UNCLAS SECTION 01 OF 02 ULAANBAATAR 000157

SIPDIS

SIPDIS

STATE PASS U.S.TR, OPIC, AND EXIMBANK
STATE FOR EAP/CM, EB/TTP, AND EB/IFD/OIA
USAID FOR ANE DEIDRA WINSTON

E.O 12958: N/A
TAGS: EINV EIND PGOV KPRV EFIN PREL MG
SUBJECT: Mongolia and GSP: An undiscovered Country


1. SUMMARY: Less than half a percent of Mongolia's exports to the
U.S. came in under GSP in 2006, partially because over 90% of
Mongolian exports to the U.S. are textiles. However, in other
cases, Mongolian goods eligible for GSP treatment simply don't take
advantage of it. The Ministry of Industry and Trade has made little
effort to publicize GSP or to pursue the GSP handicrafts agreement
the U.S. suggested in last year's TIFA talks. Instead, the
Mongolians, seeking a "home-run" mechanism to boost exports
(particularly textiles, which declined sharply after the end of the
Multifiber Arrangement), constantly suggest recourse to either a
bilateral FTA or something patterned after the African Growth and
Opportunity Act (AGOA). The Mongolians may be right that the
individual totals per GSP product category will be low but, taken
together, numerous small GSP applications can add up to sizable
exports. Both USTR and post have committed themselves to promote
GSP opportunities to Mongolian export entities. End Summary.

GSP Fails to Inspire
--------------


2. A U.S. Presidential Declaration of July 1, 1999, made Mongolia
eligible for the Generalized System of Preferences (GSP). Since
then, Mongolia has become disappointed with the GSP scheme, largely
due to the lack of increased exports under the scheme. In 2006,
U.S. figures indicate that only $530,000 of Mongolia's $113 million
in exports to the U.S. entered under the GSP program (consisting
entirely of $367,000 of tungsten concentrates, and $163,000 under
HTS 39, plastics and articles thereof). Figures for 2004 and 2005
were even lower (respectively, $142,000 and $162,000 in total GSP
exports).


3. A 2003 World Bank study found that only 1% of all of Mongolia's
non-agricultural exports to the U.S. entered under GSP, putting
Mongolia at the very bottom of the GSP beneficiaries. Only 12

percent of all Mongolian exports to the U.S. eligible for GSP
treatment actually used the scheme (with an average tariff
preference of 3.1%). One reason for this lack of use is that
minerals (particularly fluorspar), the country's only sizable
GSP-eligible export to the U.S., already benefit from zero tariffs.
In other cases, GSP-eligible Mongolian exports simply fail to take
advantage of the scheme. A recent USTR review of Mongolian products
entering the U.S. revealed that dozens of Mongolian products
exported to the U.S. qualify for GSP duty-free treatment of from
three to seven percent, but do not receive it for lack of marking an
"A" on the appropriate place on U.S. Customs Form 7501.

AGOA Envy
--------------


5. While Mongolia views a bilateral FTA as its main trade goal with
the U.S., Mongolia alternatively hopes for some equivalent of the
U.S. African Growth and Opportunity Act (AGOA), which includes GSP
concessions on some textile exports. Textiles and garments
constitute 90% of Mongolia's exports to the U.S. (50% of exports to
the U.S. in 2006 were knitted apparel items, and 41% were
non-knitted apparel items). Mongolia's exports to the U.S. are
heavily concentrated in a few textile products: cotton pants, men's
shirts, children's pants, and a few knitted items such as suits and
t-shirts. Out of the top 20 export products, 18 are textile
products, of which 13 are cotton-based and are exclusively exported
to the U.S.


