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Beijing's growing politico-economic leverage over Ulaanbaatar
Morris Rossabi, Jamestown Foundation, China Brief
Just before the 2005 Tsagaan Sar (or New Year's) celebrations, a Mongolian government official urged his fellow citizens not to buy Chinese gifts for relatives and friends because if they did he estimated that $30 million would enter China's coffers. It is impossible to tell how many Mongolians abided by his recommendation. However, his concern reveals the extraordinary economic influence that the Chinese currently exert over Mongolia. Many consumer goods in the country are imports from China. Chinese products from fresh vegetables and fruits to towels, furniture, and clothing have flooded into Mongolia.
This evidence of substantial Sino-Mongolian trade offers a striking contrast to relations between the two countries from 1964 to the mid-1980s. Mongolia had sided with the Soviet Union in its dispute with China, and ensuing relations were decidedly hostile. During the Cultural Revolution, Mongolian officials criticized China for its heavy-handed suppression of Mongolians in the Inner Mongolian Autonomous Region of China, which resulted in the deaths of 25,000 to 30,000 Mongolians. They also accused the Chinese of seeking to annex Mongolia, undertaking reconnaissance flights, and rustling and killing livestock on the Mongolian side of the border. The Chinese countered by decrying the stationing of 100,000 Soviet troops in Mongolia and the USSR's economic "exploitation" and political domination of its neighbor.
Changes in the Soviet and Chinese leadership, as well as the instability caused by their conflict, eventually promoted efforts to develop a peaceful relationship, which spilled over into a rapprochement between China and Mongolia. Mikhail Gorbachev, in particular, was determined to end the Sino-Soviet conflict. He fostered trade and cultural relations and began to withdraw troops stationed along the Chinese border, including the ones in Mongolia. Similarly, relations between Mongolia and China improved. The two countries resolved border disputes and signed agreements meant to promote exchanges among government officials, women's groups, and experts in agronomy, tourism, and infrastructure projects. Even the Tiananmen repression in 1989 did not curtail relations, and Mongolia's peaceful break from communism and its development of a multi-party political system in 1990 did not cause a rupture with Beijing.
Having lost Soviet assistance and advisers in the early 1990s and no longer able to count on trade with the USSR, Mongolia needed to turn elsewhere for economic aid and commercial partners. Because it had endured two centuries of Chinese occupation (from 1691 to 1911), it rejected its neighbor to the south and instead sought assistance from the Western (and Japanese) international donor agencies. It has since received grants and loans from the Asian Development Bank, World Bank, International Monetary Fund, and Agency for International Development and has had to abide by the regulations of these organizations. The shock therapy proposed by these agencies has actually facilitated Chinese leverage over the Mongolian economy. They supported privatization of state assets, minimal government, elimination of state subsidies and price liberalization, and the reduction, if not abolition, of tariffs on imported products and taxes on exports. Cheap Chinese consumer goods have poured into Mongolia, and the Chinese have had access to Mongolia's raw materials and mineral wealth.
Mongolian trade with China has increased rapidly since Tiananmen. In 1989, the total turnover at current prices amounted to $24.1 million, but by 2003, it had reached $483.3 million, ensuring that China is Mongolia's largest trade partner. As of 2003, 46.6 percent of Mongolia's exports went to China, and China supplied 24.4 percent of Mongolia's imports. These statistics somewhat underestimate the actual trade because they omit the extensive smuggling and illegal border commerce. 
Chinese investment in Mongolia has also increased dramatically. From a barely noticeable partner in 1989, China, currently with more than 600 businesses, has become the largest investor in the country. Chinese companies own knitting and sewing factories, which were established in Mongolia to circumvent the quotas on Chinese textiles imported into the U.S. China's entrance into the World Trade Organization has eliminated those quotas, and Chinese companies are closing these factories, leaving behind a large number of unemployed Mongolian workers. Chinese entrepreneurs have founded construction firms, tourist agencies, and restaurants and are also investing in an oil refinery and zinc plant. Rumors persist that Chinese investors have used Mongolian agents to bid for state assets and thus own even more companies in Mongolia.  The pace of economic relations has accelerated rapidly. On my latest flight to Ulaanbaatar in January of 2005, I encountered Chinese engineers investigating prospects in coal mining, builders helping to construct roads, and entrepreneurs about to open retail stores for foreigners and the Mongolian nouveau riche.
