ii Mongolia Trade work: Trade Competitiveness Diagnostic and Exploring Potential Trade Opportunities (P179679) Advisory Services & Analytics Mongolia Trade Competitiveness Diagnostic Special Focus: Trade Opportunities in Digital Services iii © 2023 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purposes, under the following citation: World Bank Group. 2023. Mongolia Trade Competitiveness Diagnostic. World Bank, Ulaanbaatar. License: Creative Commons Attribution CC BY 3.0 IGO Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Photographs are copyright of World Bank. All rights reserved. iv Acknowledgments This analytic piece was prepared by Undral Batmunkh (Economist, TTL) and Jose Luis Diaz Sanchez (Senior Economist, co- TTL). Lead contributors to the respective chapters are as follows: Chapter I on Partial Trade Competitiveness Diagnostics – Undral Batmunkh, Jose Luis Diaz Sanchez, and Yulia Vnukova (Consultant). Chapter II on Trade Opportunities in Digital Services – Randeep Sudan (Consultant), Undral Batmunkh, and Jose Luis Diaz Sanchez. The special focus chapter (Chapter II) was completed at the request of the client (Ministry of Economy and Development). The report was prepared under the guidance of Mara K. Warwick (Country Director), Sebastian Eckardt (Practice Manager), Tae Hyun Lee (Country Manager), and Elitza Mileva (Lead Economist). Valuable inputs were provided by Alberto Portugal (Senior Economist), Dulmaa Enkhtuya (Research Analyst), and Nurgul Chaimardaan (Consultant). The team is grateful to Javkhlan Bold-Erdene (External Affairs Associate) and Sukhchimeg Tumur (Program Assistant) for their communication and administrative affairs support. The findings, interpretations, and conclusions expressed in this report are those of World Bank staff and do not necessarily reflect the views of the Executive Board of the World Bank or the governments they represent. For information about the World Bank and its activities in Mongolia, please visit https://www.worldbank.org/en/country/mongolia. For questions and comments on the contents of this publication, please contact Undral Batmunkh (ubatmunkh@worldbank.org). The cutoff date for this report is June 30, 2023. v List of Acronyms ALMIS ASEAN Labor Market Information System APTA Asia-Pacific Trade Agreement BPO Business Process Outsourcing BSN Blockchain Service Network CAGR Compound annual growth rate Cedefop European Centre for the Development of Vocational Training DEPA Digital Economy Partnership Agreement DPA Digital Partnership Agreement DSA Digital Services Act EPA Japan-Mongolia Economic Partnership Agreement ERP Enterprise Resource Planning FEZ Free Economic Zone FWA Fixed Wireless Access GDPR General Data Protection Regulation GoM Government of Mongolia GSP Generalized System of Trade Preferences GVC Global Value Chain HCM Human Capital Management HHI Herfindahl-Hirschman index ICT Information and communication technologies IEMP Index of Export Market Penetration IoT Internet of Things ITC International Trade Commission ITU International Telecommunication Union, United Nations KPO Knowledge Process Outsourcing LLM Large Language Models LPI Logistics Performance Index MDDC Ministry of Digital Development and Communications MED Ministry of Economy and Development MEDS Ministry of Education and Science MFN Most Favored Nation NRCA Normalized revealed comparative advantage index NRP New Recovery Policy NTM Non-tariff measures O*NET Occupational Information Network QKD Quantum Key Distribution RCA Revealed comparative advantage index TFI Trade Facilitation Indicator UMAS University of Mongolia Academy of Sciences WBBA World Broadband Association WDR World Development Report vi Contents Executive Summary....................................................................................................................................... 1 Chapter 1. A Partial Trade Competitiveness Diagnostic ............................................................................. 10 1. Introduction ..................................................................................................................................... 10 2. A deep dive into exports of goods and services .............................................................................. 13 3. Understanding imports dynamics .................................................................................................... 20 4. Participation in Global Value Chains (GVCs) .................................................................................... 22 5. Potential for increasing and diversifying goods exports .................................................................. 23 6. Market access: Trade policy environment, logistics, and trade facilitation .................................... 24 7. Policy recommendations ................................................................................................................. 33 Chapter 2. Trade Opportunities in Digital Services ..................................................................................... 36 1. Introduction ..................................................................................................................................... 36 2. Mongolia’s ICT industry landscape and growth opportunities ........................................................ 37 3. Key constraints in expanding Mongolia’s digital services exports................................................... 41 4. Policy recommendations ................................................................................................................. 44 Annex ...................................................................................................................................................... 51 References .............................................................................................................................................. 63 vii List of Boxes, Figures, and Tables Boxes Box I.1. Key challenges to economic diversification ................................................................................... 15 Box I.2. Mitigating the negative impacts of trade....................................................................................... 35 Box II.1. Opportunities in the global market for Mongolian digital companies ......................................... 39 Figures Figure I.1. Mongolia’s trade openness remained relatively stable in the past two decades ..................... 10 Figure I.2. Mongolia mainly exports goods ................................................................................................. 13 Figure I.3. But per capita exports are lower than its comparators ............................................................. 13 Figure I.4. Exports of extractive industries expanded ................................................................................ 14 Figure I.5. Mongolia's goods export sectors (average of 2010-12 vs average of 2019-21) ........................ 14 Figure I.6. Mongolia's export products are concentrated relative to peers … ........................................... 14 Figure I.7. … and weaker in sophistication.................................................................................................. 14 Figure I.8. China has become the main market for Mongolia’s exports … ................................................. 18 Figure I.9. … leading to a higher concentration of exports market relative to peers ................................. 18 Figure I.10. Mongolia has low global market penetration vis-à-vis comparators ...................................... 18 Figure I.11. Survival rate of Mongolian goods exports remains weaker than its peers ............................. 19 Figure I.12. Exports to Japan and China are likely to survive for longer periods ........................................ 19 Figure I.13. Service exports have shifted from personal travel to freight transport .................................. 20 Figure I.14. Mongolia’s merchandise imports basket is diversified............................................................ 21 Figure I.15. Mongolia relies greatly on imported services.......................................................................... 21 Figure I.16. Transportation, tourism, and consultancy services dominate import services ....................... 21 Figure I.17. Coal exports tend to create greater demand for freight transportation services ................... 21 Figure I.18. A Taxonomy of GVC participation: Mongolia participates in the GVCs as a commodity exporter .................................................................................................................................................................... 22 Figure I.19. Mongolia’s forward participation is higher than most peers. ................................................. 23 Figure I.20. Mongolia has greater room to increase copper exports …..................................................... 24 Figure I.21. … specifically, to China ............................................................................................................. 24 Figure I.22. Mongolia has one of the lowest numbers of trade agreements ............................................. 25 Figure I.23. Mongolia’s overall tariff structure imposes relatively lower barriers ..................................... 27 Figure I.24. On average, Mongolia sets relatively lower tariffs on its imports compared to its structural peers ........................................................................................................................................................... 28 Figure I.25. Mongolia sets higher tariffs on intermediate goods compared to its peers ........................... 28 Figure I.26. Mongolia lags in terms of trade facilitation performance … ................................................... 31 Figure I.27. … reflecting weaknesses in advance ruling and automation ................................................... 31 Figure I.28. Mongolia's overall LPI performance is among the weakest among its peers ......................... 32 Figure B.1. Mongolia underperformed in the use of its human capital … .................................................. 16 Figure B.2. … and its social capital endowment deteriorated .................................................................... 16 Figure B.3. Asset diversification can facilitate product diversification ....................................................... 17 Figure B.4. Mongolia lags in assets and product diversification a ............................................................... 17 Figure II.1. Mongolian ICT firms commonly employ less than 100 employees .......................................... 37 viii Figure II.2. Firms are usually involved in a multitude of digital services and software development ....... 37 Figure II.3. Firms providing a multitude of services and software development are among the top earners in Mongolia ................................................................................................................................................. 38 Figure II.4. Mongolia lags its peers in exports of ICT services .................................................................... 38 Figure II.5. Mongolia performs poorly in cybersecurity.............................................................................. 42 Figure II.6. Employers find it difficult to hire technical staff with adequate skills...................................... 43 Tables Table I.1. Mongolia’s trade agreements (in force) ..................................................................................... 25 Table I.2. Mongolia’s GSP Utilization rate for its exports to all Preference Giving Countries 2019-2021 .. 26 Table I.3. Non-tariff measures (NTMs): Mongolia and comparators (2000-2022) ..................................... 29 ix EXECUTIVE SUMMARY Executive Summary Motivation, Objective and Scope This note, prepared at the request of the Ministry of Economy and Development, aims to analyze selected opportunities for Mongolia to diversify its economy and identifies specific policy options to realize them. Mongolia’s growing dependence on mining exports, primarily to China creates vulnerabilities and reduces resilience, as exposed during recent external shocks. Policy makers therefore continue to emphasize the importance of diversifying the economy. Against this backdrop, this note identifies opportunities and offers recommendations to achieve this goal. The note builds on and complements existing work, including the 2020 Country Economic Memorandum as well as previous policy notes on specific sectors, such as cashmere and meat production. Its focus is hence both in terms of sectoral coverage (digital services) and policies (trade policy and facilitation). The first chapter of the report analyzes Mongolia’s trade performance including diversification and sophistication and identifies constraints by focusing on trade policy and facilitation. The second chapter explores Mongolia’s potential to diversify into digital services, which can bypass the constraints associated with the exports of goods such as high transport costs and inefficiencies at the border. The note aims to help the government shape its long-term export strategy, which would support a more resilient, green, and inclusive recovery in the context of its New Recovery Policy (NRP). Chapter I. A Partial Trade Competitiveness Diagnostic Mongolia has become more dependent on exports of extractives Mongolia is characterized by limited export diversification with an increased reliance on extractives, accompanied by rising imports. The economy exhibits a significant degree of trade openness (imports plus exports as a share of GDP), well above most structural and aspirational peers1 (Figure ES1). However, export growth has been characterized by an increased concentration in exports of raw commodities, which account for 83 percent of total exports, limiting the resources available for the development of other non-mining exports. Imports of services related to mineral exploitation, together with a significant increase in domestic demand (including for infrastructure investment programs) also explain Mongolia’s relatively high trade openness. Competitiveness in exporting non-commodity goods and services has become more limited, compared to most of its peers. Extractive goods exports have expanded dramatically over the past two decades and now dominate the export goods basket. However, due to the increased focus on extractive goods, Mongolia lags its peers in terms of the variety and sophistication of its export goods. Also, Mongolia’s export markets are less diversified than its peers, increasingly concentrated in China. The probability of exports survival is found to be weak. While the exports of services, personal travel -tourism- has 1 Aspirational peers include Australia, Malaysia, and Kazakhstan, while structural peers include Armenia, Azerbaijan, Lao PDR, Vietnam, and Albania. In selecting these peers, we considered their natural resource abundance and dependency, income levels, demographics, competitiveness, and manufacturing indicators. 1 EXECUTIVE SUMMARY traditionally been the largest exported service, supporting Mongolia’s export diversification, it was supplanted by freight transport during the COVID-19 pandemic. Figure ES1. Mongolia’s trade openness remained relatively stable in the past two decades Total trade (exports and imports of goods and services) as a percent of GDP 200% 2000-2011 2012-2021 150% 100% 50% 0% Mongolia Australia Kazakhstan Malaysia Armenia Azerbaijan Lao PDR Vietnam Source: WDI (latest available data was as of 2021). Mongolia’s participation in Global Value Chains (GVCs) is also reflective of a natural resource dependent country. Mongolia is placed in the category of the “High commodities group” in the global taxonomy of GVC, mainly reflecting its high forward participation with commodity exports. While Mongolia has a higher GVC participation than most of its peers, its backward participation is weak indicating lesser use of imported intermediate inputs in its exports. This concentrated economic structure creates vulnerabilities and risks Mongolia’s macroeconomic environment, including volatility emanating from commodity price fluctuations, has stifled exports outside the mining sector. While capital has gravitated toward the mining sector, labor has moved toward non-tradable services away from tradable goods outside the mining sector. As in the case of other resource-rich countries, this resource curse has led to a loss of competitiveness in non-resource tradable sectors while increasing Mongolia’s vulnerability to external shocks. Indeed, Mongolia is prone to frequent commodity price swings, which in part explains Mongolia’s macro instability. Recent global shocks were amplified by Mongolia’s dependency on a small set of trade partners together with logistical bottlenecks, leading to balance of payments (BoP) pressures. The heightened hygiene requirements at the border ports amid China’s zero-COVID-19 policy strained the logistical capacity of the country. Mongolia’s trade with China, the most significant trade partner, was severely disrupted, while the cost of import transportation quadrupled due to congestion and delays at the major border ports, resulting in critical levels of foreign reserves. The reliance on coal exports is likely to create additional challenges in the face of the global low-carbon transition, including in China. As coal consumption in China, which is the only market for Mongolian coal, is expected to decline with China’s move towards carbon neutrality by 2060, Mongolia’s coal could 2 EXECUTIVE SUMMARY become a stranded asset, with a significant impact on trade and growth. In addition, changes in trade policy from trade partners reflecting their decarbonization efforts will likely create additional hurdles for Mongolia, for instance through changes in tariffs for carbon-intensive trade products. Furthermore, the adverse impact of climate change on traditional export sectors such as meat and cashmere is also expected to be significant, further hindering Mongolia’s export potential. The upcoming World Bank Country Climate and Development Report (CCDR) will analyze the impact of the global low-carbon transition on Mongolia’s economy and trade. Diversification would enhance Mongolia’s resilience to external and climate shocks, yet it is hampered by several constraints Due to being landlocked, geographically remote, and vast in territory, Mongolia faces significant challenges to trade development. Situated between China and Russia, without access to the sea, and a vast, sparsely populated territory, Mongolia’s logistical requirements including domestic infrastructure for exports and imports are substantial. Delays at the border, weaknesses in infrastructure, tracing and tracking, and logistics competencies are keeping Mongolia behind its peers in terms of trade performance (Figure ES2). Despite some progress in trade facilitation in recent years, longer hours needed to comply with documentary and border requirements resulted in less efficient cross-border trade. Mongolia plans to increase the capacity of its dry ports, land ports, and airports under the New Recovery Policy. Figure ES2. Mongolia's overall logistics performance is among the weakest among its peers Global ranking in terms of Logistics Performance Index (LPI) Australia Malaysia Vietnam Kazakhstan Armenia Mongolia Lao PDR 140 120 100 80 60 40 20 0 LPI (overall) Customs Infrastructure International Logistics Timeliness Tracking and Shipments Competence and Tracing Quality Source: World Bank LPI (2023). The inability to meet international standards and weak enforcement of existing domestic standards are constraining Mongolian export potential. Equine meat and preserved meat are identified as part of Mongolia’s top 10 export products with unrealized potential due to their comparative advantage (including Mongolia’s sizable stock of livestock and proximity to China, one of the world’s largest meat importers). However, a recent World Bank study on the agribusiness industry finds that lack of 3 EXECUTIVE SUMMARY harmonization with global meat quality and food safety standards and weak enforcement of sanitary and phytosanitary domestic standards act as a constraint to Mongolia’s meat exports.2 In addition, compliance with these standards creates significant additional costs for Mongolian exporters and limits the export potential of these products. Services exports, in particular those linked to the digital sector, are also constrained by limited digital infrastructure, weak regulatory environment, and lack of highly skilled human capital. Services of higher value addition, including digital services, can offer opportunities for Mongolia to diversify its economy. However, due to limited access to the internet, high network latency, lack of high-skilled labor that matches the demand of ICT entrepreneurs, and weakness in regulations on intellectual property and data privacy/access, Mongolia’s existing ICT companies are limited in size and activities. In addition, procyclical macroeconomic policy management has often amplified the volatility emanating from commodity price swings. Rather than dampening the cyclical volatility driven by swings in the commodities market and external environment, Mongolia’s macroeconomic – fiscal, monetary, and exchange rate – policies are found to exacerbate external shocks, discouraging the sustained investment needed for job creation and productivity growth, and ultimately export diversification. Despite its relatively open trade regime compared to peers, Mongolia does not fully utilize its existing trade agreements. Mongolia imposes relatively low barriers as most of Mongolia’s tariff rates are 5 percent. The trade-weighted Most Favored Nation tariff rates also suggest that Mongolia has a relatively open tariff policy compared to its structural peers. On the other hand, as a recipient of the Generalized System of Trade Preferences, Mongolia does not fully utilize its entitled benefits from the Preference Giving Countries which includes mostly advanced economies. While Mongolia enforces only a small number of NTMs, but the impact of NTMs that Mongolia’s exporters face is difficult to assess due to lack of detailed information. In the past two decades, Mongolia enforced ten NTMs on imports of goods including unauthorized drugs, toxic chemicals, and endangered species consistent with international treaties. On another hand, a complete assessment of NTMs that Mongolia’s exporters face is not plausible due to a lack of detailed information. Collecting and assembling the data is difficult as the NTMs data are not merely numbers; the relevant information is often hidden in legal and regulatory documents. This complexity not only hinders the trade policy formulation, but also discourages trade as traders cannot accurately estimate their costs and profit margins. Policy recommendations for trade development Implementing more counter-cyclical policies will create a more conducive environment for the development of tradable sectors. Fiscal policies should aim to support stabilization (saving the mineral windfall in good times and spending in bad times) while securing long-term sustainability using the existing stabilization and savings funds. This should be underpinned by institutional reforms to strengthen the independence of the Fiscal Stability Council and the Bank of Mongolia. Macroeconomic policy management should also allow greater exchange rate flexibility, while monetary policy is focused on anchoring inflation and addressing external imbalances. 