Ts.Tsolmon, who is an expert in trade and senior teacher at the Business School of the National University of Mongolia spoke about changes and trends in the global trade and their impact on the Mongolian economy in the following interview.
The economist believes that Chinese goods will lose their competitive edge if the USA suddenly increases its tariff on Chinese goods from three percent to 45 percent, allowing countries like Mongolia, India, and Bangladesh to take advantage and increase exports.
Raw material prices have recovered quite a bit. Will this price hike influence Mongolia’s export revenue and economy?
Commodity prices are increasing right now despite the economic downturn and poor fiscal and financial situation. For sure, this is a positive change as it boosts money flow coming to Mongolia. However, its impact on the economy will depend on how this money is spent.
It’s difficult to say that we’ll see considerable change in the economic growth if the revenue from price spike is used to repay the state debt and budget deficit. On the other hand, we can increase the yield by investing in sectors that increase USD reserves within a short period of time. For example, stimulating Alt 2 Program and advancing stagnant railway projects will benefit the economy. Through these improvements, we can build credibility with investors.
Slow development of the transportation sector is pulling back Mongolia's competitiveness in all fields. What needs to be done to stimulate infrastructure projects?
Long-term policy is crucial. The cost of infrastructure and industrial projects have become very high. In addition, Mongolia is a land-locked country with poor infrastructure. Even if we try to improve infrastructure, it costs significantly. It requires a lot of investment. Moreover, the return on investment is relatively low. This is the main reason why investors aren’t very keen on investing in infrastructure projects. To resolve this problem, we need to have a system with good structure and organization that allows investors to benefit from projects.
Besides improving infrastructure, Mongolia is an urgent need to improve its trading competitiveness. What do you recommend for boosting competitiveness?
There are tons of things to do. The World Bank releases Ease of Doing Business Index every year. The ranking of countries is usually based on 11 to 12 criteria. One of the measures is cross-border trading, which includes the fee you have to pay depending on the size of cargo, time it takes to transport the cargo, and documents you need to provide. Mongolia ranked in around 80th place out of over 180 countries for cross-border trading. It costs 3,000 USD on average to transport a container weighing 20 tons to Mongolia from anywhere on Earth. But, it costs less than 800 USD to transport the same container to countries that have access to the sea or ocean. Hence, Mongolia must make changes and improvements to reduce trading costs.
Mongolia's export volume increased by 5.3 percent last year. Apart from mining raw materials, what brought about this increase?
Export volume of products that boost Mongolia's competitiveness or have unique qualities didn’t increase. In fact, export volume of Mongolian woven textile and leather industries declined, as well as trade of other industrial goods. This means that export of value-added sectors decreased.
We saw some increase in exports of products which are domestically produced with foreign raw materials. In particular, cross-border trade of products and goods that are assembled in Mongolia using Chinese parts, such as vehicles and aircraft increased. However, value-added revenue of these products has already gone to China. Mongolia only assembles and exports them because it costs much higher to make them into final products and export them from China.
Export volume of mining raw materials escalated last year. The only shortcoming was that prices for commodity goods, except gold, were relatively lower than they were in 2015.
It’s still unclear whether prices will spike or drop this year. Countries started paying more attention to yellow metal sectors as the gold rate is quite high. Mongolia is also taking the same approach and increasing gold mining to boost gold reserve. According to the rule of the market, increase in supply causes prices to drop.
...President Donald Trump made an alarming statement on trade changes during the election. Many view this as just another election rhetoric, yet it’s about to come into action now. This could flip the world trade turnover...
The new president of the USA, Donald Trump, proposed a 45 percent tariff on Chinese imports. If this plan is executed, it’s highly possible that the trade circulation between China and the USA will slow down and give rise to significant changes in global trade. How would this affect Mongolia if high tariffs are placed on Chinese exports to the USA?
President Donald Trump made an alarming statement on trade changes during the election. Many view this as just another election rhetoric, yet it’s about to come into action now. This could flip the world trade turnover.
Trump announced to renegotiate or terminate the North American Free Trade Agreement (NAFTA) as he called it the "worst trade deal in history," and blames it for the loss of manufacturing jobs in America's Rust Belt. This statement cannot be denied, though.
Large US companies opened factories in developing countries for better economic yield and low manufacturing costs. This has its pros and cons. From one side, this liberated USA’s skilled personnel and resources, as explained by economists. For example, the young Americans assembling IBM personal computers have so much more potential. They have the skills to create new software and make innovations.
Some experts say that this personnel should be making 20 USD per hour instead of one USD per hour. Mexicans can take on this job. This way, Americans can do medium or high-level jobs while immigrants and foreign workers do the rest of the work – in other words, manual work. In this sense, NAFTA was established. It also proved effective as the price of goods in the US market plunged. Low-cost manufacturing allows lower prices. In a way, the agreement was beneficial. However, it reduced wages, lowering people’s real income. There have been disagreements about whether NAFTA served its purpose and brought the USA the amount of profit it was designed to.
When asked about this, most experts say no, but there is a group of people who say yes. US companies were able to move offshore as a result of free trade and open economy. On the other side, sales of small and medium-sized enterprises plunged. The USA faces two options now: to support large companies or sustain SMEs. In Trump’s case, he chose to support SMEs through policy.
If Trump forward with this policy, it will directly influence the world trade flow. Chinese goods will lose their competitiveness if US tariff on Chinese imports is heightened because China competes largely through its prices. Shrinking China’s trade will open opportunities for other countries like Mongolia, India, and Bangladesh. Even so, there’s no denying that China will continue to have its advantage.
China’s state revenue will fall as its export volume decreases if the US increases import tariff on Chinese products. How would this affect Mongolia's trade with China?
China buys raw material from Mongolia and uses it to produce final products. Then, their products are sold to countries like the USA. Hence, Mongolia will be affected if China’s export volume decreases. There’s a possibility that due to declined sales, China would lower their import from Mongolia or pressure Mongolia to lower product prices.
If Trump runs forward his proposed trade policy, it will negatively impact free trade. However, it’s clear that President Trump didn’t come up with his plans to organize free trade in just a day. This kind of approach is being observed throughout the world. One product can be manufactured with parts from many factories and countries. Cars, for instance, are cross-country productions. This system is called global value chain.
Volkswagen is a German automaker, but German engineers don’t produce their bolts or screws. They import parts and only assemble them together in Germany. However, this mechanism is starting to become inefficient because production costs are rising everywhere. Nowadays, there’s a slim chance that production cost can be lowered by collecting cheap parts manufactured all around the world to produce a final product. Therefore, I’ve observed that industries are becoming more centralized. I think that Trump has grasped this as well. It is costly for US companies to produce a product overseas and import it back. Jobs are decreasing there as well. Trump is demanding factories to move back to America as a solution to these issues. This way, transportation costs will drop, and ultimately, reduce product prices. Another advantage of this plan is that jobs will increase in the USA as well.
