Is the development competition between China and Japan beneficial or detrimental to Mongolia?
By
Yiyi Chen
China and Japan are two of the most financially influential countries
in Mongolia’s proximity. Both have a long history of trade and
investment in the latter. Mongolia calls Japan its “Third Neighbor,”
which is a term first used in 1990 by then-U.S. Secretary of State James
A. Baker who referred to the United States as Mongolia’s “Third
Neighbor.” Mongolia then adopted the “Third Neighbor” policy aim at
broadening its foreign relations outside of China and Russia to other
countries like Japan, the United States and European countries. Japan
has traded with Mongolia since
the 13th century
through the Steppe Road and is currently Mongolia’s third largest
source of imports. Since Mongolia became a democratic country in 1990,
Japan has consistently provided
aid and assistance for its transition to a market economy.
China is one of Mongolia’s closest partners and has traditionally
been its biggest trader and investor. By July 2017, China directly
invested $
4.1 billion in
the country which accounted for 30 percent of Mongolia’s foreign
investment. However, as China asserts more economic influence in
Mongolia via the Belt and Road Initiative, the Tokyo-Beijing
relationship has become increasingly complicated. With China’s rise,
Japan has felt the urgency to balance and compete with China in the
region. Is the development competition between China and Japan
beneficial or detrimental to Mongolia? And how can Mongolia maintain and
expand its interests within this complicated relationship?
Since China began its
comprehensive strategic partnership
with Mongolia four years ago, their partnership expanded their economic
cooperation, prioritizing natural resources and infrastructure. They
also pledged to strengthen security cooperation through increased
political communication. In 2014, President Xi Jinping first initiated
the China-Mongolia-Russia Economic Corridor (CMREC) as part of the Belt
and Road Initiative, furthering its goal to develop infrastructure and
industrial projects to establish free trade and economic cooperation
zones in cross-border cities. Some of the more well-known projects
include the China-Mongolia Cross-border Economic Cooperation Zone from
Erenhot to Zamiin Uud, and the Northern Railway Corridor which extends
the national rail network to connect Mongolia with Russia and China.
By contrast, Japan started its development projects in Mongolia in
the late 90s and early 2000s. In 2003, Mongolia joined the Central Asia
Regional Economic Cooperation (CAREC) Program implemented by Asian
Development Bank (ADB) in which Japan is one of the two largest voting
powers with
15.6 percent. So far there are
301 ADB projects in Mongolia. Just one year after China announced CMREC, Japan’s Prime Minister Shinzo Abe signed
Japan’s first economic partnership agreement (EPA) with Mongolia in 2015. He pledged to reduce tariffs and provide an additional $330 million in loans of
0.1 percent
annual interest rate for the construction of a new international
airport in the nation’s capital city Ulaanbaatar. Potentially inspired
by the CAREC, China’s CMREC intends to compete with it while targeting
specifically development in Mongolia instead of all Central Asian
countries.
Sino-Japan Competition Open Doors
While China and Japan are funding different projects through their
respective frameworks, the results of their projects have the potential
to complement each other. For example, while Japan provided $
500 million in soft loans to construct a new airport in Ulaanbaatar, the Export–Import Bank of China funded $
140 million in
soft loans to build a highway connecting the airport to the city. These
two projects are inseparable — while an airport without a road leading
to it is useless, a road leading to nothing is futile. Together they
improve the effectiveness of the country’s infrastructure.
Their competition also provides more options for Mongolia. In 2016,
Mongolia invited the Dalai Lama to give lectures on Buddhist teachings
to the people. At the time the country was going through a
debt crisis
and sought a large loan from China, the only country willing to lend
money with low interest rates. In order to solicit the loan, Mongolia, a
country with ancient ties to Tibetan Buddhism,
apologized
to China and pledged not to invite Dalai Lama again. This incident
demonstrated Mongolia’s dependence on China to the extent that it was
willing to forsake faith in search of financial assistance.
Japan can provide this diversity of partnership to alleviate this
pressure. While Mongolia and China’s relations were strained by the
incident with the Dalai Lama, Japan was able to utilize its resources in
financial platforms to help create an international aid framework
providing Mongolia approximately $
5.65 billion.
This framework is backed by the International Monetary Fund, the World
Bank, the Asian Development Bank, Japan, South Korea and China to
relieve the financial challenges faced by Mongolia. During a time of
political tension, diversification of loan sources helped Mongolia.
China and Japan’s Complementary Investments
It is interesting to note the difference between China and Japan’s
investment strategy. While China’s investment in Mongolia is done mostly
in direct lending between the two countries or through several new
Chinese-led multilateral frameworks such as the Asian Infrastructure
Investment Bank (AIIB) in which China has
26.6 percent of voting power,
Japan contributes through multilateral organizations that have
established longer reputation with more experiences such as the Asian
Development Bank, the World Bank and the International Monetary Fund.
Each has their own strengths and weaknesses. China’s accumulated
experiences in financing and building infrastructure projects and its
ambitious Belt and Road Initiative will enable Mongolia to be more
connected with Europe and rest of Asia through roads and access to the
sea via ports. However, some Chinese investment lacks international
oversight and comes with political strings like in the case of the Dalai
Lama incident. Meanwhile, Chinese investment in large infrastructure
projects drove Mongolia’s
capital expenditure surge in 2013, thus contributed to an abrupt rise of debt-to-GDP ratio from 2015 to 2016.
Japanese funding comes from more transparent sources that can help
diversify the risks for the borrowing country, in turn providing global
knowledge transfer and technical assistance to promote sustainable
development. The downfall is that it has a higher threshold for Mongolia
whose credit rating is low and whose public debt reached almost
100 percent of GDP last year.
For Mongolia, this is an opportune time to work through China, Japan,
other “Third Neighbor” countries such as South Korea and Canada, and
international financial institutions to diversify away from raw
materials, being selective about the projects that can provide long-term
sustainable benefits such as investing in human capital and technology
advancement. In this trilateral relationship, each country has something
to offer and Mongolia needs to establish its own development strategy
based on its national interests in order to prevent itself from being
caught between its two stronger neighbors.
Yiyi Chen is
a master’s candidate at the Fletcher School of Law and Diplomacy at
Tufts University. She studies international law, East Asia foreign
affairs, and development economics.
Source:thediplomat.com
