it became evident that building a WTO-consistent trade regime was a laborious, continuous process with a beginning, but no end. Nevertheless, despite hardships and obscurities, many of the objectives sought through Decree No. 6 were achieved. Such achievements were secured at times rather spontaneously, for the country was undergoing the transition to a market economy, and successive governments were persistently pursuing the policy of liberalizing the economy. Therefore most of the measures undertaken in pursuit of such policies ended with good results matching or going beyond the objectives of Decree No. 6 and the WTO commitments of Mongolia.

In sum, it could be argued that the problems described above associated with Mongolia’s WTO participation make it in the eyes of the Mongolians just another international organization, which collects membership fees and with which a small country like Mongolia had better comply. The WTO appears to be seen largely as the institution with complex, superior, but alien, rules, which provide fashionable talking fora for the government bureaucrats with little relevance to the earthly needs of the Mongolian industries. Therefore domestic businesses see little use in Mongolia’s WTO membership.

 
 

II. The local and external players and their roles    back to top

For a nation to benefit fully from the WTO system, there has to be a cohesive and co-ordinated interplay between the national actors. In this interplay, ideally, the first objective move to enter or to act within the WTO parameters should be coming from the grass-roots players, that is the domestic industries. In Mongolia there was a reverse pattern of interaction from the beginning. It was the government (which at the onset of the GATT/WTO negotiations was not as yet completely freed from the mentality dictated by the just-abandoned centrally planned economy) that set forth the objectives of membership of the GATT/WTO. Not surprisingly, there was little consultation with the emerging business community of Mongolia — in 1991 there virtually were no private businesses — and limited debate, if any, with civil society at the beginning of the negotiations. This trend, unfortunately, was preserved throughout the accession negotiations, although the government could have taken note of the fact that during the six years of negotiations the private sector of Mongolia had grown to represent almost 60% of Mongolia’s GDP. Surprisingly, the government monopoly over WTO business still survives in Mongolia. Moreover, the government in the heat of the pro-compliance drive has time and again exploited the WTO as a scarecrow to ‘chill’ the calls for support coming from the local business community. The term ‘WTO-inconsistent’ has almost become the surest expression to discourage any troublesome request from the business community. This in turn suggests that for the government the notion of national industries being the ultimate beneficiaries of the WTO, although it is, indeed, only national governments that are vested with a legal personality under WTO law, remains vague and obsolete. Therefore, the government apparently uses the WTO to discipline national industries rather than to encourage the national producers.

The businesses, on the other hand, irrespective of their growth to represent currently almost 80% of the nation’s GDP, remain distanced from WTO affairs. This does not mean that the WTO is irrelevant to them. Neither does it mean that the industries still have preserved their infantile nature, although it is still early to say that they have reached full maturity. It means, rather, that the industries still do not fully comprehend from which angle of their business the WTO rules and opportunities apply positively to them. It also means that the industries have not got organized to set up strong and powerful sectoral associations. The current associations are under-funded and overloaded with national-level problems. Therefore they could not extend their activities to international-level expertise. For example, the meat industry of Mongolia (where the number of livestock exceeds the number of the population by some twelve to fifteen times) is suffocating because of its reliance on a single buyer, Russia. Russia is not yet a member of the WTO and hence its trade barriers, especially those applicable to agricultural products (e.g. sanitary and phytosanitary requirements), tend to be more complex and diverse than those of the WTO member countries. Nevertheless, Mongolian meat has been exported to Russia with occasional difficulties for many years. If Mongolian meat products are capable of filtering through the Russian market strictures unbound by the WTO there is no reason why they could not enjoy access into the supposedly more liberal markets of the WTO members located in north-east Asia. However, this is not the case and the meat industry association has not as yet appealed to the government with strong demands to raise or examine the issue within the context of the WTO.

Another reason for the Mongolian business community to remain relatively distanced from the WTO is that the lion’s share of Mongolia’s exports still fall into the category of mineral commodities. The primary products of the mining sector have enjoyed more liberal access throughout the world, irrespective of the fact of whether or not the exporting or importing country belonged to the WTO. Therefore the mining sector, which could not be qualified as immature, since it is one of the more globalized sectors of Mongolian business, remains less interested in the WTO.