2 “The green transformation of the Mongolian agri-food system” – World Bank (2022a). 4 EXECUTIVE SUMMARY Adopting a multipronged strategy that covers labor skills, connectivity, and regulatory institutions will help Mongolia improve its participation in GVCs. The transition from exporting limited numbers of commodities to more sophisticated participation in GVCs has become increasingly demanding in terms of skills, connectivity, and regulatory institutions, and requires a multipronged strategy aiming at increasing the attractiveness to FDI, improving access to credit, enhancing the labor market dynamism, and promoting political stability. Connectivity measures (including improving ICT connectivity, see Chapter 2) and trade policy actions mentioned below will also support this transition. Adjusting the effective tariffs on intermediate goods can promote the productivity and competitiveness of domestic producers. Mongolia’s tariffs on intermediate import goods are relatively high compared to peers. Lower tariffs on intermediate goods will allow local producers and entrepreneurs to become more competitive, accelerating their integration into regional and global value chains. Collecting and publishing detailed data on NTMs in the country will support the trade policy. The fact that NTMs are increasingly used to regulate international trade makes the need to update data even more compelling. Better data and information on NTMs should be the first step to quantifying their restrictiveness and exploring regulatory reform aiming to diminish trade costs. Mongolia should collect detailed NTM data to be part of the Trade Analysis and Information System (TRAINS) database managed by UNCTAD, which is the most complete source of NTM data. Improving Mongolia’s logistics will reduce delivery costs and allow a larger range and volume of products to be profitable to access export markets. All other things equal, lower transport costs should allow the expansion of existing exports as well as the emergence of new export products, especially those where the cost of logistics plays a large role. It will also diminish the trade costs of imported intermediate inputs, which could have an impact on downstream producers using them. Improving public investment management will contribute to reducing the infrastructure gap and increasing the quality of infrastructure projects, helping reduce transport costs. Enhancing compliance with international standards and product requirements will reduce barriers to Mongolia’s exports. Export opportunities in agrobusiness could be increased by enforcing improved health and hygiene standards in the livestock chains. Investment in quality infrastructure, e.g., conformity assessment, testing, inspection, and certification of Mongolian products conforming to the requirements of importing countries can be a tool to promote Mongolian exports, such as meat. Table ES1. Consolidated policy recommendations for enhancing trade competitiveness Policy measures Relevant agency Short-term Implementing more countercyclical fiscal policies, allowing greater 1 exchange rate flexibility, and focusing monetary policy on anchoring MOF, BOM, and MED inflation and addressing external imbalances Collecting and publishing detailed data on NTMs, including NTMs 2 MED Mongolian exporters face Aligning domestic export requirements and standards with 3 Cabinet international standards and product requirements 5 EXECUTIVE SUMMARY Medium-term Revisiting the tariff policy on intermediate goods to support the 4 MED and MoFA productivity and competitiveness of domestic producers. Accelerating the infrastructure investment projects with significant 5 implications on logistic performance, while sequencing it not to create MED and NRP Accelerator large BOP pressure Designing a human resources development plan focusing on education 6 MEDS, MED, and MLSP quality and redesigning school curriculums to match future needs Chapter 2: Trade Opportunities in Digital Services3 Digital transformation can create opportunities for Mongolia to diversify its trade The global digital economy is growing rapidly, creating opportunities for Mongolia to overcome constraints associated with the country’s land-locked nature and inadequate logistics capacities (see Chapter 1). Digital services exports could help Mongolia diversify its exports and benefit from growth opportunities in international markets. Indeed, by focusing on key growth areas, improving digital infrastructure, developing talent, creating an enabling environment for startups and businesses, and building capabilities within its government, Mongolia can enhance its competitiveness in the international market for digital services, ultimately boosting and diversifying the country’s exports. The Government of Mongolia (GoM) has recently undertaken significant efforts to support digital transformation. Vision 2050 and the New Recovery Policy (2021-2030) emphasize digital development, recognizing the potential of fostering a thriving digital sector for the country's economic growth. At the sectoral level, the National Digital Development Strategy of Mongolia (2022-2027) highlights six key policy objectives: digital infrastructure, e-governance, cybersecurity, digital literacy, innovation and production, and national development acceleration. Progress has been made particularly in the area of e-governance, including a five-year mission to build a "Digital Nation" by harnessing data and technology to facilitate innovation and improve public services. Other digital development areas have been supported by recent legislation including public information, digital signatures, cybersecurity, and personal data protection. Mongolia's ICT industry consists mainly of micro businesses delivering software development services domestically and outperformed by peers in terms of ICT service exports. The chapter’s analysis of Mongolian ICT firms shows that software development is the largest category, indicating Mongolia's capabilities in developing software solutions. However, most ICT firms in Mongolia report relatively low revenues, have a small to medium-sized workforce, and have not been successful in attracting significant investments, which resulted in a lower export performance compared to peers such as Moldova and Armenia. There are however notable and niche success stories in software development, e-commerce, digital marketing, and telecoms, highlighting the potential for high-earning ventures in these areas. 3 Digitally service is defined as any international transaction delivered remotely through computer networks while ICT services are a subset of digitally delivered services, focusing on those related to information technology and communications infrastructure (OECD, 2020). 6 EXECUTIVE SUMMARY Global trends indicate rapid growth in digital services exports, representing opportunities for Mongolia. Opportunities in the global market for digital services include software development, business outsourcing, knowledge outsourcing, e-commerce, fintech, telemedicine, and education technology. Building on its existing assets, Mongolia can strategize to expand its trade of digital services. The youthful and growing population of Mongolia (approximately 59 percent of individuals are under 30) will likely be better acquainted with digital technologies, enabling faster skills for jobs related to digital services. Also, as mentioned above, the Mongolian government has prioritized the development of its digital economy. As a result, internet connectivity has improved, even though more needs to be done. Mongolia's strategic location between China and Russia and proximity to Central Asia presents opportunities for trade in digital services within the region due to the limited time zone difference. Given the current landscape of Mongolia's ICT industry, our analysis suggests that the Internet of Things (IoT), 4 Public Cloud, Cybersecurity, eCommerce, and gaming markets could be leveraged for growing digital services exports. Despite some recent progress, Mongolia faces substantial challenges in digital transformation and exports of digital services Limitations regarding digital infrastructure, mobile connectivity, network latencies, cybersecurity, and access to data. Despite some progress on telecommunications infrastructure, internet penetration5, data costs, digital infrastructure, and access there remain barriers to ICT access, especially in rural areas. Only 25 percent of rural households have internet access at home, highlighting that Mongolia still has work to expand its digital infrastructure and ensure ICT access for all citizens. The internet speeds are relatively slow, and its digital infrastructure is less developed than in many other countries, including its peers. Also, high network latencies pose challenges for specific applications, particularly in real-time or interactive cloud workloads, and cybersecurity capabilities remain weak. The limited scale and availability of data in Mongolia also represent bottlenecks for the digital sector’s development, including artificial intelligence. The lack of high-skilled labor that matches the demand of ICT entrepreneurs is limiting Mongolia’s ICT companies potential to expand. International indicators and surveys of the tech industry in Mongolia highlight significant constraints concerning the availability of skills and talent for the digital services sector (Figure ES3). Also, our interviews and survey results indicate that the lack of communication and coordination between industry and academia exacerbates this skills gap in the digital domain. There are no formal mechanisms or platforms to identify employers' demand for specific digital and ICT skills. Despite recent progress, the regulatory environment is still limiting the digital sector’s development. Our surveyed and interviewed participants highlighted the need for improving intellectual property regulations, developing data protection regulations, assessing market access and barriers, promoting fair competition, enhancing international data gateways, and strengthening data protection and legal frameworks. These regulatory deficiencies are likely to constrain opportunities with international investors in the sector. 4 The Internet of Things (IoT) refers to the network of physical objects, or "things" that are embedded with sensors, software, and other technologies for the purpose of connecting and exchanging data with other devices and systems over the internet. 5 Percent of population that has access to internet. 7 EXECUTIVE SUMMARY Figure ES3. Employers find it difficult to hire technical staff with adequate skills Difficulties in hiring technical staff based on a survey of employers Lack of skills 21.5 Unwillingness to stick to company 20.8 Lack of a positive attitude to learning and development 16.6 Salary not acceptable 12.1 Unhappiness with working conditions 8 Lack of foreign language skills 6.9 Other 3.8 No problems 3.8 Not interested to work locally 3.5 Inadequate education % of respondents 3.1 0 5 10 15 20 25 Source: MDDC, 2021. Policy recommendations to promote digital services exports Developing digital infrastructure will unlock Mongolia’s ability to deliver digital services, both domestically and internationally. Mongolia would benefit from improving its communication infrastructure to enhance data speeds and reduce network latencies, especially for its international terrestrial networks. As blockchain technology has the potential to transform the export of digital services, Mongolia might want to consider establishing its national blockchain infrastructure. Establishing programs to better match the talent with the demands of the digital sector will be necessary to promote high-value digital services. Mongolia could consider establishing a digital skills observatory that systematically tracks the demand for skills relevant to digital services export. The GoM can create an educational program that provides technical education on in-demand skills and connects students with work-based learning opportunities. In addition, active collaborations with online job platforms such as Upwork will support Mongolia to pinpoint high-paying job opportunities and identify skills in high demand or scarce supply. Also, drawing from other peers like Chile, Mongolia has a significant opportunity to develop a strong mining engineering industry and export engineering consultancy services leveraging its existing comparative advantage. Expanding cross-border cooperation and interconnectedness will support Mongolian firms to comply with international regulations and access cross-border data. Mongolia could opt to enter into specific digital partnership agreements and seek partnerships with international academic institutions to create an international market intelligence network. By facilitating collaboration between local academic institutions, the private sector, and government agencies, Mongolia’s ICT companies can get training to comply with international regulations relevant to digital services and data access. 8 EXECUTIVE SUMMARY Developing a national program on synthetic data and strengthening policy and regulations on data exchanges will promote private sector initiatives.6 Given the foundational importance of data in digital services, Mongolian companies can stimulate innovation and boost the quality of services offered by better access to data. To overcome the issue of limited data availability due to a small population and to enhance data accessibility for the private sector, the GoM could consider developing a comprehensive policy centered around data. For instance, synthetic data can augment research and development capabilities, while well-structured data markets can catalyze efficient data exchange and promote innovation. Table ES2. Consolidated policy recommendations to enhance trade opportunities in digital services Policy measures Relevant agency Short-term Strengthening policy and regulations on data security, privacy exchanges, and intellectual property (copyright laws to protect MDDC and Ministry of Justice and 1 intellectual property rights) while focusing on compliance with Internal Affairs (Cabinet) international regulations (GDPR and DSA). Developing communication infrastructure to enhance data speeds and MDDC in collaboration with other 2 reduce network latencies, especially for its international terrestrial institutions under the NRP networks Creating a skills observatory that systematically tracks the demand for 3 MEDS and MDDC skills relevant to digital services export Medium-term Entering into digital partnership agreements to boost future demand for MED, MDDC, and Ministry of 4 digital services Foreign Affairs Establishing partnerships with international academic institutions to 5 MEDS, MDDC, and MED create an international market intelligence network Facilitating collaboration with the private sector and academic institutions to create an educational program that provides technical 6 MEDS, MDDC, and MLSP education on in-demand skills and connects students with work-based learning opportunities Exploring collaborations with online job platforms such as Upwork to 7 pinpoint high-paying job opportunities and identify skills in high demand MED, MEDS, and MDDC or scarce supply Adopting regulations that are consistent with international regulations 8 MDDC and MOJHA (Cabinet) (GDPR and DSA) to expand future potential of exporting digital services 9 Developing a national program on synthetic data MDDC MDDC in collaboration with other 10 Establishing national blockchain infrastructure institutions under the NRP Developing an assessment tool specifically targeted at companies 11 engaged in the export of digital services, to evaluate digital maturity MDDC across multiple dimensions 6 Synthetic data is data that is artificially created rather than being generated by actual events. It is often used for testing or training machine learning models when real-world data is unavailable, inadequate, or restricted due to privacy concerns. 9 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC Chapter 1. A Partial Trade Competitiveness Diagnostic Reforms to promote export diversification remain imperative to build a sustainable economy resilient to domestic, external, and climate shocks, and mitigate sharp and frequent boom-bust cycles. This chapter explores Mongolia’s trade performance and challenges to diversify exports while building on existing literature, which is already rich with a particular focus on traditional sectors such as meat, cashmere, and tourism. Thus, instead of conducting a fully-fledged Trade Competitiveness Diagnostic, the chapter provides a selective analysis and makes references to other recently published reports. 1. Introduction Despite demonstrating higher trade openness7 compared to peers, Mongolia is characterized by limited export diversification with an increased reliance on extractives, accompanied by rising imports. Mongolia exhibits a significant degree of trade openness (imports plus exports as a share of GDP), well above most structural and aspirational peers 8 (Figure I.1). However, export growth has been characterized by an increased concentration in exports of raw commodities, which account for 83.4 of total exports of goods and services, limiting the resources available for the development of other non- mining exports.9 Imports of goods and services related to mineral exploitation, together with a significant increase in domestic demand (including for infrastructure investment programs) also explain Mongolia’s relatively high trade openness. Figure I.1. Mongolia’s trade openness remained relatively stable in the past two decades Total trade (exports and imports of goods and services) as a percent of GDP 200% 2000-2011 2012-2021 150% 100% 50% 0% Mongolia Australia Kazakhstan Malaysia Armenia Azerbaijan Lao PDR Vietnam Source: WDI (latest available data was as of 2021). 7 Expressed as a share of total trade (exports and imports of goods and services) in GDP. 8 Aspirational peers include Australia, Malaysia, and Kazakhstan, while structural peers include Armenia, Azerbaijan, Lao PDR, Vietnam, and Albania. In selecting these peers, we considered their natural resource abundance and dependency, income levels, demographics, competitiveness, and manufacturing indicators. 9 According to the Observatory of Economic Complexity, Mongolia’s trade complexity international rank decreased from 107 in 2007 to 117 in 2021. 10 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC Due to being landlocked, geographically remote, and vast in territory, Mongolia faces significant challenges to trade development. Situated between China and Russia, without access to the sea, and a vast, sparsely populated territory, Mongolia’s logistical requirements including domestic infrastructure for exports and imports are substantial. Any trade with a third party (using ground transportation) is bound to be transited through either of the two border countries, adding significantly to transportation costs.10 Mongolia’s macroeconomic environment has stifled exports outside the mining sector. While capital has gravitated toward the mining sector, labor has moved toward non-tradable services away from tradable goods. As in the case of other resource-rich countries, this resource curse has led to a loss of competitiveness of non-resource tradable sectors. As a result of large foreign exchange inflows related to both mining revenue and foreign direct investment in the extractive sector, Mongolia’s real exchange rate appreciated during commodity booms and depreciated during periods of more subdued commodity prices. Rapid wage growth in Mongolia, especially during periods of high commodity prices, was driven by the requirement to compete for employees with jobs in the mining sector. As a consequence, unit labor costs have been rising, which weighs on the competitiveness of non-extractive sectors and shifts resources - capital and labor - away from tradable activities, limiting the potential of non-mining exports. Macroeconomic volatility emanating from commodity price fluctuations and amplified by often pro- cyclical macroeconomic management, has discouraged the sustained investment needed for firm creation in the tradable and non-tradable sectors. Part of Mongolia’s macro instability is due to the economy’s increased reliance on the mineral sector, which makes Mongolia prone to frequent commodity price swings. But worryingly, Mongolia’s macroeconomic – fiscal, monetary, and exchange rate – policies are found to exacerbate the external shocks rather than mitigate them.11 For example, the exchange rate has not been allowed to depreciate during periods of low commodity prices, which has encouraged greater imports and higher current account deficits, culminating in larger required adjustments later and an overshooting exchange rate. Also, as a consequence of weak institutions and changing fiscal framework to enforce fiscal rules, fiscal policy has been historically procyclical, for instance with expenditures increasing during economic expansions, which amplified economic cycles and limited the build-up of large fiscal buffers to be used in times of need. 12 An unstable macro-fiscal environment resulted in private investors in the tradable and non-tradable sectors reducing or delaying their investments, as changing macroeconomic conditions increased risks and uncertainties and thereby inhibited labor demand. The dependency on a small set of trade partners together with logistical bottlenecks amplified recent global shocks and contributed to the balance of payments (BoP) pressures. Due to heightened hygiene requirements at the border ports amid China’s zero-COVID-19 policy, Mongolia’s trade with China, the most significant trade partner 13 , was severely disrupted, with coal exports at about half their pre- 10 Air transportation is highly expensive and used for the trade of some high value goods. In 2022, it only 8.5 percent of the total goods import and 10.5 percent of goods export were transported through air. 11 World Bank’s Country Economic Memorandum (2020b). 12 See for instance the World Bank’s Public Finance Review vol 1 (2023b). 13 About 84 percent of Mongolia’s merchandise exports go to China, while about a quarter of Mongolia’s merchandise imports originate from China. 