Start of the 2015 was significant with the signing of an EPA with Japan. Our researchers have conducted assessments few years ago and concluded that economic partnerships should be established with at least six countries including USA, Russian Federation, China and others, having Japan first in mind.
EPA with Japan has been followed with somewhat wrong assumption that Mongolia will export with tax exemptions.
Up until recently, 57 percent of the total exports to Japan have been tax exempt, while only 10.9 percent were falling under tax policy. It means we had good opportunities even before the EPA. Moreover, under EPA Mongolia has not opened its doors wide open to Japan as well. For instance, according to A.Ariunaa, Deputy Director of Economic Partnership Department at the Ministry of Foreign Affairs, only new cars with less environmental impact are tax-exempt.
After three years of negotiations Mongolia was able to significantly reduce the import taxes on the textile products to Japan, which includes carpets and wool garments.
Before jumping to the EPA in detail let’s see the figures of Mongolia and Japan trade in comparison to China and Russia.
WHAT IS THE DIFFERENCES BETWEEN FREE TRADE AGREEMENT AND ECONOMIC PARTNERSHIP AGREEMENT?
If the trade agreement regulates the products transfer, the EPA regulates wide variety of issues related with expansive measures.
EPA differs depending on countries involved in the partnership. For instance, Japan has agreement to contract nurses from Philippines and therefore EPA added the chapter on the individual relocation. While EPA with Mongolia states the issues related with visa to Japan in view of the long-term partnership with the potential investor.
MAIN PRINCIPLES OF THE AGREEMENT
Member countries of the World Trade Organization (WTO) are entitled to sign EPAs freely. Mongolia was the only country that was not enjoying its rights in this regard, as EPA usually has more favorable conditions in comparison with the WTO.
EPA requires both sides to give tax exemptions of not less than 90 percent of the majority trade for the term of not less than 10 years. Majority means not less than 90 percent.
WILL EPA WITH JAPAN REVAMP THE INVESTMENTS?
Most important section of the EPA is the chapter on Investments, which aims to improve the legal environment for the investors at both ends. The signing of the EPA will annul the previous investment agreement signed in 2001, which was criticized for causing misunderstandings.
In coming two years it is expected that investments will increase to USD 400 million. Experiences of other countries, for instance Philippines, show that in two years time the investment flow increased, while the investment to Singapore increased by 60 percent and Mexico has witnessed tripled increased in the foreign investments.
Currently Japan is the fourth biggest investor in Mongolia with 550 entities operating in Mongolia since 1990 in banking, tourism, trade, food and light industry. 550 entities are the 91 percent of the total foreign entities with activities in Mongolia.
Mongolia have established bilateral investment agreements with 42 countries and managed to attract investments and funds from 39 of them, indicating the importance of such agreements as the 82 percent of the total investment comes from those countries.
WHICH CUSTOMS TARIFFS WILL BE DECREASED?
With the EPA our side is to reduce tariffs by 96 percent, while Japanese side to reduce 100 percent, with differentiation based on the products.
A products customs tariffs will be annulled.
B products customs tariffs will be reduced in accordance with levels B3, B5 and B7.
S products customs tariffs will remain unchanged.
C products customs tariffs will be regulated through special negotiations.
STATE BUDGET INCOME TO DECREASE BY USD 9.8 MLN IN THE FIRST YEAR OF THE AGREEMENT
According to the international standards our EPA with Japan requires both sides to give tax exemptions of not less than 90 percent of the majority trade for the term of not less than 10 years. Majority means not less than 90 percent.
- Mongolia to reduce the import taxes for 5700 types of product for Japan
- Japan to reduce the import taxes for 9300 types of products for Mongolia.
Before this we have been doing trades with Japan as depicted in the following figure.
/Infographic by: O.Sukhbat/
Kondo Kazumasa, First Secretary at the Japan Embassy in Mongolia concluded the EPA results as cooperation to compensate each other. What benefits we can gain if we use our opportunity well?
For consumers
- Mongolian products will enter Japanese market with favorable conditions
- Japanese technological advancements to enter Mongolian market, opening up prospects for new product manufacturing opportunities
- Increase of the competitive advantage of Mongolian companies
- Decrease in consumer price
At macro level
- Development of the rational economic structure
- Increase in the FDI
POSSIBLE DOWN SIDES OF THE EPA
One of the issues that we haven’t yet touched up until now is the possible down sides of the EPA with Japan. As everything has two sides to it, we have to be prepared. According to N.Otgonsaikhan, Lecturer at NUM, following negative impacts might raise.
- As we are reducing the customs taxes for the majority of the imports from Japan it implies the decline in the state budget incomes as well. According to the working group estimates budget income will decrease by USD 9.8 million in the year. But as the FDI is expected to increase it is possible to compensate for the losses in the budget income.
- Domestic production decline in the sectors with less competitive advantage, leading to the increase in the unemployment. Therefore the EPA provisions the regulations on protecting the domestic production in the FDI section, which highlights 18 sectors from Mongolian side and 22 sectors from the Japanese side. Although, it does not mean that no investments will be done in those sectors, just additional documentation will be required to operate.
- Administrative costs will increase, as the additional work regarding the documentation verification on the products from Japan needs to be conducted at the customs.
Anyway, many opportunities are opening up for the Mongolian entrepreneurs and the first results are already can be seen as SUU JSC is to export its butter to Japan.
Japan is very keen on importing agricultural products, which adhere to the health and safety requirements.