In discussing the role of private business in Mongolia’s WTO-related policy-making the role of the international investors should also be touched upon. Foreign investors bring along with their investment knowledge and awareness of the WTO system. Hence they tend to raise the issue of the WTO with the government more frequently than any other national player. That explains why most of the WTO-related practical debates with the government were raised by the representatives of the cashmere industry, where the position of the investors has always been very strong.

As could be seen from what has been put forward in this section, current WTO-related interaction between the government of Mongolia and the business community is not exemplary in terms of its cohesion. In fact it would perhaps not be an exaggeration to say that on the point of the WTO the government and the business sector may be described as wandering in two separate realms. At this stage the government has a dominating role in the WTO affairs and the business community lags behind with a passive interest in and lack of belief in the use of the global body.

 
 

III. Challenges faced and the outcome    back to top

As globalization intensifies, developing countries are expected to have a stronger interest in the more consistent operation of the WTO system, to facilitate a rule-based and predictable level playing field for the benefit of every economy of the world. Therefore, it would be equally important for Mongolia to strengthen its capacity to participate efficiently in the WTO. However, such efficient participation will be possible only on overcoming the ignorance on the part of both the government and national industries. An indifferent continuation of ignorance will lead to lost opportunities, which could otherwise assist the economic growth and progress of the country. The lack of WTO expertise and of the political will to master WTO discipline have already caused problems with Mongolia’s WTO accession and post-accession policy orientation. The accession and post-accession problems have also affected the mode of practical application of WTO rules.

One of the major challenges that Mongolia is facing currently with the WTO rules is the voluntarism in the interpretation of the rules. The dispute between the cashmere producers and the national customs authority as to the application of the WTO customs valuation rules may serve as a clear example of such voluntary misinterpretation of the WTO rules and the way in which it hinders trade.

In the dispute the cashmere producers complained to the General Customs Department of Mongolia that the customs inspectors responsible for applying the export tax on cashmere had been systematically rejecting the prices declared by the exporters and instead had been applying prices close to the highest registered with the customs authority in the particular year, although it was always clear that cashmere prices were subject to substantial fluctuations in the world market. The department claimed that this approach was consistent with the WTO Customs Valuation Agreement.

The cashmere industry protested against the practice on the grounds that (i) the customs authority could not invoke the Customs Valuation Agreement in its defence, for the agreement did not apply to the calculation of export taxes; and (ii) even if one assumes that the customs authority could apply the import valuation methods to export valuations with appropriate changes, it could not just use the ‘higher of two alternative values’.(3)

The cashmere producers engaged in fairly intensive consultations with the customs authority; however, the latter never fully accepted the exporter’s arguments. Although as a result of the consultations the customs ‘concession’ was to use its up-to-date database for determining the export value, it still did not disavow the opportunity to opt for a higher alternative price.

Another challenge that could be observed currently in Mongolia is its increased interest in bilateralism. Apparently the self-perfectionist approach of the government in participating in the WTO, which has no appeal to Mongolia’s private sector, as well as the lack of determined leadership at the WTO in defending the interests of a small country like Mongolia, have made bilateral arrangements, such as free trade agreements, more attractive to the Mongolians. The stronger stance, support and leadership of the WTO was missed, for example, by Mongolia when it ran into a puzzle stemming from the collision of the IMF-World Bank economic policy guidelines on Mongolia with the legal rights provided to Mongolia under the WTO. Not surprisingly, cashmere, being Mongolia’s most globalized industry, was again the cause of the puzzle.

Before its accession to the WTO Mongolia had in place a ban on cashmere exports, which in the course of the accession negotiations was replaced by a 30% export duty, to be gradually eliminated over ten years.(4) The cashmere producers, especially the foreign investors, knew that tariffying the ban would have a sensible effect on their industry. However, agreeing to introduce a 30% rate, without consulting the industry, was an outcome falling far short of any expected by the cashmere producers.