11 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC pandemic volume for more than a year,14 while the cost of imports transportation quadrupled due to congestion and delays at the major border ports. These developments resulted in a deterioration of the BoP and critically low levels of foreign reserves.15 Climate change is likely to create additional challenges for Mongolia’s mineral and non-mineral exports. With global coal consumption, including from China, expected to decline due to climate change concerns, Mongolia’s coal could become a stranded asset, with a significant impact on trade and growth. Indeed, a 2019 EIA report16 forecasted a significant drop in coal demand in the long term from China which is the only market for Mongolian coal. In addition, changes in trade policy from trade partners to respond to climate change challenges will likely create additional hurdles for Mongolia, for instance through changes in tariffs for carbon-intensive trade products. These concerns put additional pressure to accelerate the economic transition/diversification away from coal in the country. Furthermore, the adverse impact of climate change on traditional export sectors such as meat and cashmere is also expected to be significant, further hindering Mongolia’s export potential. The upcoming World Bank Country Climate and Development Report (CCDR) will analyze the impact of the global low-carbon transition on Mongolia’s economy and trade. The Government of Mongolia (GoM) has recently concentrated its efforts on policies to promote export diversification by building on existing comparative advantages in the agricultural and mining sectors while focusing on addressing logistics constraints. In recent years, there have been several government initiatives to support non-mining exports, specifically the meat and cashmere industry with soft loans, public investment in phytosanitary and storage facilities, and vaccination of livestock. However, its impact on promoting exports has been limited. Also, to tackle logistics limitations and reduce transportation costs, the GoM started some initiatives to expand infrastructures at key border crossing points under the New Recovery Policy.17 This chapter provides analytical evidence to diagnose the trade competitiveness of Mongolia and proposes recommendations to promote more diversified and resilient trade. As a first step in a partial trade competitiveness diagnostic, it analyzes Mongolia’s trade performance in terms of growth, diversification, sophistication, market orientation, and export potential, and assesses Mongolia’s participation in the global value chain (GVC). Second, the chapter highlights key features of Mongolia’s trade tariffs and non-tariff policies, logistics performance, and the current state of trade facilitation to identify constraints to trade development. Based on this analysis, the chapter ends with policy recommendations. 14 During 2021Q2-2022Q2, monthly coal export volumes were at 45 percent of the monthly averages before the pandemic. 15 Gross international reserves of the central bank declined from US$4.9 billion in April 2021 to US$2.7 billion in August 2022 (below the critical level of 3 months of imports coverage). 16 https://www.eia.gov/outlooks/ieo/pdf/ieo2019.pdf 17 For instance, the completion of a railroad connecting a major coal mine to the border crossing is expected to reduce the cost of coal transportation, significantly. 12 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC 2. A deep dive into exports of goods and services Despite its relatively high trade openness, Mongolia’s competitiveness in exporting non-commodity goods and services is more limited, compared to most of its peers. Mongolia’s exports have mainly consisted of merchandise (nearly 90 percent) and less of services (mainly tourism and transportation) (Figure I.2). While the export of goods and services per capita remains at similar levels to its structural peers, it is far below its aspirational peers including Australia, Malaysia, and Kazakhstan, and there is still room to further promote exports (Figure I.3). Figure I.2. Mongolia mainly exports goods Figure I.3. But per capita exports are lower than its comparators Exports of goods and services as a percent of GDP Exports of goods and services per capita, US$ Exports of goods 15,000 2010-2013 80% Exports of services Exports of G&S 2014-2019 12,000 60% 2020-2021 9,000 40% 6,000 20% 2502 3,000 0% 0 Source: Bank of Mongolia – BoP statistics. Source: WDI. Export of goods Extractive goods exports have expanded dramatically over the past two decades and now dominate the export goods basket. Prompted by the mining boom starting in 2014, extractives18 exports increased by 35 times between 2002 and 2021 and reached 49 percent of GDP (Figure I.4 and Table A1 in Annex). As of 2021, nearly 90 percent of Mongolia's goods export basket is comprised of extractives including minerals, coal, and gold. Meanwhile, the share of non-extractives including textiles and agricultural goods are nearly squeezed out of the basket. This transition is also reflected in the revealed comparative advantage (RCA) of Mongolia. Mongolia lost its RCA in sectors including textile, clothing, skin and hide, while maintaining it in extractives in the past decade (figure I.5. and Table A2 in Annex). 19 Mongolia’s limited economic 18 Extractives include minerals (copper and iron ores HS 25-26), fuels (coal HS 27), and precious metals/stones (gold HS 71). 19 RCA index estimates a country’s specialization in an exported good relative to all other countries. The index is equal to the proportion of a country's exports in a sector divided by the proportion of world exports in the same sector. A comparative advantage is “revealed” when RCA>1, as this shows a relative degree of specialization. The standard RCA is asymmetric with critical value set at 1 and no upper limit and zero lower limit. 13 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC diversification can be traced to excessive macroeconomic volatility, over-reliance on natural and produced capital, and underutilized human and institutional capital (see Box I.1). Figure I.4. Exports of extractive industries expanded Figure I.5. Mongolia's goods export sectors (average of 2010-12 vs average of 2019-21) Extractive vs non-extractive merchandise exports as a Normalized revealed comparative advantage (NRCA)20 percent of GDP 60% Extractive Non-extractive (agri,manuf) 49% 50% 40% 30% 21% 20% 10% 15% 5% 0% 2014 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2015 2016 2017 2018 2019 2020 2021 Source: Author’s estimation using the UN Comtrade Source: Author’s estimation using the UN Comtrade data. data. Due to the increased focus on extractive goods, Mongolia lags its peers in terms of the variety and sophistication of its export goods. According to the Herfindahl-Hirschman index (HHI) 21 , Mongolia’s export basket is one of the most concentrated (less diversified) among peers (HHI 0.23) (Figure I.6). Export sophistication, proxied by the technological intensity of exports22, weakened as the share of resource- based manufactures increased (to almost half of the goods export basket) over 2010-202123. In contrast, the share of technology manufacture is now negligible, putting Mongolia at the lower end compared to its peers (Figure I.7). Figure I.6. Mongolia's export products are Figure I.7. … and weaker in sophistication concentrated relative to peers … HHI index for goods, averages of 2019-2021 Share of exports of goods by technological classification 20 NRCA is a better form of RCA (Laursen, 2000). NRCA has a critical value set at zero with lower ( –1) and upper (+1) symmetric limits. Sectors with NRCA>0 exhibit revealed comparative advantage. For estimations of peers see Figure A1 in Annex. 21 HHI (Diversification) allows to compare export concentration of countries that may be equal in terms of number of products (or markets) but may vary in terms of trade value concentration. Export products/markets are most diversified if HHI is close to 0 and highly concentrated if HHI is close to 1. 22 Export sophistication is measured by total share of primary and resource-based manufactures within the goods export basket. Higher the share, weaker the sophistication level. 23 Exports of raw coal is considered primary, while washed coal is considered resource-based manufacturing good. The majority of resource-based manufacturing goods include copper concentrate. 14 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC 0.6 Primary Resource-based manu 0.50 0.5 Low technology Medium technology High technology Not classified 0.4 100% 0.30 0.3 80% 0.23 60% 0.2 0.16 0.10 40% 0.09 0.1 0.04 0.03 20% 0.0 0% Source: Author’s estimation using the UN Comtrade Source: UN Comtrade via WITS. data. Note: Technological classification based on Lall (2000). Box I.1. Key challenges to economic diversification Mining has served Mongolia well in the near term but has weakened the prospect of a diversified economy. Since the commencement of large-scale mining in 2004, Mongolia’s economy has grown at an average rate of 7.2 percent per year, making it one of the fastest-growing economies in the world. Extreme poverty has been eliminated, and inequality has not increased dramatically. At the same time, human capital has been grossly underutilized, while institutional capital has deteriorated. The World Bank’s Mongolia Country Economic Memorandum (2020) identified three key interrelated challenges to economic diversification: (i) excessive macroeconomic volatility, (ii) negative productivity growth, and (iii) excessive reliance on natural and produced capital and not enough on human and institutional capital. First, Mongolia’s macroeconomic environment is characterized by high levels of volatility, which can hurt investment and labor productivity. This is evident in most of its macro indicators, especially consumption, both at the aggregate and household levels. Macroeconomic instability is partly driven by frequent commodity price swings, and Mongolia’s fiscal, monetary, and exchange rate policies tend to exacerbate external shocks rather than mitigate them. Volatility affects investment decisions, as changes in macroeconomic variables (exchange rate, interest rate, inflation, real wages) affect the expected return on investment and, hence, affect the level of labor productivity in the economy. Second, the commodity cycle and macroeconomic mismanagement have led to weak productivity growth. Total factor productivity has contributed negatively to growth for most of the recent decade. As in other resource-rich economies, capital has flown to the mining sector, while labor has moved away from high-productivity tradable goods and manufacturing sectors toward lower-productivity non-tradable services. As a result, structural transformation has contributed negatively to productivity growth in recent years. In addition, firm ownership in 15 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC key sectors has become more concentrated, and firms have become less keen to innovate and adopt new technologies. Finally, growth has been over-reliant on natural and produced capital and has underutilized human and institutional capital (Figures B.1 and B.2). The failure to better utilize human capital is largely the result of the inability to create enough well-paying jobs. Mongolia has done well in dealing with the supply side of the labor market (investing in the health and education of its labor force), but less with demand-side complements such as an enabling business environment, access to markets and complementary inputs, and well-functioning public services. There is also a mismatch between the supply of skills by educational institutions and the demand from employers. As a result, the economy does not produce enough jobs to absorb new entrants into the labor market, and there is skilled human capital flight. Mongolia also lacks a sound public investment management system to effectively and efficiently allocate resource rents. These problems have been compounded by weak control of corruption and the rule of law. Figure B.1. Mongolia underperformed in the use Figure B.2. … and its social capital endowment of its human capital … deteriorated Capital endowment as a share of total wealth Natural capital endowment as a share of total wealth and quality of institutions as an average score of Rule of Law and Corruption Control in World Governance Indicators 70% 70% 2010 20142000 MONGOLIA 2000 2010 2014 60% 60% 1995 MONGOLIA 1995 2005 50% 2005 50% Natural capital (Mines) Natural capital (Mines) 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 0% 20% 40% 60% 80% 100% -2 -1 0 1 2 3 Human capital (Minds) Quality of Institution (Minds, rule of Law & Control of Corruption) Source: World Bank 2020b. Note: Blue dots represent comparator countries used in the referred report Such inability to diversify the country’s endowments has resulted in limited diversification of outputs and exports and has further amplified its vulnerability to the swings of the global commodity markets. Indeed, a strong positive association between asset diversity and exports/product diversification is shown in Figure B.3. It indicates that Mongolia lags its peers in those measures of economic diversity (Figure B.4). The pathway to diversification is through enhanced macroeconomic management, business environment reforms, and expanding Mongolia’s intangible endowments. Macroeconomic policies better aimed at offsetting the impact of large commodity price swings can preserve stability and mitigate the resource curse. Business climate reforms can boost investment, including FDI. Finally, economic diversification requires improved 16 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC functioning of the labor market, attracting and retaining talent, an effective migration policy, strengthened public investment management practices, and radically increased transparency of policymaking. Figure B.3. Asset diversification can facilitate Figure B.4. Mongolia lags in assets and product product diversification diversification a o Diversifies portfolio of national 0.7 assets (inputs): natural and produced capital, and Canada Asset intangible assets (human 0.6 diversification capital and institutions) o Changes comparative Malaysia Product diversity 0.5 advantage and hedges structural risks UAE Product o Increase flexibility, resilience 0.4 Australia Russia diversification and productivity across Colombia economy 0.3 Kazakhstan Armenia Chile o Diversifies outputs and exports Peru away from mining through 0.2 Mongolia Ecuador energy intensive Qatar industrialization 0.1 y = 0.711x - 0.2022 o Builds on current comparative R² = 0.5088 advantage and hedges cyclical risks 0 o Increases exposure to low- 0.3 0.5 0.7 0.9 1.1 carbon transition Asset diversity Source: World Bank 2020b. Source: World Bank 2020b. Note: Peers are different in the original document. Source: Mongolia Mines and Minds report, World Bank 2020b. Note: a Asset diversity is measured as the share of non-natural capital in total wealth, and product diversity is measured with the Finger-Kreinin index. The Finger-Kreinin index is a relative index, ranging from 0 (full diversification) to 1 (no diversification), that compares the structure of exports across countries by showing the extent to which the structure of exports by product of a given country differs from the world average. This indicator is reparametrized here to mean 0 = no specialization and 1 = full diversification. Mongolia’s export markets are also less diversified. The export market for Mongolia has become increasingly concentrated in China, as its market share increased from less than half in 2002 to 84 percent by 2021 (Figure I.8 and Table A3 in Annex). Such increased market concentration puts Mongolia far behind its peers in terms of market diversification (Figure I.9). The increased concentration in a single market is also consistent with weaker market penetration. Indeed, the market reach of Mongolia’s exports, as expressed by the Index of Export Market Penetration remains far below its comparators (figure I.10) 24. 24 IEMP reveals the degree of dynamism in exports, a more systematic measure to compare success in exploiting export market opportunities across countries and years. It compares, for each exported product, the number of countries to which the country exports a product relative to the total number of countries that import this product, and then sums across all products exported. The actual number of export relationships is then divided by the potential number to assess the export opportunities a country is exploiting (Brenton and Newfarmer, 2009). One limitation of the IEMP is that it does not weigh exports by their relative importance. 17 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC Figure I.8. China has become the main market for Figure I.9. … leading to a higher concentration of Mongolia’s exports … exports market relative to peers Percent of goods exported to different markets HHI for markets, averages 2019-2021 100% 0.8 0.7 80% 0.6 60% 0.4 40% 0.3 0.2 20% 0.2 0.2 0.1 0.1 0.1 0.1 0% 0.0 2019 2021 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2020 Azerbaijan Malaysia Lao PDR Vietnam Australia Kazakhstan Mongolia Armenia China Switzerland Asia excl. China EU27 Russia America ROW Aspirational Structural Source: Author’s estimation using the UN Comtrade Source: Author’s estimation using the UN Comtrade data. data. Figure I.10. Mongolia has low global market penetration vis-à-vis comparators Index of Export Market Penetration 16 2002 2010 2019 2021 14.1 14 13.2 13.1 12 10 8.8 8.2 8 6 5.1 4 2.1 1.9 2.2 1.6 1.7 1.4 2 1.2 0.9 0.9 1.2 0 Mongolia Vietnam Lao PDR Armenia Azerbaijan Malaysia Australia Kazakhstan Structural Aspirational Source: Author’s estimation using the UN Comtrade data. Mongolia’s survival rate of export relationships has been weak, below most comparators except Kazakhstan during 2010-2021. The survival probability of Mongolia’s export flows25 beyond two years falls to 31 percent and beyond ten years is 13 percent (Figure I.11). In terms of sectors, animal products, footwear, and minerals have the best chance to survive after the second year. In terms of export 25 New export product-market relationships of at least US$100,000. 18 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC destinations, Mongolia’s exports to Japan have the highest chance of survival after the first year (72 percent), while China exhibit the second highest probability of survival (54 percent after the second year and 27 percent after the tenth year), closely followed by Korea (Figure I.12). Figure I.11. Survival rate of Mongolian goods exports Figure I.12. Exports to Japan and China are likely to remains weaker than its peers survive for longer periods Kaplan-Meier survival estimates: Mongolia and Kaplan-Meier survival estimates: Mongolia's export comparators destinations Source: Author’s estimation using the UN Comtrade data. Note: The Kaplan-Meier estimator is a non-parametric method of estimating the survival probability as a function per each time interval (Per Kiefer, 1988). See Tables A4 and A5 in Annex for details. Export of services Personal travel -tourism- has traditionally been the largest exported service in Mongolia, but it was supplanted by freight transport during the pandemic. During 2000-2019, personal travel, mainly tourism, grew by 13 times in trade value, before getting severely hit by the pandemic-related travel restrictions. Meanwhile, Mongolia’s freight transport services have grown threefold during 2020-21 due to increased demand for manufactured consumer goods and freight rates (Figure I.13). The composition of visitors has also undergone a significant shift, with the share of leisure visitors rising from 21 percent to 45 percent between 2010 and 2019 (driven mainly by visitors from East Asia), and the share of business visitors shrinking from 33 percent to 9 percent. While the natural barriers including the harsh climate have always been a constraint for inbound tourism to Mongolia, non-natural factors including availability and cost of international flights, lack of centralized tourism marketing, and supply of skilled labor in tourism destinations are considered the main obstacles for Mongolia’s competitiveness in tourism. 26,27 26 Mongolia: Fostering Inclusive Tourism Development in the Aftermath of COVID-19 (World Bank 2021a). 27 Mongolia ranked 84th out of 117 countries in the WEF’s Travel & Tourism Competitiveness Index in 2021. 19 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC Figure I.13. Service exports have shifted from personal travel to freight transport Share of service exports in GDP, variety of services 10% Others 8% Business services Tourism 6% Transportation (personal & 4% others) Transportation (freight) 2% Total service exports 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: BOP statistics BOM. 3. Understanding imports dynamics Mongolia’s imports merchandise basket is diversified, consisting of consumer goods, capital goods, intermediate goods, and fuel, largely originating from the neighboring countries. In the past two decades, imports of intermediate goods including metal products (bars and rods) and capital goods (mainly machinery) increased rapidly fueled by the boom in the construction sector as well as increased demand for machinery utilized in heavy industries including the mining (Figure I.14). Meanwhile, imports of fuel remained large (about a quarter of imports basket) due to significant demand for both consumption and production purposes (Table A6 and A7 in Annex). Nearly a quarter of total imports originate from China, Russia, and Japan, including fuel and foodstuff from Russia, transportation equipment from Japan, and most of the rest come from China (Table A8 in Annex). Imports from other countries are transited through either Russia or China (most commonly the latter as it connects Mongolia to the coast). Higher concentration in mining production and lower logistics capacity resulted in greater demand for business consulting services from abroad and imports of transportation services. Mongolia relies significantly more on imported services compared to its peers, with imports divided mainly into services of transportation, business consultancy, and tourism (Figures I.15 and I.16). The increase in coal volumes in recent years seems not to have been accompanied by an increase in capacity and competitiveness of domestic freight transportation, resulting in greater import freight transportation services (Figure I.17). Business services are also linked with mining sector activities as Mongolia relies on international expertise in this field. In recent years, demand for business services from abroad has been large and stable due to the international expertise required for the construction of the underground phase at the Oyu Tolgoi 20 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC mine. Outbound tourism, the third largest category of services imports, mainly consisted of personal trips for education and medical purposes (62 percent of total outbound tourism).28 Figure I.14. Mongolia’s merchandise imports basket Figure I.15. Mongolia relies greatly on imported is diversified services Imports basket Services imports in percent of GDP 100% 25% 80% 20% 60% 15% 40% 10% 20% 5% 0% 0% 2015 2016 2017 2018 2019 2020 2021 Capital goods (excluding transport equip.) Fuels, processed, motor spirit Mongolia Armenia Australia Transport equip., parts, passenger motor cars Azerbaijan Kazakhstan Lao PDR Consumption goods Intermediate goods Malaysia Vietnam Source: Author’s estimation using the UN Comtrade Source: BOP statistics IMF. data. Figure I.16. Transportation, tourism, and Figure I.17. Coal exports tend to create greater demand consultancy services dominate import services for freight transportation services Services imports in percent of GDP, type of services Imports of freight transportation and coal exports Others 8% 40,000 Freight imports (% of GDP) Financial services 7% Coal exports (volume, RHS) 35,000 Business services Tourism 6% 30,000 30% Transportation (personal & others) Transportation (freight) 5% 25,000 Total service imports 4% 20,000 20% 3% 15,000 10% 2% 10,000 1% 5,000 0% 0% 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2004 2000 2002 2006 2008 2010 2012 2014 2016 2018 2020 2022 Source: BOP statistics BOM. Source: BOP statistics BOM. Note: For details see Table A9 in Annex. 