VZCZCXRO9191
RR RUEHLMC
DE RUEHUM #0157/01 0670353
ZNR UUUUU ZZH
R 080353Z MAR 07
FM AMEMBASSY ULAANBAATAR
TO RUCPODC/USDOC WASHDC 1207
INFO RUEHC/SECSTATE WASHDC 0887
RUEHBJ/AMEMBASSY BEIJING 5448
RUEHKO/AMEMBASSY TOKYO 2397
RUEHUL/AMEMBASSY SEOUL 2657
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC 0492

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 
 
ULAANBAATA 00000157  002 OF 002 
 
 
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