Elimination of most tariffs and export taxes in May 1997, a policy the pure market advocates among the international donor agencies insisted upon, has fostered this increasing Chinese role in the Mongolian economy. Chinese and Inner Mongolian merchants have bought leather, hides, skins, and cashmere and transported them to China for processing. Mongolian processors cannot compete for these raw materials because of high interest rates charged by Mongolian banks and the lack of state support. Chinese purchasers and processors have access to reasonable loans in China and state subsidies. This unequal competition has wiped out many previously stable Mongolian processing industries. Most shoe and boot factories have closed, and many cashmere processors operate at less than 50 percent capacity because of their inability to buy raw cashmere.
The Mongolian responses to such a growing Chinese presence have been ambivalent. Most Mongolian officials have professed little concern, but the general Mongolian population prefers closer economic and cultural relations with Russia and Japan than with China.  The Mongolian press repeatedly highlights the poor quality of Chinese imports. Over the past six months, it has cited bacteria-infested tofu, adulterated antifreeze, and green tea infested with DDT as hazards of trading for Chinese goods. It has also criticized Chinese for poaching deer, for illegal lumbering, for polluting rivers in mining for gold, and for smuggling cars and narcotics into Mongolia.  Moreover, it occasionally reports on Mongolian security forces capturing Chinese prostitutes and pimps crossing into Mongolia or escorting North Korean prostitutes into China. Finally, both the media and Mongolian political observers have claimed that China seeks to annex Mongolia or at the very least has attempted, through financial support and influence, to influence Mongolian politics.  On the other hand, Mongolians benefited from Chinese philanthropic assistance during the devastating winters from 1999 to 2002 when about one-third of the animals in the country died. Mongolian sources also reveal that the Chinese provided funds for solar-powered generators, hospitals, and repair of bridges. 
Increasing economic leverage has translated into frequent Mongolian government acquiescence to Chinese policy objectives. Every agreement or treaty signed by the two parties has started with Mongolian affirmation of China's jurisdiction over Taiwan. Mongolian officials have repeatedly acknowledged that Taiwan is part of China. They have also muted any criticism of Chinese policies in Inner Mongolia. In fact, on a visit to Inner Mongolia, President Bagabandi observed that he "was impressed with China's efforts to protect the culture and education of the Mongolian minority," a renunciation of previous Mongolian pronouncements about harsh Chinese rule in the region.  Late in 2004, the Mongolian government did not protest the Chinese denial of entry into Inner Mongolia of "Hurd," a Mongolian rock band that the Chinese authorities deemed to be instigating Pan-Mongolian sentiments and thus a possible threat in Inner Mongolia. When Mongolian officials have defied the Chinese, they have felt the Chinese leadership's wrath. In the fall of 2002, for example, they angered Beijing by allowing the Dalai Lama to visit Mongolia. The Chinese responded by stopping train traffic between China and Mongolia for several days, indicating that they could jeopardize the steady flow of essentials to Mongolia.
China appears to be adopting the same economic strategies in attempts to exert influence in Central Asia. Chinese trade with its western neighbors, which was negligible until 1989, has increased at a rapid pace, as Chinese consumer goods flood into Central Asia. In the spring of 2004, the Chinese completed construction of a road to Tajikistan, and in September of the same year Chinese and Central Asian laborers began to lay a 600-mile oil pipeline from Kazakhstan to China's western region of Xinjiang.  The various governments in the area plan other rail lines and roads from Xinjiang to Central Asia. China seems to be challenging Russia as the main foreign influence in the region, particularly in the economic arena. As with Mongolia, economic prominence could translate into political leverage. Chinese influence in trade and investment could lead to denunciations of Central Asian criticism or perhaps acquiescence to Chinese policy objectives. Because many previous Chinese governments, both in traditional and modern times, claimed control over Central Asia, the growing economic links of late are of concern.
As China exerts greater and greater influence over Mongolia and Central Asia, reevaluations of the policies promoted by the international donor agencies (IMF, Asian Development Bank, etc.) may be required. Mongolia, for example, may need to impose tariffs on Chinese products to protect some of its infant industries from unfair competition with the state-supported and often monopolistic enterprises of the colossus to its south. Controls on foreign capital and investment and on joint ventures would also avert overly great Chinese domination of the Mongolian economy. Such changes would offer the possibility of a more equitable Sino-Mongolian economic relationship.
Morris Rossabi is the author of Khubilai Khan and numerous other books on China and Mongolia. His latest book, Modern Mongolia: From Khans to Commissars to Capitalists (University of California Press, 2005) focuses on developments in Mongolia since the collapse of communism in 1990.
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