28A World Bank report (2021a) found that Mongolians are avid international travelers as they spend nearly twice as much on international tourism than what foreign visitors spend on tourism in Mongolia. 21 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC 4. Participation in Global Value Chains (GVCs) Mongolia participates in GVCs as a high “exporter of commodities”. A total participation share of 50 percent puts Mongolia in the category of the “High commodities group” in the global taxonomy of GVC (Figure I.18)29. While the total GVC participation is higher than most of its peers (considered “limited commodities”), it is lower than some of its aspirational peers (considered “high manufacturing” (Malaysia).30 Greater participation in GVC is found to boost export growth, create better jobs, and reduce poverty.31 The participation of Mongolia in GVCs has been stable in the past decade. It increased only by 1 percent of gross exports between 2009-2018 due to an increase in forward participation and a decline in backward participation (per the latest available data). Higher backward integration is an important characteristic of countries that transition from low participation to higher value GVC specialized in non-commodity. 32 Mongolia’s backward participation at 15 percent of gross exports in 2018 is in the mid-range among two groups of comparators – below an aspirational peer (Malaysia) and two structural peers (Vietnam and Armenia). Mongolia’s forward GVC participation at 35 percent of gross exports is higher than most comparators except Kazakhstan (39 percent) due to the commodity – exporting status (Figure I.19). Figure I.18. A Taxonomy of GVC participation: Mongolia participates in the GVCs as a commodity exporter Source: World Bank (2020c) WDR, World Bank. 29 Total participation share equals the sum of backward participation and forward participation in GVCs. Backward participation (upstream) is the use of foreign inputs embodied in gross exports. Forward participation (downstream) is the domestic value- added in intermediate exports to the third country exports (World Bank, 2020). Countries being part of the commodities GVC taxonomy-group have a forward participation share lower than 60 percent, and backward participation less than 20 percent (Figure A2 in Annex). 30 By contrast, other countries such as China, India and Turkey specialize in advanced manufacturing and services, while the USA is part of innovative GVC activities. Similarly, most EU28 countries fall in one of these two categories (World Bank, 2020c). 31 World Bank (2020c). 32 World Bank (2020c). 22 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC Figure I.19. Mongolia’s forward participation is higher than most peers. GVC participation: Mongolia and comparators (percent of gross exports) 80% 66% 64% 57% 57% 60% 53% 55% 49% 50% 49% 45% 47% 41% 42% 41% 39% 40% 32% 20% 0% 2018 2009 2018 2009 2018 2009 2018 2009 2018 2009 2009 2018 2009 2018 2009 2018 MNG AUS KAZ MYS ARM AZE LAO VNM Aspirational Structural Backward participation Forward participation GVC Participation Index Source: World Bank (2020c) WDR, World Bank. 5. Potential for increasing and diversifying goods exports Mongolia’s top export products that demonstrate the highest export potential across countries are still mineral products. Comparing Mongolia’s current actual exports33 to its potential34 estimated by the ITC gravity-based model, Mongolia has untapped exports potential in mineral resources worth US$4.0 billion (equivalent to 40 percent of merchandise exported in 2022), mainly in copper-related goods and iron ore (Figure I.20). Estimating the demand for these goods in specific markets and Mongolia’s actual exports of these goods to these markets, the model suggests that there is large untapped exports potential to China, Japan, and Korea. For instance, Mongolia has room to increase its exports of copper (ore and concentrate) to China by US$2.3 billion (Figure A3 in Annex). The markets with the estimated greatest potential for Mongolia’s exports (all products) are China, Japan, and Korea. China shows the largest absolute difference between potential and actual exports in value terms (US$3.7 billion) across products (Figure I.21). The potential to export meat and meat related products is constrained by the inability to meet international standards and weak enforcement of existing domestic standards. As shown in Figure I.20, Mongolia has unrealized export potential in equine meat and preserved meat, mainly supported by the sizable stock of livestock and proximity to China, one of the world’s largest meat importers. However, 33 Actual exports are calculated by ITC based on two measures: (i) as arithmetic five-year averages of direct and mirror data of reliable reporters, with higher weights for recent years, are used to moderate the impact of outliers. (ITC). 34 Export potential is measured by identifying products in which the exporting country has already achieved international competitiveness and demonstrates good prospects of export success in a specific export destination (ITC). It considers factors including projections of supply, demand, market access conditions, and bilateral ease of trade (Decreux and Spies, 2016). 23 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC such potential is constrained by a lack of harmonization with global meat quality and food safety standards and weak enforcement of sanitary and phytosanitary domestic standards. 35 Compliance to these standards create significant additional costs for Mongolian exporters and limit the export potential of these products. Figure I.20. Mongolia has greater room to increase Figure I.21. … specifically, to China copper exports … Mongolia’s top 10 export products with unrealized Mongolia’s top 10 exports market with the largest potential (billion US$) potential (billion US$) 260300 Copper ores & 2.70 China concentrates 260111 Non-agglomerated 1.10 Japan iron ores & concentrates… 740311 Copper cathodes 0.16 Korea, Rep. of 252921 Fluorspar, <= 97% 0.10 Russia calcium fluoride 260800 Zinc ores & 0.09 Taipei, Chinese concentrates 260700 Lead ores & 0.08 Germany concentrates 020500 Equine meat 0.06 Italy 0802Xc Nuts n.e.s 0.05 Kazakhstan 160290 Prepared or Spain 0.02 preserved meat 261390 Molybdenum ores & UK 0.02 concentrates (excl. roasted) 0 0.5 1 1.5 2 2.5 3 0 1 2 3 4 Source: ITC. Source: ITC. Note: See Figure A3 in Annex for details. Products are at a 6-digit product level. 6. Market access: Trade policy environment, logistics, and trade facilitation 6.1.Trade policy Trade agreements A WTO member since 1997, Mongolia maintains a relatively open trade regime, but it has one of the lowest numbers of trade agreements globally. Mongolia currently has only two regional trade agreements such as the Japan-Mongolia Economic Partnership Agreement (EPA) (2016) and the recently 35 “The green transformation of the Mongolian agri-food system” – World Bank (2022a). 24 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC operational Asia-Pacific Trade Agreement (APTA) 36 (Figure I.22 and Table I.1). APTA allows Mongolia better access to Asian markets, reduced tariffs, and better regional integration.37 Mongolia benefits from the reduced customs duties by 30 percent on over 10,000 items exported to six APTA members. In return, Mongolia reduced tariffs on 366 product lines (at HS six-digit level) by an average of 24.2 percent for imports from APTA.38 Also, the establishment of the Economic Partnership Agreement between Mongolia and South Korea is in the planning.39 Mongolia’s NRP (a medium-term national plan ratified in 2021) aims to expand Free Economic Zones (FEZs), and improve domestic transport and sustainable energy sources to promote more trade and FDI from the EU.40 Figure I.22. Mongolia has one of the lowest numbers of trade agreements Source: World Bank DTA database. Table I.1. Mongolia’s trade agreements (in force) Year As exporter As importer 2021 Asia-Pacific Trade Agreement (APTA) (formerly Bangkok Asia-Pacific Trade Agreement (APTA) (formerly Agreement) Bangkok Agreement) UK for GSP Countries (Enhanced Framework) 2016 Japan-Mongolia Economic Partnership Agreement Japan-Mongolia Economic Partnership Agreement (EPA) (EPA) Belarus, Kazakhstan, Russia (EAEU) for Developing Countries 2015 Armenia for Developing Countries Kyrgyzstan for Developing Countries 2005 EU for GSP+ Countries 2002 Turkey for LDCs 1976 United States for GSP countries 36 After more than a decade, Mongolia formally acceded to the Asia-Pacific Trade Agreement (APTA) in 2020 and became operational in 2021. The trade preferences under APTA became officially effective on 1 January 2021. 37 https://www.unescap.org/news/mongolia-accedes-asia-pacific-trade-agreement-its-seventh-member. Members include China, South Korea, Bangladesh, India, Laos, and Sri Lanka. 38 WTO (2021), ESCAP (2021) 39 https://montsame.mn/en/read/313243 40 https://eias.org/publications/op-ed/mongolias-new-revival-policy-what-opportunities-does-it-present-for-the-eu/ 25 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC 1974 Canada for GSP Countries 1972 New Zealand for GSP Countries Switzerland for GSP Countries 1971 Japan for GSP countries Norway for GSP countries 1966 Australia for GSP Countries Source: ITC Market Access. Note: The trade agreements where Mongolia is both an Exporter and an Importer are reciprocal regional trade agreements such as the Japan-Mongolia EPA and the APTA. Those trade agreements where Mongolia is only an exporter are those that only allow access to their markets. Mongolia does not fully benefit from its status as a recipient of the Generalized System of Trade Preferences (GSP). As a recipient of the system, Mongolia is entitled to some benefits from Preference Giving Countries (PGC) which includes mostly advanced economies. 41 For instance, Mongolia is entitled to duty-free exports on 66 percent of listed goods to the EU. In 2021, Mongolia took nearly full advantage of exporting vegetable goods and manufacturing articles to the PGC (with GSP utilization rates near 100 percent42, Table I.2). After the pandemic, Mongolia’s GSP rates declined for exports of wood and wood articles, mineral products, and prepared foodstuff and beverages. Mongolia’s utilization rates on other agreements including the EPA with Japan, have weakened aft er the pandemic as well. For instance, Mongolia did not take full advantage of the preferential treatment on exports of fats and oils, live animals and products, and mineral products (Table I.2), some of this seems to be related to the heightened hygiene requirements put in place during the pandemic. Meanwhile, Mongolia has been benefitting largely from preferences under Economic Partnership Agreement with Japan. In addition to achieving 100 percent utilization on exports of vegetable products, footwear, headgear, umbrellas, base metals and products, and miscellaneous manufacturing articles, the utilization rate increased to nearly 100 percent for hides and skins, and textile and textile articles in 2021 (see Table A10 in Annex for the GSP utilization rate under the EPA with Japan). Table I.2. Mongolia’s GSP Utilization rate for its exports to all Preference Giving Countries 2019-2021 2019 2021 2019 2021 2019 vs 2021 HS Section Product Description Other Preferences GSP GSP Utilization Rate Utilization Rate (incl. Utilization (excl. Japan) Japan EPA) Rate HS II Vegetable products 20.0% 98.5% 100.0% 100.0% Increased HS XX Miscellaneous manufact. Articles 94.9% 91.5% 100.0% 100.0% Decreased HS XI Textile & textile articles 76.0% 77.3% 93.3% 97.6% Increased HS XII Footwear, headgear, umbrellas, 72.4% 69.7% 84.9% 100.0% Decreased etc. HS IX Wood & articles of wood 100.0% 60.9% 0.0% 0.0% Decreased HS VIII Hides and skins, leather, etc. 39.6% 20.0% 78.1% 98.5% Decreased HS XIII Articles of stone, cement, etc. 0.0% 8.7% 0.0% 0.0% Increased HS XVIII Optical & precision instruments 0.0% 5.9% 100.0% 0.0% Increased 41 The full list includes Australia, Norway, Japan, Switzerland, New Zealand, Canada, the USA, the EU, Turkey, and the Eurasian Economic Union. 42 GSP Utilization Rate (GSP-UR): GSP UR = 100 * GSP Received Imports / GSP Covered Imports ( Source: UNCTAD). 26 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC HS XV Base metals & products 0.2% 0.4% 100.0% 100.0% Increased HS VI Chemical products 0.0% 0.0% 0.0% 0.0% No change HS III Fats and oils 0.0% 0.0% 100.0% 41.7% No change HS I Live animals & products 0.0% 0.0% 93.0% 39.3% No change HS XVI Machinery & electrical equipment 0.0% 0.0% 0.0% 0.0% No change HS V Mineral products 92.9% 0.0% 100.0% 0.0% Decreased HS VII Plastics & rubber 0.0% 0.0% 0.0% 0.0% No change HS XIV Precious stones, etc. 0.0% 0.0% 0.0% 0.0% No change HS IV Prepared foodstuffs, beverages, 25.0% 0.0% 100.0% 88.6% Decreased etc. HS X Pulp of wood, paper, books, etc. 0.0% 0.0% 0.0% 0.0% No change HS XXII Special uses 0.0% 0.0% 0.0% 0.0% No change HS XVII Transport equipment 0.0% 0.0% 0.0% 0.0% No change HS XXI Works of art, etc. 0.0% 0.0% 0.0% 0.0% No change Source: Based on UNCTAD. Tariff measures Mongolia’s current tariff policy demonstrates a relatively open trade regime compared to its peers. Most of Mongolia’s tariff rates are 5 percent, although Mongolia has the lowest share of free tariff lines in Most Favored Nation (MFN) rates (1 percent) and duty-free imports (2 percent) when compared to peers (Figure I.23). In terms of MFN tariffs in the aspirational peers, 49 percent of tariff lines are free in Australia, 57 percent in Malaysia, 28 percent in Kazakhstan, and the average for East Asia and Pacific region is 36 percent. However, structural peers such as Azerbaijan, Armenia, and Vietnam, commonly set MFN tariffs higher than 10 percent indicating higher tariff barriers compared to Mongolia. The trade- weighted MFN tariff rates also suggest that Mongolia has a relatively open tariff policy compared to its structural peers but to a lesser extent compared to aspirational peers (Figure I.24). Figure I.23. Mongolia’s overall tariff structure imposes relatively lower barriers Tariff rates distribution (percent of total tariff lines) (2021 or most recent) 100% 80% 60% 40% 20% 0% AHS MFN AHS MFN AHS MFN AHS MFN AHS MFN AHS MFN AHS MFN AHS MFN AHS MFN Mongolia Azerbaijan Armenia Lao PDR Vietnam Australia Kazakhstan Malaysia Structural Aspirational East Asia - Pacific 0 0 < t ≤ 5% 5 ≤ t ≤ 10% 10 ≤ t ≤ 20% t ≥ 20% N/A Source: Based on TRAINS. Note: AHS – Effectively applied tariff rate, MFN – Most Favored Nation tariff rate. For details see Table A11 in Annex. 27 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC At the sectoral level, Mongolia protects its agriculture sector the most, while applying higher effective tariff rates to intermediate goods compared to peers. Imports tariffs set on agricultural goods in Mongolia, at a weighted average of 8.1 percent MFN, is the highest compared to other goods (Table A12 in Annex). However, it is lower compared with structural peers such as Armenia (10.1 percent), and Vietnam (11.8 percent). In terms of other goods, Mongolia seems more protective for consumer goods in general (higher than its average of 5 percent) and equally protective on intermediate and capital goods (4.96 percent and 4.74 percent trade-weighted average MFN rates, respectively) (see Table A12 in Annex). While the average MFN tariff on intermediate goods is at par with its peers, Mongolia’s effective tariffs rates fall on the higher end (figure I.25). Greater protectiveness regarding intermediate goods could be adding to the production costs of domestic producers (including for agricultural production) and affect their productivity. Figure I.24. On average, Mongolia sets relatively lower tariffs on its imports compared to its structural peers MFN rates, all products, 2021 9 8.1 8 7.1 7 6 5.2 5.5 5 Mongolia 4.2 4 3.6 Structural (avg) 3 Aspirational (avg) 2 1 0 MFN Simple Average MFN Weighted Average Source: Based on TRAINS. Note: AHS – Effectively applied tariff rate, MFN – Most Favored Nation tariff rate. Figure I.25. Mongolia sets higher tariffs on intermediate goods compared to its peers Tariff rates on intermediate goods Mongolia: Distribution of tariff AHS, 2021 (tariff, percent) MFN, 2021 (tariff, percent) rates on intermediate goods 8 8 (percent of total tariff lines) Simple Average 7 Simple Average 7 Weighted Average 6 6 100% Weighted Average 5 5 80% AHS 4 4 MFN 60% 3 3 40% 2 2 1 1 20% 0 0 0% Malaysia Azerbaijan EAP Vietnam Lao PDR Australia Mongolia Kazakhstan Armenia EAP Azerbaijan Lao PDR Malaysia Vietnam Australia Kazakhstan Armenia Mongolia Free 0 < t 5 ≤ t 10 ≤ T ≥ N/A lines ≤ 5 ≤ 10 t ≤ 20 lines 20 Source: Based on the Trade Analysis and Information System (TRAINS). 28 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC Note: AHS - Effectively applied tariff rate, MFN - Most Favored Nation tariff rate. Non-tariff measures (NTMs)43 Over 2000-2022, Mongolia enforced only ten NTMs reported by the WTO44, which is the lowest across all structural and aspirational comparators. The aspirational comparators enforced a greater number of NTMs on average compared to the structural peers (Table I.3). Per WTO, Mongolia’s prohibitions, and restrictions stem from international treaties. Examples of prohibited import items include ozone- depleting substances, unauthorized drugs and psychotropic substances and their raw materials, toxic and hazardous chemicals, and hazardous waste. Examples of restricted goods subject to import licensing (as of 2020) are very rare living animals and endangered plants, alcohol, tobacco, firearms, ammunition, firearm-like devices, etc. Mongolia has not imposed any anti-dumping, countervailing, or safeguard measures. Table I.3. Non-tariff measures (NTMs): Mongolia and comparators (2000-2022) In force Initiation Mongolia 10 15 Sanitary and Phytosanitary 1 Technical Barriers to Trade 10 14 Aspirational Australia 404 1072 Anti-dumping 137 242 Countervailing 17 36 Quantitative Restrictions 178 178 Safeguards 3 Sanitary and Phytosanitary 40 462 Technical Barriers to Trade 32 151 Malaysia 104 259 Anti-dumping 56 90 Safeguards 4 6 Sanitary and Phytosanitary 9 47 Technical Barriers to Trade 35 116 Kazakhstan 37 170 Quantitative Restrictions 29 29 Safeguards 1 3 Sanitary and Phytosanitary 6 110 Technical Barriers to Trade 1 28 Structural Armenia 14 131 Safeguards 5 3 Sanitary and Phytosanitary 8 40 Technical Barriers to Trade 1 88 Lao PDR 12 16 Quantitative Restrictions 12 12 Sanitary and Phytosanitary 3 Technical Barriers to Trade 1 43 NTMs are classified into three categories: technical measures on imports, non-technical measures on imports, and export measures. Application of standard measures, however, faces many constraints, including numerous players with unclear roles and overly general regulations, as well as a lack of human and financial resources. Though many NTMs pursue primarily non- trade objectives, such as protecting public health or the environment, they may also act as obstacles to trade due to their heterogeneity, opacity and complexity, or to the cumbersome procedures that are imposed to enforce compliance. 44 The WTO database includes members’ notifications of their own NTMs as well as information on specific trade concerns raised by other members at WTO committee meetings. According to both the WTO SPS and TBT Agreements, countries must notify their NTMs to the WTO. 29 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC Vietnam 89 387 Anti-dumping 16 26 Countervailing 1 Safeguards 5 6 Sanitary and Phytosanitary 32 137 Technical Barriers to Trade 36 217 Source: WTO I-TIP. Note: Transparency of import and export regulations and procedures is lacking in Mongolia and detailed official information on NTMs is not readily available. While the WTO collects information on NTMs, detailed official information on NTMs is lacking in Mongolia. To date, the most comprehensive collection of NTM information at the product level is provided by a recent effort by international organizations. This has resulted in the Trade Analysis and Information System (TRAINS) database managed by UNCTAD, which is the most comprehensive database on NTMs for more than 110 countries, and Mongolia is not part of it. Also, note that NTM data reported by the WTO has three main weaknesses45. First, some countries do not notify their measures to the WTO and therefore some notifications are missing. Second, the information provided for some notifications is rather scarce. Finally, countries have no obligation to notify final NTMs; some notified measures may therefore have been amended before being implemented, or even not implemented at all. 6.2.Trade facilitation and connectivity Mongolia has undertaken important efforts to improve trade facilitation and modernize its customs procedures but there remain significant improvements to make. In 2016, Mongolia ratified the WTO Trade Facilitation Agreement, which provides a common and internationally agreed framework for the modernization and reform of all agencies working at the border46. However, the implementation rate as of June 2023, remains incomplete at 85.3 percent of the total planned.47,48 The full implementation of this agreement together with other paperless and cross-border trade facilitation measures (digital trade facilitation) is associated with nearly 15 percent trade cost reduction for Mongolia.49 To accelerate the implementation process Mongolia adopted a national trade facilitation roadmap and a national committee in 2017 to oversee the plan. 50 Mongolia’s ratification of the Framework Agreement on Facilitation of Cross-border Paperless Trade in Asia and Pacific in April 2022, was crucial to reduce trade costs by digitalizing export and import documents.51 52 However, Mongolia is still significantly behind in its commitment to the UN International Convention on the Harmonization of Frontier Controls of Goods (ratified in 2007), which stipulates to improve international transport, facilitate the movement of goods 45 Disdier and Fugazza (2021) 46 The WTO TFA technical provisions include articles on publication and availability of information, comments and consultations, advance rulings, procedures for appeal review, measures to enhance impartiality, disciplines on fees and charges, border agency cooperation, movement under customs control, trade transit formalities, freedom of transit and customs cooperation. 