ULAANBAATAR -- Hopes are high that a bilateral agreement now in force between Japan and Mongolia will spur economic exchange.
The economic partnership agreement, signed in February 2015, went into effect June 7. Japan "would like to see Mongolia strengthen business ties and develop -- without relying on grant aid," a government source said about the significance of the pact.
Automobiles and autoparts make up nearly 70% of Mongolia's imports from Japan. The economic partnership agreement, or EPA, removed Mongolia's 5% import duty on new cars, autoparts and construction machinery, with the duty on vehicles up to 10 years old to be abolished within 10 years. The accord is to eliminate tariffs covering 96% of trade between the two countries over the next decade.
Japan, for its part, removed its tariff on cashmere coats coming in from Mongolia, potentially helping grow that country's exports. The pact also grants Japanese companies preferential terms when investing in the country -- particularly useful for trading houses and others aiming to tap Mongolia's rich copper, coal and other mineral resources.
Trade between Mongolia and Japan totals around 37 billion yen ($349 million) annually. The country is Japan's 79th largest export market, and ranks No. 108 as a source of imports. Though it covers four times as much land as Japan, its population is a mere 3 million or so. The number of Japanese living there stands at around 400. A little over 200 Japanese companies have a Mongolian presence, many of them small or midsize businesses. While Mongolia's reputation for producing top-class sumo wrestlers gives it a sizable cultural presence in Japan, its economic weight is lacking in comparison.
Yet the two nations have long maintained friendly ties, providing a foundation for the recent EPA. Japan was a consistent supplier of grants and other financial aid to Mongolia after the country broke away from the Soviet Union and democratized in 1990. That support exceeded 200 billion yen in all -- the most from any nation.
Resource development and other activity powered rapid growth in Mongolia's economy after the turn of the millennium, raising per-capita gross domestic product above $4,000. This put the country squarely in the club of middle-income nations, precluding Japan's ability to provide grant aid as it had in the past.
But perhaps because Mongolia has grown accustomed to such aid, the political will to push development along independently is low, a Mongolian government source said. Bringing the EPA into force was apparently intended in part to banish that mindset and encourage sustainable economic growth based on private-sector investment.
Japan's economic weight alone makes it a natural partner in this endeavor. But so does a particularly high affinity for Japan in Mongolia. Around 1,600 Mongolian students study in Japan in any given year -- the most from any country in proportion to its population. Nearly 10% of the Mongolian legislature has study-abroad experience in Japan. Linguistic similarities between Mongolian and Japanese make fluent Japanese speakers fairly common among the general populace as well.
"Japanese companies have been slow to enter this country so far," said an official at the Mongolia-Japan Center for Human Resources Development here. "But I would like to see them use the EPA as a chance to take advantage of Mongolia's superb talent," he said.
Yet Mongolia still presents business challenges characteristic of developing nations. Many politicians run companies of their own, and are unafraid of pushing policies favoring those interests. The rapidly shifting regulatory environment that results is a source of headaches for many Japanese companies. The country also suffers from a deep-rooted corruption problem: a number of lawmakers appeared in the Panama Papers, which revealed the identities of those exploiting tax shelters.
The Mongolian economy is now suffering chills as resource prices slide and China's economy continues to lose speed, with GDP growing just 2.3% last year. Hopes are high that the EPA will give the country the shot in the arm it needs, in the absence of any other obvious medicine. The government will need to continue cutting its aid dependence and creating a business-friendly economic climate if that cure is to take.