Furthermore, in introducing the export duty instead of the agreed ad valorem rate the Mongolian authorities somehow decided to impose a specific rate of 4,000 tugruks, which was roughly equal to 30% of the export value of raw cashmere at the time of introduction.(5) However, with a serious rise in the world price for cashmere the 4,000 tugruk rate often slumped down to a level which ranged below 10% of the value of cashmere. The cashmere producers, both the Mongolian companies and foreign investors, in reaction to that started pressing the government to transform at least the specific rate into the proper 30% ad valorem rate to discourage the virtually unrestricted export of raw cashmere, which left the local industry with a serious shortage of raw material. The introduction of the ad valorem rate would have been consistent with Mongolia’s WTO commitment. However, at this point another global institution, the IMF, which has a leading role in Mongolia in (i) facilitating donor community support, and (ii) promoting liberal economic policies, intervened by opposing any change.

The Mongolian government turned to the WTO Secretariat for support,(6) referring to the co-operation agreement between the WTO and the Bretton Woods institutions on achieving greater coherence in global economic policy-making,(7) under which the WTO could seek respect of its legal rules by the IMF and World Bank. Mongolia argued that in its view, for the sake of true inter-institutional coherence the legal rights protected under the WTO should not be jeopardized, if not respected. Moreover, for Mongolia the 30% ad valorem rate was the result of six years of negotiations and, if it were to accept easily the power of another international organization in questioning its WTO rights, then for Mongolia the value, integrity and reliability of the entire WTO multilateral legal system would have been put in doubt.

In responding to the Mongolian request the WTO Secretariat confirmed in a very round-about manner that Mongolia would indeed be free to apply an export tariff at a rate not exceeding the 30% limit.(8) At the same time it went on to state that the issue should be resolved in the context of Mongolia’s consultations with the IMF and the World Bank, thus distancing itself from the debate and leaving Mongolia face to face with the IMF. The outcome of such a stand-off was predictable — the specific rate remained intact.

This sort of indecisiveness on the part of the WTO Secretariat understandably did not contribute to the consolidation of Mongolian confidence in the WTO. Also the lack of progress on substantiating the GATT provision on freedom of transit transportation, always a serious need for Mongolia, a land-locked country, is not making Mongolia more enthusiastic about the WTO.

Besides these challenges another seems to be looming to press the government in the future. With the growth of the economy and the strengthening of national industries the pressure to increase tariffs is likely to mount. Initially the government will have little difficulty with such pressure, for there is sufficient gap between its ceiling binding rate of 20%(9) and the applied rate of 5%.(10) However, once the gap is closed a continuous tug of war between the government and national industries may begin. However, based on the government’s present reasoning and behaviour pattern, it may be hoped that the government, in the interest of ensuring long-term economic growth, would not go beyond the limit of its WTO commitments.

 
 

IV. Lessons for others (the players’ views)    back to top

As one can see from the review of the selected issues relating to Mongolian membership of the WTO, Mongolia’s ‘marriage’ with the global trade organization was not perfect and free of flaws. However, these flaws and problems do not constitute sufficient grounds to provoke Mongolia into wishing to leave the club. Nowadays it is clear that no country in this ever globalizing world could afford to stay in seclusion outside the universal trading system. This is especially true of a small economy like Mongolia, since without the WTO rule-based system such a player would be doomed to stay confined to its limited markets, while the WTO system opens the doors of opportunity created by economies of scale to the entities in that small economy.

Moreover, the WTO itself is not the cause of the problems faced by Mongolia in its membership. It is rather the flawed approach of Mongolia to the WTO which is triggering the problems; once Mongolia fixes the problems its participation should become more efficient. The possibility of confusing the issue should always be borne in mind, for failure to do so leads to needless frustration and an unjustified lack of interest in the WTO.

Mongolia should therefore undoubtedly continue to retain its commitment to the WTO, while rectifying its strategies in respect of its participation. First of all the government should put an end to the lack of knowledge and understanding of the WTO and seriously start focusing on the build-up of its capacity to master the WTO’s disciplines. Otherwise, Mongolia will never be able to avoid the risk of (i) choosing inappropriate policy lines; or (ii) trotting down the path of voluntarism in the interpretation of WTO rules.