47 https://www.tfadatabase.org/en/members/mongolia 48 https://tfadatabase.org/en/notifications/implementation 49 UN ESCAP (2018). 50 Mongolia adopted the National Trade Facilitation Roadmap 2019-2025 and established the National Committee on Trade Facilitation Strategic Action Plan (2017) (WTO, 2021). 51 https://mfa.gov.mn/en/cross-border-paperless-trade-toolkit-launches-on-30-june-2022/ 52 Ratification of this agreement was estimated to reduce trade costs by 13 percent in Mongolia by coordinating e-data with other member countries and exchanging information. Source: https://montsame.mn/en/read/295624 30 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC across its border, and coordinate the various border control agencies, to ensure efficient clearance processing without compromising their effectiveness.53 Despite improvement in trade facilitation in recent years, there is room for improvement for Mongolia to catch up to its peers. Mongolia’s average trade facilitation performance has improved since 2017 most significantly in appeal procedures. A recent institutional reform which combined the inspections of the Customs and Specialized Inspections agencies at the border ports and created a mutual online system for declaration and recording, is also expected to have improved the cooperation of border agencies. 54 However, performance in several dimensions including advance rulings and automation are pulling Mongolia behind most of its peers (Figures I.26 and I.27).55 Only carriers permitted by the customs are transporting goods on customs roads under their control. Also, the working hours of public and private organizations are not coordinated. 56 Figure I.26. Mongolia lags in terms of Figure I.27. … reflecting weaknesses in advance ruling and trade facilitation performance … automation OECD TFI (2022 scores) OECD TFIs: Mongolia and comparators 2.0 Avg TF performance 11-Governance and 2 1-Information impartiality availability 1.5 10-External border 2-Involvement of 1.5 1 agency co-operation trade community 0.5 9-Internal border 0 3-Advance rulings agency co-operation 1.0 8-Procedures 4-Appeal procedures 7-Automation 5-Fees and charges 0.5 6-Documents Mongolia Armenia Azerbaijan Australia Kazakhstan Lao PDR Vietnam Source: OECD Trade Facilitation Indicators (TFI). Note: The TFI ranges between 0 to 2 (the best performance). See Table A13 in Annex for details. The recent improvement in the coordination of the Customs and Special Inspections agencies is not reflected. Longer hours needed to comply with documentary and border requirements resulted in less efficient cross-border trade. 57 The country’s performance in cross-border trade has not improved since 2015 and remains behind all structural and aspirational comparators. While the cost of doing cross-border trade is 53 IFC (2019). 54 A government decree was issued in January 2022. https://legalinfo.mn/mn/detail?lawId=16390051900521 55 OECD TFI (2022) http://www.compareyourcountry.org/trade-facilitation/en/1/MNG/MNG/default. 56 Time release study in Mongolia (IFC 2019). 57 Doing Business Trading across borders indicator captures the time and cost to (i) export the product of comparative advantage and (ii) import 15 metric tons of containerized auto parts (HS 8708) from its natural import partner. 31 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC low in Mongolia, it takes nearly 134-168 hours to meet the necessary documentary and border requirements for exports. This is 11-15 times longer than in Laos and Azerbaijan, 5 times longer than in Armenia and Malaysia, and 2-4 times longer than in Australia, Vietnam, and Kazakhstan. Similarly, the time for imports border compliance is also the longest in Mongolia, only faster than in Vietnam. The Logistics Performance Index report (2023) indicates improvements in customs clearance processes since 2018. In addition to delays at the border, weaknesses in infrastructure, tracing and tracking, and logistics competencies are keeping Mongolia behind its peers. There is still significant room to improve its performance on infrastructure and timeliness, as weaker infrastructure at both the border ports and road leading there, add significant costs to cross-border trading. In addition, performance in tracing and tracking the cargo, and poor logistics competence kept Mongolia behind most of its peers (Figure I.28). This is partly because the logistics companies in Mongolia are not able to fulfill market requirements as they lack the proper knowledge and experience. Delays due to these weaknesses add to deadweight costs, especially for smaller firms that have limited resources. Also, producers of agricultural and other perishable goods or goods that compete in just-in-time markets experience a direct detrimental effect on the value of the goods and the financial well-being of the companies sending or receiving the goods. Figure I.28. Mongolia's overall LPI performance is among the weakest among its peers Global ranking in terms of LPI Australia Malaysia Vietnam Kazakhstan Armenia Mongolia Lao PDR 140 120 100 80 60 40 20 0 LPI (overall) Customs Infrastructure International Logistics Timeliness Tracking and Shipments Competence and Tracing Quality Source: World Bank LPI (2023). Mongolia plans to increase the capacity of its dry ports, land ports, and airports under the NRP . To improve the infrastructure and promote competitiveness, the authorities plan to expand the Mongolian railway and highway network and expand airport capacity. The rail expansion plans include the construction of railroads at the Gashuunsukhait-Gantsmod and Shiveekhuren-Sekhee border checkpoints, as well as plans to construct cross-country railways, such as the 1200km western Artssuuri-Nariinsukhait, Shiveekuren railway, and the eastern 420km Choibalsan-Khuut, Bichigt railway (these are considered critical for commodity exports). 32 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC 7. Policy recommendations Creating more adequate and stable macro-economic conditions for trade development More counter-cyclical policies will create a more stable environment for the development of tradable sectors. Fiscal policies should aim to support stabilization (saving the resource windfall in good times and spending in bad times) while securing long-term sustainability using the existing stabilization and savings funds. This should be underpinned by institutional reforms to strengthen the independence of the Fiscal Stability Council and the Bank of Mongolia. Macroeconomic policy management should also allow greater exchange rate flexibility, while monetary policy is focused on anchoring inflation and addressing external imbalances.58 Improving participation of Mongolia in GVC The transition from exporting limited numbers of commodities to more sophisticated participation in GVCs has become increasingly demanding in terms of skills, connectivity, and regulatory institutions, and requires a multipronged strategy. 59 While GVC participation is often determined by factor endowments (land, labor, and capital), geography, market size, and institutions, policies also play an important role. The path toward greater integration into GVCs for a commodity exporter such as Mongolia will require government reforms and actions in a large range of social and economic areas. These include structural policies aiming at increasing the attractiveness to FDI, improving access to credit, enhancing the labor market dynamism, and promoting political stability. 60 Trade policy-related and connectivity measures (including improving ICT connectivity, see Chapter 2), mentioned below, will also support this transition. Figure A4 in Annex provides some examples of national policy that can support transitioning to more sophisticated participation in GVC. Adjusting tariffs on intermediate goods Lower tariffs on intermediate goods would lower the costs of intermediates, hence, enabling domestic producers to add more value to final goods for exports. Therefore, further reducing tariffs on intermediates is likely to have a positive impact on productivity. This will allow local producers and entrepreneurs to become more competitive, accelerating their integration into regional and global value chains. Collecting data on NTMs The GoM needs to collect and publish detailed data on NTMs in the country. The paucity of data on trade policy measures has been the main problem behind the study of the effects of NTMs (including non-tariff barriers), and this is also the case for Mongolia. The fact that NTMs are increasingly used to regulate 58 Mongolia Country Economic Memorandum – World Bank (2020b) 59 World Bank’s WDR (2020c). Trading for Development in the Age of Global Value Chains. 60 See the following World Bank reports for a detailed analysis of suggested structural reforms: Mongolia Country Economic Memorandum (2020b), Mongolia Jobs Diagnostic (2022a), and Mongolia Business Environment and Competitiveness Assessment Report (2022b). 33 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC international trade makes the need to update data even more compelling. Also, the lack of this data discourages trade as traders cannot accurately estimate their costs and therefore their profit margins. The reason behind the scarcity of databases on NTMs is largely related to the difficulty in collecting the data and in assembling consistent databases. Unlike tariffs, NTM data are not merely numbers; the relevant information is often hidden in legal and regulatory documents. Moreover, these documents are generally not centralized but often reside in different regulatory agencies. All these issues make the collection of NTM data a very resource-intensive task. Box A1 in Annex provides, in a nutshell, the guidelines to collect data on NTMs.61 Better data and information on NTMs is a first step to quantifying their restrictiveness and exploring regulatory reform aiming to diminish trade costs. Mongolia should collect detailed NTM data to be part of the Trade Analysis and Information System (TRAINS) database managed by UNCTAD, which is the most complete source of NTM data. 62 Enhancing logistics capacities Improving Mongolia’s logistics will reduce delivery costs and allow a larger range and volume of products to be profitable to access export markets. All other things equal, lower transport costs should allow the expansion of existing exports as well as the emergence of new export products, especially those where the cost of logistics plays a large role. It will also diminish the trade costs of imported intermediate inputs, which could have an impact on downstream producers using them. Enhanced infrastructure will help unlock the full potential of its tourism sector.63 Improving public investment management (PIM) will contribute to reducing the infrastructure gap and increasing the quality of infrastructure projects, helping reduce transport costs. The recent World Bank Public Finance Review for Mongolia (2023) provides specific recommendations to improve PIM and to better prioritize public investments. Complying with standards and product requirements Export opportunities in agribusiness could be increased with improved compliance on health and hygiene standards. Investment in quality infrastructure, e.g., conformity assessment, testing, inspection, and certification of Mongolian products conforming to the requirements of importing countries can be a tool to promote Mongolian exports, such as meat. Yet, a detailed financial analysis of the costs and benefits of different options for different value chains needs to be undertaken. Making the trade facilitation regime more predictable Reducing the time and costs associated with goods crossing the border will make it easier for domestic producers to become exporters. For this, some recommendations to improve trade facilitation and border management provided by a 2019 IFC study remain relevant64: (i) Address inconsistency in control and clearance procedures of the goods with the same categories, trade regime, and risk channels by undertaking benchmarking; (ii) introduce risk-based controls and sampling of goods in GASI/Customs through proper risk assessment and management practice; and (iii) develop the Authorized Economic Operator (AEO) procedure and introduce its implementation to reducing physical inspections. As more 61 For more information, refer to: https://unctad.org/webflyer/guidelines-collect-data-official-non-tariff-measures-2019-version 62 Indonesia’s successful experience in collecting NTM data can be found in World Bank (2023a). 63 World Bank’s InfraSap (2020a). 64 IFC (2019). 34 CHAPTER 1. A PARTIAL TRADE COMPETITIVENESS DIAGNOSTIC legal entities are authorized, greater opportunities to transport goods under customs control will emerge, reducing transportation time and costs. These measures can be complemented with steps recommended by a recent OECD study, including (i) further reducing the share of physical inspections; (ii) promoting preferential treatment for perishable goods concerning the separation of release from clearance; (iii) further simplifying procedures in terms of associated costs, and (v) fully adjusting the Customs working hours to commercial needs. 65 Box I.2. Mitigating the negative impacts of trade Although trade brings overall gains to households and is a driver of growth and poverty reduction, gains from trade do not accrue equally across and within countries, industries, jobs, and regions. Labor market and consumption gains tend to concentrate in some regions and among some groups. These concentrated impacts could persist because of steep adjustment costs (more so for vulnerable groups), and they are related to geographical barriers, policy distortions, and industry- and occupation-specific human capital. For instance, trade liberalization can produce benefits for the poor through lower prices, but these are often not fully passed on to consumers because of barriers related to geography, the market power of intermediaries, and the structure of domestic markets. In addition, most countries have reduced tariffs, but nontariff barriers, poor infrastructure, and other impediments to trade continue to be prevalent across developing countries, raising trade costs, and making it difficult to spread the benefits of trade. These impacts increasingly serve as an argument for protectionism and greater economic nationalism. Indeed, anti-trade attitudes have escalated in countries that have been unable to attract better export-oriented jobs or that offer little help for workers who experience trade- related dislocation.a Complementary policies are required to mitigate this negative impact. To maximize gains from openness to trade and ensure that adjustment costs are borne by society at large rather than by the few workers whose jobs are displaced, labor market adjustments that facilitate the reallocation of workers toward more productive activities should be made. They include policies aimed at facilitating the mobility of workers across sectors, such as providing training and relocation support, but also policies to support workers facing job losses, such as providing unemployment insurance and other social safety policies. The World Bank’s 2022 Mongolia Jobs Diagnostic provides a detailed analysis of these policies. Note: a See Engel et al. (2021) for a recent discussion on the distributional impacts of trade. 65 OECD Trade Facilitation Indicators 2022 edition. 35 CHAPTER 2. TRADE OPPORTUNITIES IN DIGITAL SERVICES Chapter 2. Trade Opportunities in Digital Services 1. Introduction The digital era provides a unique opportunity for landlocked countries like Mongolia – facing high transport costs and often inadequate infrastructure – to benefit from international trade and global value chains. No longer dependent on geography or physical resources, governments can leverage their human talent, innovation capacity, and institutional frameworks to compete on the global digital stage. Digital service exports, which have significantly outpaced other services and goods exports globally, have the potential to lift countries’ income levels.66 By developing its digital ecosystem systematically and strategically, Mongolia could reinvigorate economic growth, diversify its industries, and prepare its citizens for the jobs and opportunities of the future. The Government of Mongolia (GoM) has recently undertaken significant efforts to support digital transformation. Vision 2050 and the New Recovery Policy (2021-2030) emphasize digital development, recognizing the potential of fostering a thriving digital sector for the country's economic growth. 67 At the sectoral level, the National Digital Development Strategy of Mongolia (2022-2027) highlights six key policy objectives: digital infrastructure, e-governance, cybersecurity, digital literacy, innovation and production, and national development acceleration. Progress has been made particularly in the area of e-governance, including a five-year mission to build a "Digital Nation" by harnessing data and technology to facilitate innovation and improve public services, online platforms such as e-Mongolia (offering public services), Mindgolia (software procurement) and Shilen dans (open data for public procurement contracts). Other digital development areas have been supported by recent legislation since 2020 including public information, digital signatures, cybersecurity, and personal data protection. Despite recent progress, this chapter identifies substantial constraints to Mongolia’s digital transformation while proposing recommendations for boosting digital services exports. The chapter presents first the country’s current landscape of the information and communication technologies (ICT) industry and potential opportunities in global markets. Then, it analyzes the key constraints that the sector is facing and ends by presenting medium-term policy recommendations to promote digital services exports and help the GoM shape its sector strategy. A literature review, benchmarking assessment, a survey, and stakeholder interviews are used to obtain insights into Mongolia's digital services, infrastructure, skills, and regulatory environment.68 In addition to using structural and aspirational peers (see Chapter 1 for details) in the analysis, countries that have been successful in digital services exports were used to identify relevant best practices, strategies, and policies. The preliminary findings and policy 66 Digital services is defined as any international transaction delivered remotely through computer networks while ICT services are a subset of digitally delivered services, focusing on those related to information technology and communications infrastructure (OECD, 2020). Digitally delivered export services increased at an average of 8.1 percent annually during 2005-2022, currently representing 54 percent of global services exports (WTO, 2023). 67 Mulenga and Mayondi (2022) finds that a 1 percent increase in digital service exports increases per capita GDP by 0.88 percent, 0.78 percent, and 0.34 percent in developed, emerging, and developing countries, respectively. 68 A total of 29 stakeholders were surveyed (7 policymakers, 8 academics, 16 entrepreneurs from private firms and an official from a state-owned enterprise). The interviews covered 21 organizations (10 public organizations, 3 ICT industry associations, 6 private companies, 1 consulting firm, and 1 international development organization). 36 CHAPTER 2. TRADE OPPORTUNITIES IN DIGITAL SERVICES recommendations were shared with relevant stakeholders, including the Ministry of Economy and Development (MED) and ICT industry representatives, and the study incorporates the authorities’ feedback. 2. Mongolia’s ICT industry landscape and growth opportunities 2.1. Analysis of Mongolia’s ICT Firms Mongolia's ICT industry consists mainly of micro businesses delivering software development services domestically. The Ministry of Digital Development and Communications (MDDC) reported 2,255 businesses active in the ICT industry of Mongolia in 2021, of which 92.0 percent were micro, 3.9 percent were small, 2.2 percent were medium, and 1.9 percent were large. 69 Our analysis based on the Crunchbase database confirms the size of these firms in terms of the number of employees (Figure II.1).70 A significant portion of these firms are involved in a multitude of digital services, software development being a main area of activity (Figure II.2) and among the top earners (Figure II.3). Figure II.1. Mongolian ICT firms commonly employ Figure II.2. Firms are usually involved in a multitude of less than 100 employees digital services and software development Breakdown of firms by number of employees Percentage of Mongolian ICT companies engaged in digital services, by sector Multi Services 25% 5001 - Software 24% 10000 , 14% Telecomms 10% Digital Marketing 9% 1001 - 5000 , Fin-tech 9% 0 - 100, 14% 50% E-commerce 8% 501 - 1000, Web Development 8% 7% Cloud Computing 4% 101 - 250, Edu-tech 4% 14% Digital Media 3% Others (less than 3%) 21% Source: Authors’ analysis based on Crunchbase data for 2022. Mongolia's strength in digital services lies in software development, telecommunications, and digital marketing, with promising potential for growth and innovation. Beyond the profile of top earners revealed in Figure II.3, our interviews and surveys revealed that there are notable success stories in software development, e-commerce, digital marketing, and telecoms, highlighting the potential for high- earning ventures in these areas. Successful cases of firms exporting digital services include Fibo Global 69MDDC (2021). 70Crunchbase is a platform that gathers comprehensive information on companies globally by employing automated data collection methods and user-generated content. 