Mongolia’s ‘third neighbor’

On Feb. 10, Japan and Mongolia signed an Economic Partnership Agreement that will come into effect this spring. Trade between the two countries is small — accounting for less than 1 percent of Japanese trade. The agreement is, however, of strategic importance as Japan seeks to negotiate closer economic ties with countries in the region. Mongolian mineral resources such as its coal deposits are increasingly important for Japan as it contemplates the appropriate energy mix at a time when it is considering how to reduce its dependence on nuclear power.

Japan, Mongolia, China and Russia exist alongside the United States within the World Trade Organization (WTO) system as equal members. This system has at its core, a set of mutually agreed principles on the operation of international trade in goods, services, agriculture and other areas.

The casual observer could be forgiven for thinking that this system had fallen into disuse since the late 1990s. Nothing could be further from the truth.

The turning point was the failed 1999 WTO Ministerial held in Seattle that prompted a few small Asia-Pacific countries to begin a pattern of negotiating bilateral trade agreements according to the model originally found in Article 24 of the General Agreement on Tariffs and Trade (GATT). These countries such as Singapore and New Zealand, because they were smaller countries, felt more keenly the cold wind of anxiety as the U.S. and Europe were bogged down in multilateral trade negotiations.

In hindsight, the trade system was deadlocked and little has changed in 15 years. Up to this point, Japan had placed faith and confidence exclusively in a nondiscriminatory trade policy that didn’t entertain even the notion of a free trade agreement. After careful evaluation, credible evidence emerged that failure to negotiate bilaterally would undermine Japan’s competitive advantage. This remains Japan’s view.

At the time, existing free trade agreements were conferring preferential treatment to other countries, discriminating against Japanese companies operating abroad. Some in the government also believed that such agreements would have a positive flow-on effect on the Japanese economy.

What Japan adopted was the pattern of negotiating bilateral agreements that while originally intended to focus on “free trade” became wider in scope, leading to the framing of “strategic economic partnership agreements” or EPAs. Currently Japan has 13 agreements in force and one regional agreement, and is negotiating with a further three nations and five regions.

Receiving media attention these days has been the Trans-Pacific Partnership (TPP), partly because of the involvement with the U.S. All agreements both in force and under negotiation are of importance to Japan.

In the 1990s there was some discussion of so-called strategic trade policy. This was tied to the idea of using protectionism to promote certain domestic industries. The use of the term in the context of an EPA is quite different.

An EPA usually focuses on the liberalization of trade, clarification and stabilization of rules of commerce and paves the way for an expansion of trade and investment only among some trading partners. Since the turn of the century, most countries in the region have been negotiating various types of similar trade agreements with many of their trading partners.

It is true that the Japan-Mongolia EPA is not the TPP. But the Mongolia-Japan EPA is of strategic importance for both countries. At the Japan-Mongolian Summit in Tokyo on Feb. 10, Mongolian Prime Minister Chimed Saikhanbileg affirmed Japan as Mongolia’s “third neighbor,” alongside Russia and China. This idea encompasses a growing cultural, educational, social as well as economic integration between the two countries.

In economic terms, Mongolia’s rich mineral deposits are increasingly important for Japan. Mongolia is rich in iron ore, gold, coal and crude oil. Japan is a resource-poor country and needs to import such materials to sustain economic well-being.

At the current time, China is the principal importers of Mongolian mineral resources, but Chinese dominance is expected to be challenged under this agreement.

In recent years there has been growing concern in Mongolia and elsewhere over China’s economic growth and implications for the future political integrity of this landlocked nation.

Critics allege that coal prices are suppressed by China’s dominant influence. Others critics argue that this has led to national anxiety over China’s intentions for Mongolia. Not surprisingly, as China grows exponentially, its appetite for raw materials and minerals such as coal is a consequence of that growth.

China remains Mongolia’s largest destination of coal.

The EPA with Mongolia however is expected to facilitate greater Japanese investment in the Mongolian resources market, to compete with other foreign companies already operating in the country. Provisions in the treaty guarantee national treatment as well as giving both parties the right to take measures against anti-competitive behavior. These rules will contribute to greater stability and clarity.

The WTO celebrates competition and free markets within a system of mutually agreed rules. Japan, China and Mongolia rely upon these rules to safeguard the massive economic growth in the region in recent years. Any trade with Mongolia relies upon the transportation of trade resources across Chinese territory.

Japan also needs to adapt to the energy realities after the tragic March 11, 2011, earthquake and tsunami. Before this catastrophe, Japan’s electrical power was driven largely by nuclear energy but in the current climate, other sources of power are desirable.

It is in this context that Mongolian mineral resources are of growing importance for Japan as the nation seeks the right path for “An agreeable energy mix” as suggested in the Feb. 27 editorial of The Japan Times.

Mongolia is part of a vital regional economy that relies upon continual economic expansion and stability. Japan’s future is also dependent upon the WTO system, a system that has informed and underpinned the growth and development of China and East Asia.

Noburo Iwata is the director of the WTO Research Center at Aoyama Gakuin University. Michael Sutton is a visiting research fellow.

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