6. The expiration of the Multifiber Arrangement in 2005 brought
hard times, and saw Mongolia's textile industry collapse to 10,000
workers and 20 exporters, down from a height of 40,000 workers and
80 exporters in 2001. Entirely because of precipitous declines in
exports of textiles, total Mongolian exports to the U.S. of all
products dropped from $239 million in 2004, to $143 million in 2005,
and $113 million in 2006. Chinese and Korean investors pulled up
stakes and moved south of the border to take advantage of lower
production costs, leaving the industry moribund. In a bid to keep
the industry on life support, the Mongolian Parliament has approved
VAT and customs duties exemptions on textile raw materials and other
equipment used in apparel manufacture.


7. Since 2005, Mongolia's textiles and apparels have been eligible
for export to Europe under the EU's GSP Plus system. However,
results have been lackluster. European customers generally place
small orders for high quality material, and this low demand makes it
hard for Mongolian producers to export in large quantities that
would earn sufficient profits. Textile manufacturers find that
shipping times and inspections cut into already narrow profit
margins on the small shipments, making them question if it is really

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worth their effort. Mongolian manufactures long for the large bulk
shipments that characterized their exports to the U.S., which more
than made up for transport and administrative costs. Consequently,
Mongolians view GSP Plus as little more than a marketing exercise --
introducing Europe to their products, especially cashmere, and
enticing vendors to increase their orders.

Education is Key
--------------


8. Perhaps the greatest obstacle to Mongolia's taking full
advantage of export opportunities under the U.S. GSP system is its
lack of awareness of what exactly qualifies for preferences, making
the case for education and outreach all the more palpable. Embassy
Ulaanbaatar, following up on March 2006 Trade and Investment
Framework Agreement (TIFA) discussions in Washington, provided
information to our Mongolian counterparts at the Ministry of
Industry and Trade (MIT) that aimed to promote increased use by
Mongolia producers, importers, and exporters of the U.S. GSP
Program's duty-free benefits administered by the Office of the U.S.
Trade Representative (USTR). Post can find little evidence that MIT
has made any but the most desultory attempts to reach out to
Mongolian business entities regarding GSP opportunities. MIT has
not held any seminars on GSP for any of the target audiences.


9. Experience with the Mongolia GSP handicrafts agreement is a case
in point. Following the 2006 TIFA meeting, the U.S. and Mongolian
Governments agreed to informally consider a GSP certified handicraft
agreement. The agreement gives duty-free treatment to certified
exports to the U.S. of certain hand-loomed and folklore wall
hangings and pillow covers, and certain hand-loomed fabrics.
However, the Mongolians remain ambivalent about the handicrafts
agreement. After they received USTR Portman's letter with
recommendations on improvement of technical issues, the Ministry of
Industry and Trade (MIT) expressed doubts about the worth of going
through so much effort, especially if Mongolia could not produce
sufficient quantities of hand made products "to fill even a single
container for export." One year later, MIT has told us they have
not yet done all the work necessary to bring a handicrafts agreement
into effect.


10. MIT's lack of enthusiasm for the agreement is puzzling. When
asked, MIT colleagues acknowledged that they had not pounded the
pavement and beat the gongs to see if any Mongolian firms would be
interested. For example, they did not even ask Mongolia's largest
producer of leather souvenirs if it had an interest in the
handicrafts agreement. It is reasonable to conclude that MIT does
not really know the actual value of the agreement to Mongolia.
Further, post noted to MIT that even if the immediate economic
impact might be slight in the near term, a well-advertised
demonstration to the producers that MIT is taking steps to craft,
sign, and promote a trade agreement would be a deliverable that MIT
could proudly bring forward to the public.


11. Both USTR and post have undertaken specific ongoing measures to
increase understanding and use of GSP in Mongolia. First, USTR and
post have sponsored GSP digital video conferences for MIT so that it
can learn how to explain the system and possible opportunities to
exporters. Second, USTR/post will co-sponsor a "GSP Road Show" with
MIT and the Mongolian National Chamber of Commerce and Industry that
will reach out to exporters in Mongolia's three largest cities.
NGOs working with the urban and rural poor who make many exportable
handicraft products will also be included in the outreach. These
are small steps to be sure, but incremental steps that will add up
to a prosperous, mature trade relationship in the long run.

Minton