37 CHAPTER 2. TRADE OPPORTUNITIES IN DIGITAL SERVICES (cloud service in Kazakhstan), Astvision (software development initiatives in Australia), and Infinite Solutions (IT services in the US, Singapore, and the Philippines). While on average Mongolian ICT firms were not able to raise much funding from abroad (out of the 70 firms, only six were able to raise a total of US$7.2 million in 2022) standout examples like Chimege Systems and World Plus Digital LLC have secured substantial funding (US$6.2 million). Figure II.3. Firms providing a multitude of services and software development are among the top earners in Mongolia Service categories of top revenue-earning ICT companies, in percent of ICT companies Multi Services 24% Software 20% Digital Marketing 16% Web Development 12% Fin-tech 12% Data Management 8% E-commerce 8% Edu-tech 8% Telecomms 8% Cloud Computing 4% Cybersecurity 4% Source: Authors’ analysis based on Crunchbase data. 2.2. Mongolia’s ICT services export performance compared to peers Compared to peers, Mongolia performs significantly weaker in exports of ICT services. Mongolia’s exports of ICT services in 2021 amounted to US$31.3 million (0.2 percent of GDP), lagging significantly behind its peers (Figure II.4). Several factors including geographic and cultural proximity to large markets, strong talent pool, excellent internet connectivity, and a strong diaspora network, put these countries ahead of Mongolia. For instance, leveraging its cultural and geographical proximity Moldova has experienced significant success in ICT service exports, with a fivefold increase over the past five years, primarily to EU countries.71 Among the structural peers Armenia also performs better in exports of ICT services, supported by a strong talent pool in mathematics and natural sciences, government support for the ICT sector, local universities, research institutions offering relevant programs, a significant presence of foreign-owned ICT firms, and government initiatives to support the high-tech industry. Figure II.4. Mongolia lags its peers in exports of ICT services ICT service exports recorded in the balance of payments as a percent of GDP 71 Moldova's success can also be attributed to its strong pool of ICT professionals, competitive salaries, and excellent internet connectivity. The Moldovan government has developed the Digital Moldova 2020 Strategy to support the growth of the ICT industry, especially in software development and internet services. 38 CHAPTER 2. TRADE OPPORTUNITIES IN DIGITAL SERVICES 3.0% 2.5% Mongolia Albania 2.0% Armenia 1.5% Azerbaijan Kazakhstan 1.0% Lao PDR 0.5% Malaysia 0.0% Moldova Source: Author’s estimation based on BOP statistics. 2.3. Growth opportunities for Mongolia in the trade of digital services The global digital economy is booming and creating opportunities in various sectors for digital service exports, including software development, business outsourcing, e-commerce, fintech, telemedicine, and education technology (see Box II.1). Building on its existing assets, Mongolia has the potential to expand its trade of digital services. Firstly, the youthful and growing population of Mongolia (approximately 59 percent of individuals are under 30) will likely be better acquainted with digital technologies, enabling faster skilling for jobs related to digital services. 72 Secondly, as mentioned in Section 1, the Mongolian government has prioritized the development of its digital economy. As a result, internet connectivity has improved, even though more needs to be done (see section 3). Fourthly, Mongolia's strategic location between China and Russia and proximity to Central Asia presents opportunities for trade in digital services within the region due to the limited time zone difference. Within the ICT industry in Mongolia, subsectors including the Internet of Things (IoT) 73, Public Cloud, Cybersecurity, eCommerce, and gaming markets show the most promise. Considering the global trend in demand for IoT smart devices, Mongolia’s level of digitalization, and the current exchange rates, the IoT sub-sector revenue is expected to grow at 12.1 percent (at CAGR) until 2028.74 Box II.1. Opportunities in the global market for Mongolian digital companies There is significant potential in the global market for a range of digital services. Opportunities lie in software development, e-commerce, digital media, fintech, telemedicine, edtech, and smart city development. 72 World Population Review (2023). 73 The Internet of Things (IoT) refers to the network of physical objects, or "things" that are embedded with sensors, software, and other technologies for the purpose of connecting and exchanging data with other devices and systems over the internet. 74 Estimation using Statista. https://www.statista.com/outlook/tmo/internet-of-things/mongolia#volume CAGR = compound annual growth rate. 39 CHAPTER 2. TRADE OPPORTUNITIES IN DIGITAL SERVICES Software development, particularly in engineering, enterprise resource planning, and human capital management indicates lucrative opportunities for Mongolian tech startups. Considering the global value of companies in this sector and their potential revenue growth, verticals like Engineering, ERP, and Human Capital Management (HCM) command high earnings before interest, taxes, depreciation, and amortization. The proliferation of AI and large language models (LLM) 75 provides opportunities for developing unique software solutions that can enhance Mongolia's industries, including mining, construction, agriculture, and livestock. Global e-commerce revenues are on an upward trajectory, with a significant contribution from the Chinese market. According to Statista, global e-commerce revenues will likely reach US$4.1 trillion in 2023 and grow at an annual rate of 11.5 percent thereafter. The Chinese market significantly contributes to this revenue, accounting for over a third of global revenues. With China, a major e-commerce player, being a close neighbor, learning from and potentially integrating into the Chinese digital marketplace could provide additional opportunities for Mongolian companies. For example, Gobi Cashmere reported sales revenues of MNT144.3 billion in 2021, of which MNT36.8 billion were overseas sales.76 The success of companies like Gobi Cashmere demonstrates the potential of e-commerce for Mongolian businesses. To leverage the potential of e-commerce in reducing regional trade barriers and expanding trade opportunities, policy actions should focus on bringing the current rules on e- commerce in line with international standards, improving coordination among multiple government agencies on e-commerce, strengthening the ICT infrastructure, and developing ICT skills are considered key to boosting Mongolia’s e-trade readiness.77 The global digital media and entertainment landscape is expanding at an unprecedented rate. The worldwide video gaming market is estimated at US$184.4 billion in 2022, with mobile games contributing US$92.2 billion, accounting for almost half of the total market. 78 Mongolia's digital media industry offers opportunities to export digital services in mobile gaming, animation, content localization, online video and music, tech support, co- productions, and tourism promotion. Currently, a few Mongolian startups developing mobile app games are already catering mostly to US consumers. The global value of cross-border payments and fintech industry revenues is increasing. According to Boston Consulting Group, the value of cross-border payments was estimated in 2017 to be $150 trillion. This figure was expected to surpass US$250 trillion by 2027 due to the increased digitization of the economy and international mobility of goods, services, capital, and people79. The global revenues of the Fintech industry are estimated to reach US$169.32 billion in 2023 and grow to US$294.5 billion by 2027 80 . However, Fintech companies must comply with the regulations of each country they operate, which can be complex and time-consuming. Failure to comply with regulations can result in fines, legal action, and damage to the company's reputation. Another challenge is data privacy and security. Fintech companies must ensure they comply with data protection laws in each country. Such compliance can be challenging as different countries have different data protection laws and regulations. The global market for telemedicine and e-health services provides lucrative opportunities, poised to expand nine-fold by 2030. Mongolia's initiatives in telemedicine and e-health have successfully utilized modern technology to address the country's geographical and infrastructural challenges in providing healthcare. The comprehensive initiatives cover mobile health services, telemedicine, artificial intelligence, and machine learning to optimize healthcare delivery, especially to rural and vulnerable populations. Cross-border telemedicine 75 LLMs are a type of artificial intelligence algorithm that use deep learning techniques and massive data sets to generate human- like responses to natural language inputs. 76 Gobi Joint Stock Company (2022). 77 UNCTAD (2023). 78 Wijman (2022). 79 Visa Economic Empowerment Institute (2022). 80 Statista database. 40 CHAPTER 2. TRADE OPPORTUNITIES IN DIGITAL SERVICES services hold significant potential between Mongolia and Central Asian countries, with factors such as geographic proximity, cultural similarities, shortages of health professionals, and successful pilot projects81. The EdTech market is experiencing robust growth , with North America leading in revenue, Asia Pacific fastest in growth, and a surge in venture capital and edtech unicorns. The global edtech market was valued at US$106.5 billion in 2021 and is projected to grow at an annual rate of 16.5 percent from 2022 to 2030, reaching US$404 billion by 2025. North America accounted for 35 percent of the global edtech revenue in 2021. The Asia Pacific region is expected to experience the fastest growth, with a CAGR of 19 percent from 2022 to 2030. The number of edtech unicorns82 has nearly doubled in the past two years and collectively holds a market value of US$105 billion83. Venture capital investment in edtech has grown substantially, increasing from US$500 million in 2010 to US$16.1 billion in 2021. Many venture investments have been directed toward professional or corporate education and upskilling initiatives. The international smart cities market is expanding, fueled by urbanization and tech investments to improve livability and sustainability. In 2022, the global smart cities market was estimated to be worth US$1,226.9 billion. It is projected to grow at a CAGR of 25.8 percent between 2023 and 2030. This growth is driven by rising urbanization, the need for energy efficiency, application of advanced technology and data analytics to enhance sustainability, improve city operations, address public safety, and boost the quality of life for citizens. These elements are significantly contributing to the expansion of the smart cities market 84. Several opportunities are arising with emerging technologies. These nascent technologies include Generative AI, Web 3.0, Digital twin, Metaverse, and Quantum cryptography. Box A2 in Annex provides details of these opportunities and how Mongolia can take advantage of these emerging technologies. 3. Key constraints in expanding Mongolia’s digital services exports Mongolia faces substantial challenges in digital transformation and exports of digital services. Mongolia ranked 74 out of 193 countries in the UN eGovernment Survey 2022 and 71 out of 172 countries in overall talent competitiveness.85 Also, Mongolia is classified in the C category of the Digital Transformation Index, reflecting some progress in digital transformation but still significant challenges regarding ICT infrastructure, affordability, business environment, skills and innovation, and social inclusion.86 Limitations regarding digital infrastructure, mobile connectivity, network latencies, cybersecurity, and access to data Mongolia’s telecommunications infrastructure, internet penetration87, and data costs have significantly improved. Mongolia’s global ranking in the Telecommunication Infrastructure Index 2022 was 74 out of 193 countries and its internet penetration rank was 92 out of 148 countries in 2021. As for data costs, 81 Gupta et al. (2019). 82 Unicorns are privately held startups valued at over US$1 billion. 83 Yelenevych (2022). 84 Grand View Research (2023c). 85 The Global Talent Competitiveness Index (2022). 86 Jun et al. (2022). 87 Percent of population that has access to internet. 41 CHAPTER 2. TRADE OPPORTUNITIES IN DIGITAL SERVICES Mongolia ranked 43 out of 233 countries with an average price of 1 GB of data at US$0.67 in 2022 (Israel ranked first with an average price of US$0.04).88 Substantial progress was made in digital infrastructure and access, reaching 100 percent network coverage for mobile-cellular networks and 99 percent population coverage by at least a 4G mobile network.89 Since 2017, Unitel and Mobicom have extended 4G mobile broadband extensively to every soum, with some base stations providing service to surrounding baghs and herder areas for up to 30 Km. There is now high mobile phone ownership in the country, with 94 percent of individuals owning a mobile phone in 2021. Despite high mobile phone ownership and active mobile broadband subscriptions, there remain barriers to ICT access, especially in rural areas. Only 25 percent of rural households have internet access at home, highlighting that Mongolia still has work to expand its digital infrastructure and ensure ICT access for all citizens. Meanwhile, the internet speeds are relatively slow, and its digital infrastructure is less developed than in many other countries, including its peers. Mongolia ranked 109 out of 180 countries on its median speed for mobile and 75 for fixed broadband speeds in March 2023. These data speeds make it difficult for businesses to access the internet and develop digital services.90 Moreover, Mongolia ranks 83 out of 170 countries on the GSMA Mobile Connectivity Index for 2022, reflecting constraints regarding handset prices, online security, and spectrum issues.91 High network latencies pose challenges for specific applications, particularly in real-time or interactive cloud workloads. Network latency on the international terrestrial networks connecting Mongolia ranges from 109 to 146 milliseconds. Such high latencies on international terrestrial networks limit performance on real-time applications such as online gaming and video conferencing, swift execution of trades in financial markets, cloud services, and efficient functioning of IoT devices.92 Cybersecurity capabilities are weak as well. Mongolia ranks 120 out of 182 countries on International Telecommunication Union (ITU)’s Global Cybersecurity Index 2020. In particular, there is significant room for improvement in terms of capacity development and organizational measures (Figure II.5). Figure II.5. Mongolia performs poorly in cybersecurity Mongolia’s ratings on ITU’s Global Cybersecurity Index 2020 (overall score on subcomponents = 26.2/50) 88 Cable.co.uk (2022). 89 ITU (2023). 90 Mongolia's mobile internet had a median download speed of 18.39 Mbps and a median upload speed of 7.61 Mbps, with a median latency of 23 milliseconds (ms). The fixed broadband networks boasted a median download speed of 54.49 Mbps and a median upload speed of 34.37 Mbps, with a considerably lower median latency of just four milliseconds (Speedtest, 2023). 91 GSMA (2022). 92 Du and Majoor (2023). 42 CHAPTER 2. TRADE OPPORTUNITIES IN DIGITAL SERVICES Legal measures 10 8 6 Cooperative 4 Technical measures measures 2 0 Capacity Organizational development measures Source: ITU Global Cybersecurity Index 2020. Note: Higher score indicates stronger performance. Limited scale and availability of data also represent bottlenecks for the digital sector’s development, including artificial intelligence. To begin with, the relatively low population of Mongolia, roughly 3.45 million as of 2023, makes data collection and analysis more difficult because there simply are not as many data points to draw from in the domestic market as in larger countries. Furthermore, the absence of mature data markets means that companies and industries often lack access to data that could otherwise help them make more informed decisions, understand market trends, and develop AI solutions, especially for international markets. Talent constraints Mongolia faces significant constraints concerning the availability of skills and talent for the digital services sector. According to the EF English Proficiency Index, Mongolia has a low level of English proficiency, with a score of 485 out of 700. This score places Mongolia at 72 out of 111 countries ranked in the index93. Further, the Global Talent Competitiveness Index 202294 ranked Mongolia at 71 out of 172 countries. Surveys of the tech industry in Mongolia rate the lack of skills as one of the highest constraints as well (Figure II.6). Our interviews and survey results indicate that the lack of communication and coordination between industry and academia exacerbates this skills gap in the digital domain. There are no formal mechanisms or platforms to identify employers' demand for specific digital and ICT skills. Universities and training institutions design their programs based on broad trends rather than the specific needs of the digital services market. Figure II.6. Employers find it difficult to hire technical staff with adequate skills Difficulties in hiring technical staff based on a survey of employers 93 EF Education First (2022). 94 Lanvin & Monteiro (2022). 43 CHAPTER 2. TRADE OPPORTUNITIES IN DIGITAL SERVICES Lack of skills 21.5 Unwillingness to stick to company 20.8 Lack of a positive attitude to learning and development 16.6 Salary not acceptable 12.1 Unhappiness with working conditions 8 Lack of foreign language skills 6.9 Other 3.8 No problems 3.8 Not interested to work locally 3.5 Inadequate education 3.1 % of respondents 0 5 10 15 20 25 Source: MDDC, 2021. Embryonic startup ecosystem The startup ecosystem is showing some sign of promise, but it is still in its nascent stages. According to the Mongolian Startup Ecosystem Survey, 95 there are a total of 80 startups creating 1318 jobs in the economy, with an estimated total value of MNT452 billion (US$131 million or 0.8 percent of GDP). Most startups have emerged in the last three years, primarily in edtech, AI, big data, and analytics. The ecosystem is still in its early stages, with no unicorns and few startups securing Series A funding (equity- based financing is considered the first major round of external funding startups can raise). The government lacks institutional clarity for the promotion of digital services startups. For example, the following ministries have overlapping roles in promoting startups in Mongolia: The MDDC, the Ministry of Education and Science (MEDS), and the MED. Legal environment Despite recent progress, the regulatory environment may be still limiting the digital sector’s development. Our surveyed and interviewed participants highlighted the need for improving intellectual property regulations, developing data protection regulations, assessing market access and barriers, promoting fair competition, enhancing international data gateways, providing clear guidelines and information, and strengthening data protection and legal frameworks. These regulatory deficiencies are likely to constrain opportunities with international investors in the sector. A global survey of investment decision-makers in 310 technology and digital firms indicates that the top three factors that investors care about when investing in new digital activities are data security regulations, copyright laws to protect intellectual property rights, and data privacy regulations.96 4. Policy recommendations 4.1. Development of digital infrastructure Communications infrastructure 95 JICA (2022). 96 WEF (2020). 44 CHAPTER 2. TRADE OPPORTUNITIES IN DIGITAL SERVICES Mongolia would benefit from improving its communication infrastructure to enhance data speeds and reduce network latencies, especially for its international terrestrial networks. The World Broadband Association’s (WBBA) roadmap for 2030 recommends that leading operators work toward networks capable of residential speeds of up to 50 Gbps and enterprise speeds of up to 3.2 Tbps97, providing fiber connectivity to individual sensors and being fully autonomous. The future of telecom is also expected to be transformed by emerging technologies such as quantum technologies and the exponential growth of structured and unstructured data (see Annex 1 for opportunities in emerging technologies). National blockchain infrastructure Blockchain technology has the potential to transform the export of digital services. By offering a secure and transparent platform for transactions, it can reduce costs, enhance efficiency, and improve compliance across various industries. As blockchain technology develops, its impact on the global economy is expected to grow. Industries such as music, gaming, and healthcare already benefit from more secure and transparent systems for royalty distribution, in-game transactions, and sharing medical records. By tracking ownership, transfer, and accessibility, blockchain is poised to play an increasingly important role in the digital world. Several countries have launched public blockchain infrastructure initiatives including the Blockchain Service Network (BSN)98 of China and the European Blockchain Services Infrastructure. Recently India has drafted a National Strategy on Blockchain outlining a roadmap for adoption99. Mongolia could consider establishing its national blockchain infrastructure. Mongolia’s National Data Center and Disaster Recovery Center could be added as nodes. In addition, Mongolian telecom companies could be co-opted as partners for the infrastructure. 4.2. Development of talent Digital Skills Observatory There are several labor market-related initiatives internationally, including the EU's Skills Panorama, OECD Skills for Jobs Database, ASEAN Labor Market Information System (ALMIS), Gulf Labor Observatory, International Observatory of Digital Life, Colombia Skills Council's observatory, and the World Economic Forum Jobs Reset Observatory. These observatories collect and analyze data related to job vacancies, skill requirements, imbalances, and mismatches. Their insights guide policymaking, support job transitions, and inform their regions' workforce planning, skills development, and digital economies. Aspirational international examples that monitor skills gap and information on labor markets include Singapore’s SkillsFuture, the US Department of Labor's Occupational Information Network (O*NET), and the European Skills and Jobs Survey of the European Centre for the Development of Vocational Training (Cedefop). Mongolia could consider establishing a digital skills observatory that systematically tracks the demand for skills relevant to digital services export. The observatory could be established in partnership with one 97 Terabytes per second is a measure of data transmission rate, equivalent to 1,000 gigabytes per second. 98 BSN Global (bsnbase.io). 99 Government of India (2021). 