Mongolia Ponders Transparency Agreement with U.S.

UNCLAS SECTION 01 OF 04 ULAANBAATAR 000050

SIPDIS

SENSITIVE

SIPDIS

STATE FOR EAP/CM AND EB/IFD/OIA
STATE PASS USTR, DOC/ITA, USTDA, OPIC, AND EXIMBANK
USAID FOR ANE FOR D. WINSTON

E.O. 12958: N/A
TAGS: ETRD PREL EAID ECON EFIN PGOV MG
SUBJECT: Mongolia Ponders Transparency Agreement with U.S.

Ref A: 07 Ulaanbaatar 276
B: 07 Ulaanbaatar 712

SENSITIVE BUT UNCLASSIFIED - NOT FOR INTERNET DISTRIBUTION.


1. (SBU) SUMMARY: Acting on a commitment to the Mongolian Government
at last year's US-Mongolia Trade and Investment Framework Agreement
(TIFA) talks (reftel A),Assistant U.S. Trade Representative Timothy
Stratford proposed negotiating a Transparency Agreement (TA) with
the Government of Mongolia. The GOM has so far shown profound
reluctance to embrace the proposal, in the apparent belief that
Mongolia does not need a TA; that USTR's offer accuses Mongolia of
opacity in its trade dealings; and that the move is simply a tactic
to further delay discussion on the GOM's overarching goal: a Free
Trade Agreement (FTA) with the United States. Post and USTR have
argued that TAs are cornerstone agreements with trading partners and
must be part of any deep and lasting bilateral trade relationship,
the lack of which will limit improvements in US-Mongolia trade
relations. Although the Mongolians are not hopelessly opposed to
negotiating a TA, they look to next month's TIFA talks in Washington
for answers to their remaining questions on the TA. Post provides
the following information to feed into a response to Mongolia's
ongoing attempt to link movement on a Transparency Agreement with a
Free Trade Agreement. END SUMMARY.


2. (SBU) Following the March 2007 TIFA talks, USTR committed itself
to a concrete step that would advance US-Mongolia bilateral trade
relations without crafting a comprehensive FTA, for which USTR did
not consider Mongolia to be ready. In a June 26, 2007 letter to the
Ministry of Industry and Trade (MIT),Assistant U.S. Trade
Representative Timothy Stratford proposed that Mongolia and the U.S.
consider negotiating a United States-Mongolia Transparency Agreement
(UMTA). Stratford wrote that the USG considers transparency a "core
trade and investment issue," and that provisions on transparency are
"cornerstones of US-negotiated free trade agreements." He added
that transparency is an integral part of trade agreements such as
the WTO, which Mongolia joined in 1997. Stratford noted that
businesses and other stakeholders would look more favorably on a GOM
that formally adopted transparency concepts in laws and regulations
that affect the marketplace, and that a TA would likely inspire
confidence among U.S. investors in Mongolia, contributing to closer
ties between the U.S. and Mongolia. He offered the GOM the basic
provisions of the Korea-US Free Trade Agreement (KORUS) to provide
GOM a sense of the kind of provisions a TA would encompass.

Mongolian Concerns, USTR Responses
--------------


3. (SBU) From July through early November 2007, MIT/GOM maintained a
conspicuous silence on the TA proposal, despite repeated USG
requests for a response. Post's contacts at MIT informally told us
of a vague push-back by other ministries. A mid-November 2007 DVC
with USTR, Post and the Department of Commerce's International Trade
Administration spurred MIT to provide a more concrete accounting of
GOM concerns. Following a change of government in Mongolia in
December, the new administration revealed additional concerns.


4. (SBU) GOM concerns can be summed up in five points, followed by
our recommended responses:

Will a TA Lead to an FTA?
--------------


5. (SBU) Mongolian Concern No. 1: Is a US-Mongolia Transparency
Agreement (UMTA) an end unto itself, or would it lead to a Free
Trade Agreement (FTA)? If a UMTA is part of an incremental process
that might lead to more bilateral trade agreements, why is it not
part of an overall FTA agreement in the first place?

-- The USG has noted that transparency is an end in and of itself,
as well as a step in an FTA process. The USG, WTO and other trade
organizations clearly consider transparency in the formation and

ULAANBAATA 00000050 002 OF 004


execution of laws and regulations for international trade to be, in
and of itself, a key priority. USTR noted that the foreign business
community in Mongolia had expressed concerns about transparency, and
that the USG views transparency and a TA as an important way to
strengthen business development.

-- USTR further noted that Mongolia is not yet ready for an FTA, but
that the conclusion of a TA would make it a more competitive
candidate for an FTA. And even in the absence of an FTA, a TA would
increase Mongolia's attractiveness to U.S. investors.

Why Is USTR Pushing the KORUS TA?
--------------


6. (SBU) Mongolia Concern No. 2: Why was the proposed UMTA -- an
almost verbatim copy of a section of the Korean-US Free Trade
Agreement (KORUS) -- not adapted to reflect Mongolian conditions?

-- USTR explained the KORUS FTA was being submitted as a reference
point, and an example of the sort of TA that the USG had in mind for
Mongolia. It was not a formal offer of a proposed UMTA. The KORUS
TA provides ideas for the basic principles inherent in any TA
agreement. The USG's general expectation is that an UMTA would
resemble the Korean TA, in terms of the principles of transparency.
The USG recognizes that some provisions might not be easy for
Mongolia to implement immediately; if that is the case, the US is
willing to work with the GOM to offer support and flexible
benchmarks/timetables for legal and regulatory changes, as well as
for the execution of any TA. However, the core substance of the TA
-- administrative procedures, and public outreach on drafting
measures for laws and regulations -- matter to us, and need to be a
part of any TA entered into between the two countries.