Start of the 2015 was significant with the signing of an EPA with Japan. Our researchers have conducted assessments few years ago and concluded that economic partnerships should be established with at least six countries including USA, Russian Federation, China and others, having Japan first in mind.
EPA with Japan has been followed with somewhat wrong assumption that Mongolia will export with tax exemptions.
Up until recently, 57 percent of the total exports to Japan have been tax exempt, while only 10.9 percent were falling under tax policy. It means we had good opportunities even before the EPA. Moreover, under EPA Mongolia has not opened its doors wide open to Japan as well. For instance, according to A.Ariunaa, Deputy Director of Economic Partnership Department at the Ministry of Foreign Affairs, only new cars with less environmental impact are tax-exempt.
After three years of negotiations Mongolia was able to significantly reduce the import taxes on the textile products to Japan, which includes carpets and wool garments.
Before jumping to the EPA in detail let’s see the figures of Mongolia and Japan trade in comparison to China and Russia.
WHAT IS THE DIFFERENCES BETWEEN FREE TRADE AGREEMENT AND ECONOMIC PARTNERSHIP AGREEMENT?
If the trade agreement regulates the products transfer, the EPA regulates wide variety of issues related with expansive measures.
EPA differs depending on countries involved in the partnership. For instance, Japan has agreement to contract nurses from Philippines and therefore EPA added the chapter on the individual relocation. While EPA with Mongolia states the issues related with visa to Japan in view of the long-term partnership with the potential investor.
MAIN PRINCIPLES OF THE AGREEMENT
Member countries of the World Trade Organization (WTO) are entitled to sign EPAs freely. Mongolia was the only country that was not enjoying its rights in this regard, as EPA usually has more favorable conditions in comparison with the WTO.
EPA requires both sides to give tax exemptions of not less than 90 percent of the majority trade for the term of not less than 10 years. Majority means not less than 90 percent.
WILL EPA WITH JAPAN REVAMP THE INVESTMENTS?
Most important section of the EPA is the chapter on Investments, which aims to improve the legal environment for the investors at both ends. The signing of the EPA will annul the previous investment agreement signed in 2001, which was criticized for causing misunderstandings.
In coming two years it is expected that investments will increase to USD 400 million. Experiences of other countries, for instance Philippines, show that in two years time the investment flow increased, while the investment to Singapore increased by 60 percent and Mexico has witnessed tripled increased in the foreign investments.
Currently Japan is the fourth biggest investor in Mongolia with 550 entities operating in Mongolia since 1990 in banking, tourism, trade, food and light industry. 550 entities are the 91 percent of the total foreign entities with activities in Mongolia.
Mongolia have established bilateral investment agreements with 42 countries and managed to attract investments and funds from 39 of them, indicating the importance of such agreements as the 82 percent of the total investment comes from those countries.
WHICH CUSTOMS TARIFFS WILL BE DECREASED?
With the EPA our side is to reduce tariffs by 96 percent, while Japanese side to reduce 100 percent, with differentiation based on the products.
A products customs tariffs will be annulled.
B products customs tariffs will be reduced in accordance with levels B3, B5 and B7.
S products customs tariffs will remain unchanged.
C products customs tariffs will be regulated through special negotiations.
STATE BUDGET INCOME TO DECREASE BY USD 9.8 MLN IN THE FIRST YEAR OF THE AGREEMENT
According to the international standards our EPA with Japan requires both sides to give tax exemptions of not less than 90 percent of the majority trade for the term of not less than 10 years. Majority means not less than 90 percent.
- Mongolia to reduce the import taxes for 5700 types of product for Japan
- Japan to reduce the import taxes for 9300 types of products for Mongolia.
Before this we have been doing trades with Japan as depicted in the following figure.
/Infographic by: O.Sukhbat/
Kondo Kazumasa, First Secretary at the Japan Embassy in Mongolia concluded the EPA results as cooperation to compensate each other. What benefits we can gain if we use our opportunity well?
For consumers
- Mongolian products will enter Japanese market with favorable conditions
- Japanese technological advancements to enter Mongolian market, opening up prospects for new product manufacturing opportunities
- Increase of the competitive advantage of Mongolian companies
- Decrease in consumer price
At macro level
- Development of the rational economic structure
- Increase in the FDI
POSSIBLE DOWN SIDES OF THE EPA
One of the issues that we haven’t yet touched up until now is the possible down sides of the EPA with Japan. As everything has two sides to it, we have to be prepared. According to N.Otgonsaikhan, Lecturer at NUM, following negative impacts might raise.
- As we are reducing the customs taxes for the majority of the imports from Japan it implies the decline in the state budget incomes as well. According to the working group estimates budget income will decrease by USD 9.8 million in the year. But as the FDI is expected to increase it is possible to compensate for the losses in the budget income.
- Domestic production decline in the sectors with less competitive advantage, leading to the increase in the unemployment. Therefore the EPA provisions the regulations on protecting the domestic production in the FDI section, which highlights 18 sectors from Mongolian side and 22 sectors from the Japanese side. Although, it does not mean that no investments will be done in those sectors, just additional documentation will be required to operate.
- Administrative costs will increase, as the additional work regarding the documentation verification on the products from Japan needs to be conducted at the customs.
Anyway, many opportunities are opening up for the Mongolian entrepreneurs and the first results are already can be seen as SUU JSC is to export its butter to Japan.
Japan is very keen on importing agricultural products, which adhere to the health and safety requirements.