45 CHAPTER 2. TRADE OPPORTUNITIES IN DIGITAL SERVICES or more leading academic institutions and the private sector. Mongolia is establishing the University of Mongolia Academy of Sciences (UMAS), focusing on project-based learning (i.e., working on actual projects). A dedicated unit could be set up as part of this university. The observatory could be equipped with data analytics capabilities to track skills demand in labor markets and monitor emerging technologies. By doing so, Mongolia could be better equipped to develop a future-ready workforce for its digital services sector. Work-based learning program for digital services skills Mongolia can create an educational program that provides technical education on in-demand skills and connects students with work-based learning opportunities. Similar to the model of Ecole 42 in France, the unit would not require formal degrees or qualifications for admission, allowing access to a broader talent pool.100 The curriculum would emphasize peer mentorship, collaboration, and hands-on project work, fostering technical and soft skills. In addition, it can connect young individuals and mid-career professionals seeking to transition into digital roles to work-based learning opportunities in companies within and outside Mongolia. Opportunities in the remote delivery of services The gig economy's expansion, facilitated by digital platforms, has contributed significantly to the remote delivery of digital services. This trend has accelerated, particularly during the COVID-19 pandemic, as businesses shifted their operations online, leading to a surge in demand for digital services and, thereby, more opportunities for gig workers. The iLabour Project at Oxford University’s101 estimates suggests that in 2020, there were around 163 million registered user accounts globally, with 8.6 percent having worked at least once and 2.0 percent qualifying as full-time workers. Using the midpoints of their uncertainty estimates, the researchers estimate about 14 million active workers and 3.3 million full-time workers in the online freelance space. High-paying remote jobs Mongolia could explore collaborations with online job platforms such as Upwork to pinpoint high- paying job opportunities and identify skills in high demand or scarce supply102. The UMAS could consider setting up training initiatives and partnering with other academic establishments and the private sector to ensure Mongolians can take advantage of these opportunities. If suitable courses for the necessary skills are lacking, UMAS could locate relevant training programs from Massive Open Online Courses and other academic institutions and help integrate micro-credentials from external training sources into regular courses offered by Mongolian educational institutions to enhance learning. Knowledge Process Outsourcing 100 This school provides free technical education focusing on in-demand skills. It emphasizes a project-based, peer-to-peer learning approach that does not require formal degrees or qualifications for admission. Students learn programming and other ICT skills by working on real-world projects, with the school also fostering partnerships with tech companies to provide internships, job opportunities, and practical project experiences. 101 Stephany (2021). 102 Digital platforms like Upwork, 99designs, Kabanchik, Freelancer, Catalant, TopCoder, and Fiverr offer remote jobs. 46 CHAPTER 2. TRADE OPPORTUNITIES IN DIGITAL SERVICES Mongolia can build digital services industry for the mining sector following Chile's success story in developing its capabilities in engineering services based on its mining industry. Starting from the nineties, Chile emerged as a premier hub for mining engineering services, thanks to the influx of international mining companies. These companies brought along their significant engineering partners to set up operations in Chile. Initially providing lower-value design drawings, these firms progressively built their capacities and established a strong local presence. They established Centers for Excellence for the copper industry based in Chile, serving as lead offices for developing copper projects worldwide103. Based on mining, we find some Mongolian companies offering consulting services internationally. One example is Trigteq104, a U.S.-established, Mongolian-owned company offering geological and mining engineering consultation services. Founded in 2013, Trigteq provides advanced geological software and products from leading mining countries like Australia, Canada, and the U.S. to clients in Central Asia, Korea, China, and Mongolia. As international mining companies tap into Mongolia's rich mineral resources, they could be encouraged to bring along their engineering partners and establish local operations and centers of excellence. In addition, knowledge and skills gained at the Oyu Tolgoi mine, especially the underground mine project, can also be leveraged to build a strong digital service industry for Mongolia. 4.3. Expanding cross-border cooperation and interconnectedness Integration to Digital Economy Partnership Agreements Digital partnership agreements (DPA) can play a crucial role in promoting trade in digital services by fostering greater interconnectedness between the digital economies of partner countries. DPAs, such as the Singapore's Digital Economy Partnership Agreement (DEPA) 105 and the EU-Singapore Digital Partnership 106 , can facilitate paperless trade and enable secure cross-border payments, supporting traditional financial institutions and emerging fintech firms. These agreements also enhance the interoperability of digital services and encourage the free flow of data across borders while ensuring personal data protection, fostering an environment conducive to data-driven innovation. In addition to trade cooperation agreements including digital services 107 , Mongolia could consider entering into specific digital partnership agreements. Considering the potential of digital partnership agreements for promoting trade in digital services, it would be advantageous for Mongolia to engage in digital partnership agreements with a range of countries (preferably with advanced countries) that could potentially spur its digital economic growth and global economic integration. Helping Mongolian companies comply with international regulations 103 Fernandez-Stark et al. (2009) 104 https://trigteq.com/en 105 The DEPA between Singapore, Chile, and New Zealand is an agreement to establish a cooperative framework for facilitating digital trade and addressing issues emerging from digitalization (Chile NZ Singapore, 2020). 106 This partnership aims to support cross-border data flows with trust through model data protection contracts and emerging technologies. It includes provisions on non-discrimination in trade-related matters, including tariffs, non-tariff barriers, services, investment, intellectual property rights, government procurement, and sustainable development (EU & Singapore, 2023). 107 The Comprehensive Partnership and Cooperation Agreement between Mongolia and the EU has references to digital services. The cooperation involves a comprehensive dialogue on data privacy, regulation, regulatory authorities, cybersecurity, standardization and dissemination of new technologies and joint research projects. 47 CHAPTER 2. TRADE OPPORTUNITIES IN DIGITAL SERVICES Companies exporting digital services from Mongolia are increasingly subject to critical regulatory requirements that apply to digital exports. Two prominent examples of such regulations are the GDPR 108 and the DSA109 in the EU110. The GDPR sets out strict data protection and privacy rules, while the DSA establishes obligations for online intermediaries. Complying with these regulations is crucial for Mongolian companies to access and operate in the EU market effectively. Given the complexity and evolving nature of international regulations, it would be advisable for the Mongolian government to support and assist these companies in understanding and meeting the compliance requirements. For Mongolian companies exporting digital services to the EU, compliance with the DSA will be essential. They must ensure the timely removal of illegal content and implement measures to protect users' fundamental rights. Additionally, Mongolian companies must familiarize themselves with the specific obligations outlined in the DSA based on the type and classification of their intermediary services. Compliance requirements may include implementing efficient content moderation systems, establishing clear user complaint policies and procedures, and providing transparency in data usage and algorithms. Mongolia can facilitate collaboration between local academic institutions, the private sector, and government agencies to develop training programs for companies to comply with international regulations, including GDPR and DSA. This collaborative approach will enable Mongolian companies to enhance their data protection practices, stay updated on GDPR and DSA requirements, and demonstrate their commitment to compliance when serving European Union markets. Ultimately, this partnership will foster digital readiness and innovation within Mongolian companies, positioning them competitively in the global market for digital services. Cross-border exchanges of data for government service delivery Mongolia could develop cross-border data exchange to improve public service delivery. Estonia’s X-Road infrastructure is an excellent example of a system that supports cross-border data exchange through federation.111 This system allows members of the federated ecosystems to interact and exchange services as though they were part of the same ecosystem, using the same Security Server for national and cross- border exchanges. Federation connections can be established with multiple X-Road ecosystems. Case studies, such as cross-border interoperability between the business registers of Estonia and Finland and real-time data exchange on taxation, illustrate the practical applications of the federation. There is an opportunity for Mongolia to further develop the e-Mongolia (a platform for digital government services) using architectures and approaches that could potentially be leveraged for other governments in the region. Note that e-Mongolia is already implementing X-Road with support from Estonia. 108 The GDPR is a comprehensive privacy regulation to protect the personal data of individuals in the EU. Companies exporting digital services to the EU must comply with GDPR. It also restricts transferring personal data outside the EU, requiring companies to follow specific mechanisms for lawful data transfers. Failure to comply leads to significant fines and penalties. 109 The DSA applies to Business-to-business and Business-to-client providers of digital intermediary services, including platforms providing access to goods, services, and content. It emphasizes the removal of illegal contents and protecting users' fundamental rights online and establishes a transparency and accountability framework for online platforms. 110 The EU has the most advanced regulatory regime for the digital economy and represents an international reference. 111 X-Road (2023). 48 CHAPTER 2. TRADE OPPORTUNITIES IN DIGITAL SERVICES Collaborations with academic institutions abroad as listening posts Mongolia could actively seek partnerships with international academic institutions to create an international market intelligence network. This network could include listening posts stationed in global technology and financial hubs. These listening posts could track and analyze market trends, regulatory changes, emerging opportunities, and potential threats for Mongolian companies. An example of this approach is the partnership between Chile and the Thunderbird School of Global Management (Arizona, US).112 Similarly to this, a two-way exchange would provide Mongolian interns valuable global exposure and skills and bring international perspectives to Mongolia's digital scene. 4.4. Promoting private sector initiatives Assessments of Digital Services Companies Mongolia could develop an assessment tool specifically targeted at companies engaged in the export of digital services. The tool could evaluate digital maturity across multiple dimensions tailored to companies exporting digital services' unique needs. These could include, for example, their digital infrastructure and operations, cross-border data compliance, digital financial transactions and risk management, innovation, and scalability, customer experience management in a global context, and digital marketing and communication strategies. Such a tool would provide valuable insights for Mongolian businesses looking to improve their digital capabilities and facilitate Mongolia's efforts to enhance its global digital economy competitiveness. For instance, Korea used certification schemes including VentureBiz, InnoBiz, and MainBiz to enable firms to signal quality to the local and global markets, lower their cost of capital, signal quality to labor markets, and receive benefits from government tax incentives or financial incentives. A hybrid approach to the assessment could be adopted by combining self-assessment with an independent review by a specialized organization. Such an approach would allow Mongolian companies engaged in exporting digital services to gain a comprehensive and accurate understanding of their digital maturity while also benefitting from the expertise and impartiality of an independent assessment body. Data availability for the private sector To overcome the issue of limited data availability due to a small population and to enhance data accessibility for the private sector, the GoM might consider developing a comprehensive policy centered around data. This policy could include a regulatory framework overseeing various data markets, e.g., personal data marketplaces that allow individual users to monetize their data, IoT and data streaming platforms catering to technology-driven businesses, and decentralized data markets that ensure data exchange efficiency and transparency. The policy could include the creation of a data exchange platform, prioritizing key sectors akin to the European data spaces model. The government could also consider measures to encourage synthetic data, cross-market interoperability, and data standards, thereby improving data access while upholding data quality and security across all platforms. 112The official contract was to provide consulting services, setting up a consulting workshop and an internship program. Students with relevant skills worked on market research and industry projects and interned at CORFO's high-technology investment office in Chile. 49 CHAPTER 2. TRADE OPPORTUNITIES IN DIGITAL SERVICES The GoM could take steps to promote public-private and research partnerships with academic institutions as part of a national program on synthetic data that companies can use to export digital services. The synthetic data initiative could be anchored at the National Data Center or the e-Mongolia Academy with support from the Mongolian Academy of Sciences, which has the Institute of Mathematics and Digital Technology under its wing. Companies like Gerege Systems, Interactive, and others that handle government data could be engaged as part of the initiative. Besides, MDDC and MEDS could jointly incentivize startups engaged in synthetic data. Startup ecosystem Mongolia might want to consider establishing a clear institutional anchor for digital startups. Just as Startup SG is part of Enterprise Singapore, a statutory board under Singapore's Ministry of Trade and Industry, and represents the shared interests of Singapore's startup community, Mongolia could benefit from a similar institution that can centralize support and provide a unified voice for its digital startup industry. The Singapore government has set up various programs to support startups, investors, and incubators. Among these programs are Startup SG Talent, which helps attract international entrepreneurs; Startup SG Founder, offering venture building, mentorship, and startup capital; Startup SG Tech, which provides funding for the commercialization of proprietary technology; Startup SG Accelerator, offering mentorship and guidance; and Startup SG Equity, providing co-investment opportunities for investors. A loan scheme for startups, also known as Startup SG Loan, is provided through the Enterprise Financing Scheme. Thanks to these proactive government policies, Singapore's technology startup ecosystem has grown significantly.113 4.5. Capacity building within the government Boosting the capacity of GoM to support its private sector in exporting digital services is essential and requires a multifaceted approach. A primary element of this approach should be fostering closer coordination with the private sector. The government must enhance its dialogue with digital service providers, technology firms, and start-ups to understand their needs, challenges, and potential growth areas. This liaison can lead to more effective policies and regulations tailored to enhance the competitiveness of digital service companies on the global stage. The government could also build robust capabilities in horizon scanning - systematically exploring and interpreting potential future opportunities and threats in the digital service sector. This predictive analysis will enable Mongolia to be better prepared for dynamic global market trends and technological shifts. Tracking opportunities globally should also be an integral part of this capacity enhancement strategy. It would involve the government actively monitoring international markets and seeking potential partnerships, trade agreements, and business relationships that could facilitate the entry and growth of Mongolian digital service providers. By integrating these elements into its approach, the Mongolian government can effectively bolster its capacity to support the private sector's export of digital services. 113 Pangarkar and Vandenberg (2022) 50 ANNEX Annex Annex of Tables Table A1. Mongolia: merchandise exports by industry and sector US$ million Percent of goods exports Growth (CAGR), percent NRCA* 2010 2016 2021 2010 2016 2021 2010- 2016- 2019- 21 21 21 Industry Agriculture 48 140 259 1.5% 3.0% 3.1% 16.6% 13.1% 20.8% Extractive** 2836 4106 7461 91.5% 88.3% 90.8% 9.2% 12.7% 3.8% Manufacturing 266 268 229 6.9% 8.6% 6.1% 8.0% 4.5% 5.2% Sector avg1012 avg1921 25-26 Minerals, of 1364 2061 4092 44.0% 44.3% 49.8% 11% 15% 17% 0.57 0.54 which: 2603 Copper ores and concentrates. 895 1641 3072 28.9% 35.3% 37.4% 12% 13% 31% 27 1210 1275 2312 39.1% 27.4% 28.1% 6% 13% -13% 0.18 0.39 Hydrocarbons/Fuels, of which: 2701 Coal; briquettes, ovoids and similar solid fuels manufactured from coal. 1028 993 2002 33.2% 21.4% 24.4% 6% 15% -19% 68-71 Stone/Glass, 262 771 1060 8.5% 16.6% 12.9% 14% 7% 19% 0.21 0.55 of which: 7108 Gold (incl. gold plated with platinum) unwrought or in semi- manufactured forms, or in powder form. 261 769 1054 8.4% 16.6% 12.8% 14% 7% 30% 50-63 Textiles, 143 220 324 4.6% 4.7% 3.9% 8% 8% 6% 0.03 -0.13 Clothing 5102 Fine or 89 160 263 2.9% 3.4% 3.2% 10% 10% 17% coarse animal hair, not carded or combed. 06-15 Vegetable 1 100 175 0.0% 2.2% 2.1% 54% 12% 92% -0.96 -0.74 72-83 Metals 39 115 144 1.3% 2.5% 1.7% 13% 5% 6% -0.76 -0.57 16-24 Foodstuffs 3 6 49 0.1% 0.1% 0.6% 28% 51% -3% -0.93 -0.52 01-05 Animal 43 34 35 1.4% 0.7% 0.4% -2% 1% -20% -0.46 -0.58 84-85 Mach/Elec 4 22 14 0.1% 0.5% 0.2% 11% -9% 15% -0.98 -0.99 41-43 Hides, Skins 17 19 7 0.6% 0.4% 0.1% -8% -19% -12% 0.11 -0.63 90-97 Miscellaneous 3 5 3 0.1% 0.1% 0.0% 2% -6% -10% -0.94 -0.98 86-89 2 10 3 0.1% 0.2% 0.0% 4% -23% 27% -0.90 -0.95 Transportation 64-67 Footwear 2 1 2 0.1% 0.0% 0.0% 3% 13% 9% -0.91 -0.98 28-38 Chemicals 1 3 2 0.0% 0.1% 0.0% 11% -11% -27% -0.99 -0.98 39-40 Plastic / 4 5 1 0.1% 0.1% 0.0% -9% -25% -12% -0.93 -0.99 Rubber 44-49 Wood 1 1 1 0.0% 0.0% 0.0% 1% -10% -28% -0.97 -0.98 Total 3097 4648 8222 100% 100% 100% 9% 12% 4% Source: Author’s estimation using the UN Comtrade data. 51 ANNEX Note: *NRCA – Normalized Revealed Comparative Advantage; ** The extractive industry includes minerals (HS 25- 26), fuels (HS 27), and precious metals (HS 71). The manufacturing industry includes HS28-70 and HS72-97 codes. The year 2016 was chosen as the mid-year partly because Mongolia signed several trade agreements as an exporter such as with KGZ, ARM (2015), BLR/KAZ/RUS (2016), and EPA with JPN (2016). Table A2. Top 10 export products at 4-digit level, 2021 US$ million Percent of goods Growth (CAGR), percent exports 2010 2016 2021 2010 2016 2021 2010- 2016- 2019-21 21 21 2603 Copper ores and concentrates. 895 1641 3072 28.9% 35.3% 37.4% 11.9% 13.4% 30.7% 2701 Coal; briquettes, voids and similar solid 1028 993 2002 33.2% 21.4% 24.4% 6.3% 15.1% -19.3% fuels manufactured from coal. 7108 Gold (including gold plated with 261 769 1054 8.4% 16.6% 12.8% 13.5% 6.5% 29.9% platinum) unwrought or in semi- manufactured forms, or powder form. 2601 Iron ores and concentrates, including 222 203 618 7.2% 4.4% 7.5% 9.8% 24.9% 20.4% roasted iron pyrites. 2709 Petroleum oils and oils obtained from 163 280 293 5.2% 6.0% 3.6% 5.5% 0.9% -10.1% bituminous minerals, crude. 5102 Fine or coarse animal hair, not carded or 89 160 263 2.9% 3.4% 3.2% 10.4% 10.4% 17.1% combed. 802 Other nuts, fresh or dried, whether 1 76 166 0.0% 1.6% 2.0% 63.4% 17.0% 1202.3% shelled or peeled. 2613 Molybdenum ores and concentrates. 69 36 131 2.2% 0.8% 1.6% 6.0% 29.4% 37.7% 7403 Refined copper and copper alloys, 35 105 131 1.1% 2.3% 1.6% 12.6% 4.4% 9.8% unwrought. 2529 Felspar; leucite, nepheline, and 83 49 104 2.7% 1.1% 1.3% 2.1% 16.1% -7.6% nepheline syenite; fluorspar. Table A3. Main export destinations, 2021: China accounts for 84 percent of the export market share US$ million Percent of goods exports Growth (CAGR), percent 2010 2016 2021 2010 2016 2021 2010-21 2016-21 2019-21 China 2550 3621 6896 82.3% 77.9% 83.9% 9.5% 13.8% 4.4% Switzerland 1 772 1057 0.0% 16.6% 12.9% 85.1% 6.5% 30.0% Asia excl. China 87 125 117 2.8% 2.7% 1.4% 2.7% -1.3% -8.6% EU27 68 72 78 2.2% 1.5% 0.9% 1.2% 1.5% -6.7% Russia 79 36 43 2.6% 0.8% 0.5% -5.4% 3.7% 13.2% America 246 11 20 7.9% 0.2% 0.2% -20.4% 13.1% 13.9% ROW 66 12 10 2.1% 0.3% 0.1% -15.5% -3.1% -14.3% Table A4. Kaplan-Meyer export survival estimates by year 1 2 3 4 5 6 7 8 9 10 11 12 VNM 0.64 0.50 0.44 0.40 0.37 0.35 0.33 0.31 0.30 0.30 0.29 0.29 ARM 0.58 0.45 0.37 0.32 0.29 0.26 0.25 0.24 0.23 0.22 0.22 0.22 MYS 0.58 0.44 0.37 0.32 0.29 0.27 0.25 0.24 0.22 0.21 0.21 0.21 AUS 0.51 0.36 0.29 0.25 0.22 0.20 0.19 0.18 0.17 0.16 0.15 0.15 LAO 0.50 0.35 0.28 0.23 0.20 0.17 0.15 0.15 0.14 0.13 0.13 0.13 AZE 0.49 0.33 0.26 0.23 0.20 0.17 0.16 0.14 0.13 0.12 0.12 0.12 MNG 0.46 0.31 0.24 0.20 0.18 0.16 0.15 0.14 0.14 0.13 0.12 0.12 KAZ 0.42 0.26 0.19 0.14 0.11 0.09 0.07 0.06 0.05 0.04 52 ANNEX Table A5. Kaplan-Meyer export survival estimates by export destination After After After After After After After After After After Year1 Year2 Year3 Year4 Year5 Year6 Year7 Year8 Year9 Year10 Japan 0.72 0.50 0.42 0.38 0.31 0.26 0.26 0.26 0.26 China 0.68 0.54 0.41 0.34 0.33 0.32 0.31 0.28 0.28 0.27 Russia 0.58 0.38 0.29 0.24 0.24 0.22 0.22 0.18 0.14 Korea, Rep. 0.52 0.36 0.29 0.25 0.23 0.20 0.20 0.20 0.13 EU27 0.44 0.28 0.25 0.19 0.17 0.14 0.12 0.11 0.11 0.10 America 0.37 0.24 0.16 0.14 0.12 0.09 0.06 Asia (excluding 0.33 0.18 0.12 0.08 0.06 0.06 0.05 0.05 0.03 CHN, KOR, & JPN) ROW 0.32 0.20 0.16 0.15 0.13 0.10 0.09 Table A6. Goods imports at 4-digit HS product level per top sector (US mln) sector1 hs4 hs4descr avg0204 avg1921 27 Fuels 2710 Petroleum oils and oils obtained from bituminous minerals, other 148 974 than crude; preparations not elsewhere specified or included, containing by weight 70 % or more of petroleum oils or oils obtained from bituminous minerals, these oils being the basic con 2716 Electrical energy. (optional heading) 5 151 2711 Petroleum gases and other gaseous hydrocarbons. 