Does the USG Believe Mongolia Lacks Transparency?
-------------- --------------


7. (SBU) Concern No. 3: Mongolian law and regulation already provide
for transparency, and the GOM is working to address the system's
weaknesses. So why does Mongolia need a formal agreement? Were
there any specific complaints from investors regarding a lack of
transparency?

-- The USG recognizes that Mongolia is taking steps to promote
transparency, and that a letter of agreement on a TA makes the
US-Mongolia trade and economic relationship closer. USTR noted that
signing a TA would raise confidence in moving toward an FTA.

-- Post made clear that it had informally received a variety of
transparency-related complaints and concerns from private companies.
Post observed that in general, transparency is not a concept
applied only certain laws and regulations; rather, that any laws and
regulations affecting the conduct of business in Mongolia need to be
transparent. The reality is that there remains much doubt over how,
and at what point, the GOM shares information with the public.
Moreover, there are gaps in process, not only in business issues but
in terms of budgetary plans, elections, uranium policy, and
amendments to the mining law.

What About Mongolia's Reputation?
--------------


8. (SBU) Mongolian Concern No. 4: Would adopting a TA suggest that
Mongolia is less than transparent? And would such a suggestion not
damage Mongolia's reputation among investors? Isn't the UMTA
proposal really a slap at Mongolia's good-faith efforts to promote
transparency? We've come a long way in these past 17 years.

-- Far from being a criticism, let alone an insult, a UMTA would
send a positive signal to observers and investors. If Mongolia were
an unimportant trading partner, the USG would not even have
contemplated such an agreement. A UMTA would let everyone know that
Mongolia could be (and already is, in some respects) functioning

ULAANBAATA 00000050 003 OF 004


transparently at a high level.

Is All This Really Necessary?
--------------


9. (SBU) Mongolian Concern No. 5: Exactly how important is a UMTA to
US-Mongolia bilateral trade relations?

-- Based on USTR guidance and positions mentioned by the Ambassador
during his meeting with Industry and Trade Minister Narankhuu
(reftel B),Commoff made clear that a UMTA is crucial for enhancing
bilateral trade relations, and that not doing so would be seen by
the USG as signal that Mongolia does not want to face the hard work
required to deepen the relationship. The GOM needs to realize that
the USG sees transparency as a core, non-negotiable issue in
commercial and trade relations. It matters to us and must be part
of our relationship. By choosing to negotiate a TA, Mongolia would
demonstrate that it is serious about its trade agenda.


10. (SBU) (Note: Privately, some Mongolian counterparts have doubted
USG intentions, asserting that the USG was foisting UMTA on Mongolia
as an FTA-delaying tactic. These questions were recently put to
Commoff by Minister Narankhuu's recently appointed personal advisor.
Such advisors often reflect a given minister's unspoken concerns.
End Note.)

So What's in it for Us?
--------------


11. (SBU) Further conversations between Post and MIT have led us to
conclude that the GOM is ambivalent about a UMTA but not completely
opposed to concluding such an agreement, provided that some GOM
concerns could be assuaged. Part of the problem is that the GOM
remains unsure of what a UMTA would require of them, and whether
they would receive help to implement its provisions. (These are
important issues for the under-resourced GOM.) The personal advisor
to the MIT Minister informed us that the GOM's primary concern is
that the USG acknowledge that a UMTA should provide significant
momentum toward an FTA for Mongolia.


12. (SBU) On the plus side, Mongolia's new Prime Minister S. Bayar
recently told the Ambassador he considers the UMTA a reasonable
proposal that is worth consideration. Bayar is not given to
gratuitous, feel-good statements; we are encouraged by his positive
impression of UMTA.

General Conclusions for TIFA #4
--------------


13. (SBU) The GOM would clearly prefer to move directly to FTA
negotiations. Repeated USG explanation of why Mongolia is still
unprepared for such a move has not yet gained much traction. To
date, there has been no firm commitment by the GOM on a UMTA, but
MIT Minister Narankhuu's personal advisor says the GOM seeks a USG
commitment, or confirmation, that a UMTA would lead to an FTA, or
some reasonable facsimile thereof. As the advisor put it bluntly:
"What does a TA lead to? What sort of FTA mileage does UMTA get for
Mongolia?"


14. (SBU) The GOM does not appear to fully understand what TAs are
all about, and what they require of signatories. The USTR may need
to address TA requirements during TIFA #4 in practical but general
terms, as Mongolia's capacity and will to implement a TA are not yet
fully understood yet.


15. (SBU) The GOM remains prickly about the negative implications of
a UMTA. The GOM argues that it would be insulting for the U.S. to
sit in judgment of Mongolia's transparency, or lack thereof, and
that pursing a UMTA is an inherent criticism of Mongolia. We have
repeatedly pointed out the holes in these perceptions, noting that a
UMTA, in and of itself, would acknowledge Mongolia's capacity and
will to negotiate and implement this challenging but essential

ULAANBAATA 00000050 004 OF 004


agreement. The USG would not have presented the GOM with a proposal
that Mongolia could not have acted upon. This is not criticism, but
praise.


16. (SBU) If the Mongolians ask how important a UMTA is to our
bilateral trade relationship, USTR may want to state, as the Embassy
has in one-on-one meetings, that UMTA is an essential next step in
our bilateral relationship, and that inaction on this front would
put the relationship on hold. If the Mongolians signal a
willingness to begin UMTA negotiations, we will need to make clear
that the resulting agreement is not a superficial or perfunctory
deal, but a serious and important undertaking, and one that must be
implemented assiduously. The Mongolians must understand that there
would be a price to pay for promising to engage but then failing to
do so.

Minton