Bearing in mind (i) above, the government should also rapidly change its one-sided pro-compliance policy into a balanced approach, which envisages more aggressive efforts to improve market access for national products and services. Given the fact that Mongolia’s businesses, which could in fact benefit from the WTO, have not as yet organized the effective defence of their interests (despite their relative growth and gaining in strength), the government should without delay take up the leadership in setting up the habit of regular consultations with business through which it could formulate optimum policy positions on WTO matters. At this stage merely waiting for the emergence of a system whereby the policy positions on various matters are urged by the grass-roots will lead to further loss of opportunities and time.

In the meantime, Mongolian industries should work harder on getting better organized and strengthening their associations so that they could better and more accurately articulate their interests. It is also important for the industries and their associations alike to learn to get their message across to the government. In parallel with those efforts the industries should try to make the best use of foreign investors, which could assist significantly in identifying the opportunities that the WTO may offer.

These changes would bring the government and businesses, currently living in two separate realms, closer. Such an alignment would stimulate Mongolia’s improved participation in the WTO.

In addition to the measures elaborated above, the government needs to carry out thorough research as to the gains realized by Mongolia as a result of its participation in the WTO. If the government at the end of the accession negotiations was able to get away without having to sell to the public the outcomes of the negotiations, now that the enthusiasm for the WTO is moderating in both camps, that is the government and business, it should now display hard evidence as to the gains that Mongolia has achieved. Without such research it will be hard to respond to the surge of bilateralism or the potential increase in the demand by domestic industries for protectionist barriers to be raised. It would be better if the research is carried out in co-operation with the WTO Secretariat, for Mongolia may indeed lack expertise in carrying out such a job. It may, for example, be included in the agenda of the trade policy review scheduled to be undertaken by the Trade Policy Review Body of the WTO in 2005.

Finally, all the lessons learnt from Mongolian participation may turn out to be useful for other countries operating under similar conditions and in similar situations.

 
 

NOTES:
1.- Government of Mongolia, Resolution No. 14, 1 Zasgiin Gazryn Medeelel (Government Bulletin), 74, 1997. back to text
2.- Prime Minister of Mongolia, Decree No. 6 (1997), Ministry of Foreign Affairs Archives. back to text
3.- See Agreement on the Implementation of Article VII of the General Agreement on Tariffs and Trade 1994, Art. 7.2(b). back to text
4.- Protocol for the Accession of Mongolia to the Marrakesh Agreement Establishing the World Trade Organization (93 Accession Protocol 94), WT/ACC/MNG/11 (1996), Art. 3, at 118; and WTO, Report of the Working Party on the Accession of Mongolia (93 Working Party Report 94), WT/ACC/MNG/9 (1996), p. 24. back to text
5.- N. Bataa, ‘The Present Situation of the Cashmere Processing Sector’, in The Cashmere Summit (Gobi Regional Economic Growth Initiative, Ministry of Agriculture and Industry, 2000), p. 8. back to text
6.- See Letter from the Prime Minister of Mongolia, Mr N. Enkhbayar, to the Director-General of the WTO, Mr Mike Moore, dated 20 March 2001, Ministry of Foreign Affairs Archives. back to text
7.- See, e.g., Declaration on the Contribution of the World Trade Organization to Achieving Greater Coherence in Global Economic Policymaking, in Legal Texts: Results of the Uruguay Round of Multilateral Trade Negotiations (1999), 386-7. See also Singapore Ministerial Declaration, WT/MIN(96)/DEC (18 Dec. 1996), p. 5. back to text
8.- See Letter from the WTO Director-General to the Prime Minister of Mongolia, 18 May 2001, Archives of the Ministry of Industry and Trade. back to text
9.- Schedule CXXXIV-Mongolia, Part I 96 Schedule of Concessions and Commitments on Goods, WT/ACC/MNG/9/Add.2 (1996). back to text
10.- Parliament Resolution No. 27 (3 June 1999). back to text
 

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* Executive Director, Mongolian Development Strategy Institute, Ulaanbaatar.