0 16 2713 Petroleum coke, petroleum bitumen and other residues of 3 15 petroleum oils or oils obtained from bituminous minerals. 2715 Bituminous mixtures based on natural asphalt, on natural bitumen, 0 1 on petroleum bitumen, on mineral tar or on mineral tar pitch (for example, bituminous mastics, cut-backs). 86-89 Transport 8703 Motor cars and other motor vehicles principally designed for the 32 347 transport of persons (other than those of heading 87.02), including station wagons and racing cars. 8704 Motor vehicles for the transport of goods. 14 199 8701 Tractors (other than tractors of heading 87.09). 1 119 8716 Trailers and semi-trailers; other vehicles, not mechanically 0 97 propelled; parts thereof. 8708 Parts and accessories of the motor vehicles of headings 87.01 to 10 54 87.05. 84-85 Mach/Elec 8429 Self-propelled bulldozers, angledozers, graders, levelers, scrapers, 21 118 mechanical shovels, excavators, shovel loaders, tamping machines and road rollers. 8474 Machinery for sorting, screening, separating, washing, crushing, 11 64 grinding, mixing or kneading earth, stone, ores or other mineral substances, in solid (including powder or paste) form; machinery for agglomerating, shaping or molding solid mineral fuels, 8431 Parts suitable for use solely or principally with the machinery of 11 63 headings 84.25 to 84.30. 8525 Transmission apparatus for radio-telephony, radio-telegraphy, 13 53 radio-broadcasting or television, whether or not incorporating reception apparatus or sound recording or reproducing apparatus; television cameras; still image video cameras and other video cam 8471 Automatic data processing machines and units thereof; magnetic 9 44 or optical readers, machines for transcribing data onto data media in coded form and machines for processing such data, not elsewhere specified or included. 72-83 Metals 7214 Other bars and rods of iron or non-alloy steel, not further worked 1 103 than forged, hot-rolled, hot-drawn or hot-extruded, but including those twisted after rolling. 7308 Structures (excluding prefabricated buildings of heading 94.06) and 3 61 parts of structures (for example, bridges and bridge-sections, lock- gates, towers, lattice masts, roofs, roofing frameworks, doors and windows and their frames and thresholds for doors, 7326 Other articles of iron or steel. 7 57 53 ANNEX 7302 Railway or tramway track construction material of iron or steel, the 2 41 following: rails, check-rails and rack rails, switch blades, crossing frogs, point rods and other crossing pieces, sleepers (cross-ties), fish-plates, chairs, chair wedges, sole plates 7306 Other tubes, pipes and hollow profiles (for example, open seam or 2 26 welded, riveted or similarly closed), of iron or steel. 16-24 Foodstuffs 1806 Chocolate and other food preparations containing cocoa. 10 54 2402 Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco 8 52 substitutes. 2106 Food preparations not elsewhere specified or included. 3 45 1905 Bread, pastry, cakes, biscuits and other bakers' wares, whether or 7 38 not containing cocoa; communion wafers, empty cachets of a kind suitable for pharmaceutical use, sealing wafers, rice paper and similar products. 1902 Pasta, whether or not cooked or stuffed (with meat or other 3 27 substances) or otherwise prepared, such as spaghetti, macaroni, noodles, lasagne, gnocchi, ravioli, cannelloni; couscous, whether or not prepared. Table A7. Mongolia: Goods imports by sector US$ million Percent of goods imports Growth (CAGR), percent 2010 2016 2021 2010 2016 2021 2010-21 2016-21 2019-21 86-89 Transport 623 368 1194 18.2% 11.2% 19.5% 6.1% 26.6% 6.9% 27 Fuels 666 886 1180 19.5% 27.1% 19.3% 5.3% 5.9% -6.7% 84-85 Mach/Elec 652 559 1023 19.1% 17.1% 16.7% 4.2% 12.9% -1.7% 72-83 Metals 202 171 531 5.9% 5.2% 8.7% 9.2% 25.4% 9.1% 16-24 Foodstuffs 220 298 524 6.4% 9.1% 8.5% 8.2% 12.0% 17.7% 28-38 Chemicals 160 252 522 4.7% 7.7% 8.5% 11.4% 15.7% 25.6% 39-40 Plastic / Rubber 124 115 243 3.6% 3.5% 4.0% 6.3% 16.2% 6.4% 06-15 Vegetable 99 134 203 2.9% 4.1% 3.3% 6.8% 8.6% 11.3% 90-97 Miscellaneous 119 110 197 3.5% 3.4% 3.2% 4.7% 12.3% 14.3% 44-49 Wood 63 78 123 1.8% 2.4% 2.0% 6.3% 9.6% 13.8% 50-63 Textiles, Clothing 337 150 123 9.9% 4.6% 2.0% -8.8% -4.0% 25.3% 01-05 Animal 29 39 119 0.8% 1.2% 1.9% 13.7% 24.7% 26.6% 68-71 Stone/Glass 54 61 115 1.6% 1.9% 1.9% 7.2% 13.6% 7.9% 64-67 Footwear 15 12 21 0.5% 0.4% 0.3% 2.6% 10.6% 8.4% 41-43 Hides, Skins 22 22 6 0.7% 0.7% 0.1% -11.4% -23.2% -0.1% 25-26 Minerals 33 16 5 1.0% 0.5% 0.1% -16.1% -21.8% -28.8% Total 3418 3272 6127 100% 100% 100% 5.4% 13.4% 5.4% Table A8. Origins of Mongolia’s imports US$ million Percent of goods imports Growth (CAGR), percent 2010 2016 2021 2010 2016 2021 2010-21 2016-21 2019-21 China 1450 987 2233 42.4% 30.2% 36.4% 4.0% 17.7% 12.1% Russia 936 1108 1776 27.4% 33.9% 29.0% 6.0% 9.9% 1.2% Asia excl. China 499 715 1199 14.6% 21.8% 19.6% 8.3% 10.9% 0.7% EU27 291 333 626 8.5% 10.2% 10.2% 7.2% 13.4% 8.5% ROW 102 71 154 3.0% 2.2% 2.5% 3.8% 16.6% 6.0% America 140 57 140 4.1% 1.7% 2.3% 0.0% 19.5% -5.9% 54 ANNEX Table A9. Mongolia's services imports US$ million Percent of services Growth (CAGR), percent imports 2010 2016 2021 2010 2016 2021 2010-21 2016-21 2019-21 Travel: Personal travel 262 471 739 33.3% 22.0% 29.7% 9.9% 9.4% -6.9% Transport: Freight 215 316 638 27.2% 14.8% 25.6% 10.4% 15.1% -8.0% Other: Other business services 139 685 500 17.7% 32.0% 20.1% 12.3% -6.1% -13.5% Other: Financial services 10 220 154 1.3% 10.3% 6.2% 28.2% -6.9% -10.0% Other: Construction services 7 164 145 0.9% 7.7% 5.8% 32.0% -2.4% -0.1% Other: Telecommunication, computer, and 0 88 128 3.9% 4.1% 5.2% n/a 7.9% 6.9% information services Transport: Other (including postal and 16 61 61 2.0% 2.9% 2.5% 13.0% -0.1% 5.2% courier) Transport: Passenger 54 54 36 6.9% 2.5% 1.5% -3.6% -7.6% -31.0% Other: Charges for the use of intellectual 3 25 32 0.3% 1.2% 1.3% 25.6% 5.2% 6.4% property Other: Government goods and services 20 21 25 2.6% 1.0% 1.0% 1.7% 3.5% 0.2% Other: Insurance and pension services 19 15 24 2.5% 0.7% 1.0% 1.9% 9.3% 1.6% Travel: Business travel 3 12 3 0.4% 0.6% 0.1% 0.7% -23.0% -26.4% Manufacturing services on physical inputs 0 6 2 0.0% 0.3% 0.1% n/a -17.5% -29.8% owned by others Other: Personal, cultural, and recreational 0 1 1 0.1% 0.1% 0.0% 9.6% 1.8% 11.3% services Maintenance and repair services 8 0 0 1.0% 0.0% 0.0% Total 758 2139 2490 100% 100% 100% 11.4% 3.1% -8.3% Source: IMF BOP. Table A10. Mongolia's GSP Utilization rate for its exports to Japan, 2019-2021 2019 2021 2019 vs 2021 HS Section Product Description GSP Other GSP Other Other Utilization Preferences Utilization Preferences Preferences Rate Utilization Rate Utilization Utilization Rate Rate Rate HS II Vegetable products 0.0% 100.0% 0.0% 100.0% No change Footwear, headgear, umbrellas, Increased HS XII etc. 0.0% 84.9% 0.0% 100.0% HS XV Base metals & products 0.0% 100.0% 0.0% 100.0% No change HS XX Miscellaneous manufact. articles 0.0% 100.0% 0.0% 100.0% No change HS VIII Hides and skins, leather, etc. 0.0% 78.1% 0.0% 98.5% Increased HS XI Textile & textile articles 0.0% 93.3% 0.0% 97.6% Increased Prepared foodstuffs, beverages, Decreased HS IV etc. 0.0% 100.0% 0.0% 88.6% HS III Fats and oils 0.0% 100.0% 0.0% 41.7% Decreased HS I Live animals & products 0.0% 93.0% 0.0% 39.3% Decreased HS V Mineral products 0.0% 100.0% 0.0% 0.0% Decreased HS VI Chemical products 0.0% 0.0% n/a HS X Pulp of wood, paper, books, etc. 0.0% 0.0% 0.0% 0.0% No change HS XIV Precious stones, etc. 0.0% 0.0% n/a HS XVI Machinery & electrical equipment 0.0% 0.0% 0.0% 0.0% No change HS XVII Transport equipment 0.0% 0.0% 0.0% 0.0% No change HS XXI Works of art, etc. 0.0% 0.0% 0.0% 0.0% No change HS XVIII Optical & precision instruments 0.0% 0.0% n/a n/a n/a Source: Based on UNCTAD. Table A11. Tariff profiles: Mongolia and comparators (2021) Simple Weighted Free Lines (% Free Imports Average Average of tot) (% tot) Country Mongolia AHS 5.0 5.3 4% 3% MFN 5.2 5.5 1% 2% Structural Azerbaijan AHS 8.7 5.8 31% 42% MFN 7.9 7.8 29% 24% 55 ANNEX Armenia AHS 4.9 3.0 30% 48% MFN 6.2 5.4 16% 23% Lao PDR AHS 2.5 1.1 63% 76% MFN 8.6 9.7 9% 2% Vietnam AHS 4.2 1.2 57% 80% MFN 9.6 5.3 28% 45% Aspirational Australia AHS 1.9 0.8 61% 75% MFN 2.4 2.9 49% 34% Kazakhstan AHS 3.9 2.0 45% 66% MFN 5.2 4.3 28% 33% Malaysia AHS 5.1 3.6 57% 67% MFN 4.9 3.6 57% 67% East Asia - Pacific AHS 3.8 1.9 58% 68% MFN 5.8 3.2 36% 53% Source: Based on TRAINS. Note: AHS - Effectively applied tariff rate, MFN - Most Favored Nation tariff rate. Table A12. Mongolia’s tariffs by sector Sector Duty Simple Weighted Free Lines Free Imports Type Average Average (% of tot) (% tot) By industry Agricultural AHS 6.38 7.96 2.8% 0.5% MFN 6.29 8.12 3.9% 0.2% Industrial AHS 4.87 4.7 4.4% 4.3% MFN 5.03 4.96 0.9% 2.7% Petroleum AHS n/a n/a n/a n/a MFN 2.96 n/a 20.6% n/a By processing stage Raw materials AHS 5.35 5.41 5.8% 0.6% MFN 5.68 5.43 3.2% 0.6% Intermediate goods AHS 4.92 4.92 2.8% 1.5% MFN 5.1 4.96 0.2% 1.2% Consumer goods AHS 5.34 6.34 2.3% 0.4% MFN 5.48 6.56 0.1% 0.0% Capital goods AHS 4.53 4.34 8.8% 8.0% MFN 4.78 4.74 4.3% 5.3% Source: Based on TRAINS. Note: AHS – Effectively applied tariff rate, MFN – Most Favored Nation tariff rate. Table A13. Mongolia’s performance on OECD TFIs relative to its peers Best Armenia Azerbaijan Australia Kazakhstan Lao PDR Malaysia Vietnam practice Average trade facilitation n/a -0.256 -0.114 -0.654 -0.093 0.275 -0.37 -0.289 performance A-Information availability -0.429 -0.333 -0.286 -0.762 0.138 -0.191 -0.362 -0.429 B-Involvement of the trade -0.464 0.143 0 -0.589 -0.285 0.715 -0.428 -0.143 community C-Advance rulings -1.159 -0.917 -0.583 -1.159 -1.25 0.75 -1.25 -0.472 D-Appeal procedures 0.135 0 0.5 0.083 0.306 0.194 0.125 0.125 E-Fees and charges -0.319 -0.308 0.153 -0.319 -0.231 0.615 -0.308 -0.308 F-Documents -0.778 -0.375 0 -0.778 -0.125 0.444 -0.5 -0.444 G-Automation -0.923 -0.595 -0.616 -1 -0.631 0.069 -0.504 -0.462 H-Procedures -0.489 -0.409 -0.353 -0.713 -0.209 0.18 -0.568 -0.496 I-Internal border agency co- -0.182 0.182 0 -0.636 0.273 -0.009 -0.109 -0.273 operation J-External border agency co- -0.546 -0.091 -0.182 -1.091 0.091 -0.273 -0.273 -0.273 operation K-Governance and impartiality -0.111 -0.111 0.111 -0.222 0.903 0.528 0.111 0 Source: OECD TFI. Note: The negative values in red are the TF areas where Mongolia underperforms vis-à-vis comparators. The positive values in black indicate the indicators where Mongolia’s performance exceeds the comparators. 56 ANNEX Annex of Figures Figure A1. NRCA of sectors for selected comparators, avg1012 vs avg1921 Figure A2. Measuring participation in global value chains: Backward and forward participation Gross exports Domestic value added (DVA) Foreign value added (FVA) Backward participation Exported as Exported as Exported as Exported as intermediates intermediates intermediates final goods that are further re- that return to absorbed in exported to home country destination third country Forward participation Source: Ignatenko et al. 2019. 57 ANNEX Note: Hummels et al (2001) and Aslam et al (2017) define GVC participation as: = + The larger the ratio, the greater the intensity of involvement of a country in GVCs. FVA captures backward GVC participation, while DVA captures forward GVC participation. FVA= foreign value added, DVX= domestic value-added exported to third countries. Figure A3. Mongolia’s current export products with the highest export potential per each key destination To China To Japan To Korea To Russia Source: ITC Export Potential Map. Figure A4. Transitioning to more sophisticated participation in GVCs: examples of national policy 58 ANNEX Source: WDR 2020c, World Bank. Annex of Boxes Box A1: How to collect NTM data in a nutshell. According to the guidelines developed by UNCTAD (2019 ), seven steps should be: 1. Identify sources of information 2. Identify documents from each source 3. Identify regulations from each document 4. Identify and classify measures within each regulation 5. Identify and classify affected products for each measure 6. Identify and classify affected countries for each measure 7. Identify and classify objectives for each measure This first step varies according to the country. In some countries, the information may be available at a centralized location, where one official source compiles all legal measures. In others, the information needs to be obtained from different locations/institutions. In many countries, an official journal regularly publishes new laws, regulations, acts, decrees, and the like, the information being contained in one publication, irrespective of the government department and the subject covered. Information about NTMs may also be obtained through various government institutions, for instance: NTM chapter Government bodies potentially responsible 59 ANNEX A SPS measures Ministry of Agriculture; Standardization Agency; Ministry of Health B TBT measures Standardization Agency; Min. of Health; Ministry of Ecology; Min. of Industry C Pre-shipment inspection and other Customs Agency; Standardization Agency formalities D Contingent trade protective measures Ministry of Finance; Ministry of Economy or Trade E Non-automatic licensing, and other quantity Ministry of the Economy (or Trade, Foreign Relations) control measures F Price control measures including additional Ministry of Economy (or Trade, Foreign Relations); taxes and charges Customs Agency G Finance measures Ministry of Finance; National Bank H Measures affecting competition Ministry of Economy (or Trade, Foreign Relations) I Trade-related investment measures Ministry of Economy (or Trade, Foreign Relations) P Export-related measures Ministry of Economy (or Trade, Foreign Relations); Customs Agency This list is not exhaustive. Names of government agencies could be different according to the country. Each institution may disseminate legislative documents through their websites, or other means. Steps 2 and 3 systematically register the origin of the information. These steps are essential to make sure that the data is traceable and can be verified and updated. From each source, one or more legal documents can be obtained. These documents may also contain one or more regulations. The remaining steps identify and classify all the relevant information from the legal text of each regulation. Box A2: Opportunities for Mongolia in Emerging Technologies The global market for digital twin, a digital representation of a real-world entity or system is projected to grow significantly in the coming years. Implementing a digital twin is an encapsulated software object or model that mirrors a unique physical object, process, organization, person, or other abstraction. Data from multiple digital twins can be aggregated for a composite view across real-world entities, such as a power plant or a city, and their related processes.114 The global market for digital twins was valued at US$11.1 billion in 2022115 and is expected to grow by 25-43 percent (CAGR) from 2023 to 2032. Mongolia could consider launching a national strategy on digital twins that includes a Digital Twin Research and Development Center. The Center could serve as a hub for technological innovation, fostering local expertise and attracting international collaborations in the field. A nationally recognized center dedicated to digital twins could emulate the successes of existing global centers, such as those in Dayton, Ohio, Chennai, India, and the joint venture by Siemens Technology and Georgia Institute of Technology. The strategy could also incorporate workforce training and education, national standards and regulations, public-private partnerships, international marketing, and access to Digital Twin as a Service platform. Developing digital twin-focused education and training programs can enhance local workforce skillsets and attract international students. National standards could ensure quality, safety, interoperability, and data privacy, instilling confidence in potential international clients. Public-private 114 Gartner (2023) 115 Grand View Research (2023a) 60 ANNEX partnerships could be integral to the development of digital twins in Mongolia. An example of such an approach is the Orlando Economic Partnership's regional digital twin initiative. The Metaverse is a shared, persistent, three-dimensional virtual space, poised for significant market growth. Ideally, the Metaverse should be able to support unlimited numbers of concurrent users in many virtual worlds. According to McKinsey, the Metaverse is estimated to represent a US$5 trillion business opportunity by 2030. Citigroup estimates this to be between US$8 and US$13 trillion. Mongolia could consider launching an initiative focusing on the Metaverse and Education. Mongolia has a capable private sector engaged in developing the Metaverse immersive technologies. Recently Erdenes Tavantolgoi JSC the state-owned Mongolian mining company, and Frontera Capital Group Limited signed the first-of-its-kind legally binding agreement via their avatars in the Metaverse. The initiative on the metaverse and education could not only develop cutting-edge digital skills in specializations like XR, AI, blockchain, cybersecurity, and digital design but could create knowledge assets that could be monetized. For example, innovative educational courses on climate change could be developed, providing immersive interactions with climate data that are better than traditional teaching methods. The Metaverse's 3D virtual space could also be utilized for a climate tech showcase and a gallery of climate art. The latter could be done by benefiting from the experience of ClimArt in Norway.116 Quantum technologies, which encompass computing, sensors, and communication, are fast emerging due to our advancing ability to manipulate quantum-level phenomena.117 With more than US$35.5 billion in investments, these technologies are set to potentially revolutionize computation, solving problems currently deemed intractable by classical computing, but they could also disrupt modern digital security.118 Quantum cryptography, particularly Quantum Key Distribution (QKD), can revolutionize the security infrastructure of cross-border delivery of digital services. Its application could transform industries from online banking to cloud-based services by providing unhackable encryption. Threats to the global financial sector can be seen from the fact that cyber-attacks increased by 238 percent during the peak of the COVID-19 pandemic.119 QKD can ensure secure transactions by providing a key that cannot be intercepted without detection due to the inherent properties of quantum mechanics. The technology significantly reduces the risk of information being intercepted, tampered with, or stolen during cross- border digital transactions. Several countries have initiatives on quantum-safe cryptography. For example, the United States National Institute of Standards and Technology has announced four quantum-resistant cryptographic algorithms. At the same time, the Cybersecurity and Infrastructure Security Agency launched the Post- Quantum Cryptography Initiative to consolidate agency efforts against quantum threats. Given the growing global investment in quantum-safe cryptography, Mongolia must consider strategic initiatives in this field. Mongolia could begin by developing partnerships with academic 116 Climart Norway was an interdisciplinary research project that combines psychology, natural sciences, and art to study the impact of visual art on perceptions of climate change. 117 Quantum cryptography is a method of encryption that uses the principles of quantum mechanics to secure and transmit data in a way that cannot be hacked. 118 WEF (2022) 119 VMVare (2020) 61 ANNEX institutions and technology companies to build a robust knowledge base in quantum technologies and then gradually incorporate quantum cryptography in sensitive sectors like financial services and digital government. Raising quantum awareness among Mongolian digital service providers will strengthen the nation's digital security infrastructure. Training programs and workshops for digital service providers could be introduced, focusing on quantum technologies, their applications in cryptography, and potential vulnerabilities in current security systems. Furthermore, collaborations with international quantum experts and research institutions could be considered for sharing knowledge and best practices. Potential vulnerabilities in cross-border digital transactions often involve insufficient encryption, poor identity verification processes, and outdated security systems. Quantum attacks, though not yet commonplace due to the nascent state of quantum computing, are an emerging threat for which these companies should prepare. By understanding these risks, digital service providers can implement quantum-resistant algorithms, ensuring the long-term security of their cross-border transactions. Mongolian companies can fortify their defense against existing and future cyber threats by building a quantum-aware and quantum-ready environment. Generative AI is a rapidly developing field with the potential to revolutionize many industries. Generative AI refers to a class of artificial intelligence systems that can create new content, concepts, or ideas based on the input data they receive. These systems go beyond merely analyzing and understanding data, as they can generate original outputs that resemble human-created content. Some examples of generative AI programs include OpenAI's ChatGPT and DALL-E. Various applications of generative AI include image synthesis (creating new images or modifying existing ones), text generation (writing coherent and contextually relevant text), music and audio generation (composing new melodies or sounds based on the musical input patterns or audio data) and data augmentation (generating new samples to expand training datasets for machine learning models). The generative AI market is poised for significant growth, with various sources projecting a surge in market value at 32- 36 percent CAGR. 120 The expansion is driven by increasing demand for AI-generated content in industries like media and entertainment, commercial sectors investing in generative AI to enhance algorithms, and the rising applications of technologies such as super-resolution, text-to-image conversion, and text-to-video. Web 3.0 is the third generation of the World Wide Web, characterized by decentralization, AI, and blockchain technology. The Web 3.0 market is still in its early stages but is expected to grow rapidly in the coming years and reach US$44.2 billion by 2031 (a CAGR of 44.1 percent). Several factors are likely to drive the market including the increasing adoption of blockchain technology, the growing popularity of decentralized applications, and the rising demand for user privacy and security. 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