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3 April, 2017
Japan and Mongolia entered into an economic partnership agreement ("EPA") on 10 February 2015 with a view to liberalize and facilitate trade and investment flows between the two countries and to create a regulatory framework for further cooperation on the improvement of the business environment generally.
The EPA entered into force on 7 June 2016. The EPA is the first free trade agreement concluded by Mongolia. Both Japan and Mongolia are parties to the Marrakesh Agreement Establishing the World Trade Organisation, dated 15 April 1994 ("WTO Agreement"). Both parties also joined the Agreement on Trade-Related Aspects of Intellectual Property Rights in Annex 1C to the WTO Agreement ("TRIPS Agreement"). Certain commitments under the EPA are supplementary to existing commitments of the contracting parties under the WTO Agreement and the TRIPS Agreement.
The EPA consists of 11 chapters covering topics such as trade in goods and services, customs procedures and trade facilitation, electronic commerce, investment protection, movement of persons, competition, protection of intellectual property, dispute resolution, and the improvement of the business environment. The EPA does not regulate matters related to taxation. There is currently no double taxation agreement between Japan and Mongolia.
We discuss below the key features of the EPA in detail.
1. Trade in Goods and Services
To facilitate trade in goods between the two countries, the EPA removes or gradually decreases customs duties and taxes for certain goods and commodities.
Specifically, Mongolia's tariff-related obligations under the EPA concerning the main import products from Japan are as follows:
agricultural machinery – customs duty on all types of agricultural machinery has generally been eliminated as of the date of the EPA;
mining machinery – customs duty on all types of mining machinery has generally been eliminated as of the date of the EPA or will be eliminated over a period of six to eleven years (in equal instalments from the base rate);
textile machinery – customs duty on all types of textile machinery has generally been eliminated as of the date of the EPA; and
vehicles – customs duty on new or nearly-new cars (0-3 years old) has been eliminated as of the date of the EPA. Customs duties on older cars (4-6 years old) will be eliminated over a period of 11 years (in 11 equal instalments from the base rate). Customs duty on old cars (7-9 years old) will be eliminated from the eleventh year after the date of the EPA.
Further, Japan has the following obligations in relation to customs duty on Mongolia's main export products:
Meat products
beef – the Government of Japan will consider eliminating customs duty on certain beef products (bone-in) once Mongolia (or any part thereof) is officially recognized by the International Office of Epizootics as foot and mouth disease free based on a risk assessment conducted by the Government of Japan;
wild Boar Meat – customs duty on wild boar meat has been eliminated as of the date of the EPA;
lamb – customs duty on fresh, chilled or frozen lamb or goat meat has been eliminated;
horse – customs duty on horse meat has been eliminated as of the date of the EPA; and
goose – customs duty on goose has been eliminated as of the date of the EPA.
Animal skin/furskins – customs duty on raw animal skins/hides, as well as duties on the raw furskins of lamb, fox and other animals (except mink) have generally been eliminated as of the date of the EPA;
Metals – customs duty on various unrefined or refined metals have generally been eliminated as of the date of the EPA or over a period of 4 to 11 years;
Petroleum oils – customs duty on various petroleum oils have generally been
eliminated as of the date of the EPA; and
Vodka and other alcoholic beverages – customs duties on vodka, gin, liquors, cordials, rums and whiskies have been eliminated as of the date of the EPA.
In relation to trade in goods and services, the contracting parties undertook to provide equal (national) treatment to the goods and services or service providers of the other party. To benefit from the reduced or "0" tariff rates, a certificate of origin must be supplied.
The EPA has detailed regulations on rules of origin, customs tariffs and procedures, sanitary and phytosanitary measures and technical regulations and conformity assessment procedures.
2. Investment Protection
Investor protection
The EPA contains detailed rules on the protection of investment made by an investor from the other party. The protections afforded under the EPA are typical of those rules that are generally found in bilateral investment treaties.
The EPA employs an asset-based definition of investment which includes portfolio investment. However, the contracting party may deny the benefit of protection for those who do not have substantial business operations in the country. Specifically, the EPA affords national treatment (no less favorable treatment than the treatment the contracting party affords in like circumstances to its own investors and their investments), protection from expropriation, fair and equitable treatment as the minimum standard of treatment under international law, full protection and security, and prohibitions on imposing performance requirements.
Protection from expropriation extends to taxation measures to the extent such measures have the same effect as expropriation. The EPA defines indirect expropriation, but carves out general regulatory measures from its scope. The EPA lists those performance requirements that are expressly prohibited to be adopted by the contracting party to promote its domestic economy, such as achievement of a certain level of domestic content and hiring of a certain percentage of nationals. Further, the EPA extends its protection to free transfer of funds, profits, capital gains and payments, but sovereign rights in relation to balance of payments or for certain other grounds, such as creditor protection, are reserved.
The protection extends to both pre-existing and post-EPA investments. However, it specifically excludes pre-existing disputes.
The Bilateral Investment Agreement between Japan and Mongolia signed on 15 February 2001 terminated when the EPA entered into force.
Investor-State dispute settlement
Investors have the right to seek administrative or judicial settlement of disputes within the territory of the contracting party against whom relevant investment dispute arose.
Investors may also submit its dispute with the contracting party to one of the following:
- arbitration in accordance with the Convention on the Settlement of Investment Disputes between States and Nationals of Other States signed on 18 March 1965;
- arbitration under the ICSID Additional Facility Rules;
- arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law; and
- if so agreed between the disputing parties, any arbitration in accordance with other arbitration rules.
3. Protection of Intellectual Property Rights
The contracting parties agreed to grant and ensure adequate, effective and non-discriminatory protection of intellectual property rights and provide measures for the enforcement of intellectual property rights against infringement in accordance with the EPA and the TRIPS Agreement. The contracting parties undertook to promote efficiency and transparency in the administration of intellectual property system, including in relation to the application procedure and publication.
The scope of protection extends to patents, industrial designs, trademarks, copyrights and related rights, geographical indications, unfair competition, and undisclosed information.
4. Miscellaneous
The EPA creates a framework within which the contracting parties agreed to further cooperate to facilitate trade in goods and services between two countries, increase investment opportunities and generally improve the business environment. The contracting parties will consult through joint committees and sub-committees in charge of specific matters.
The contracting parties undertook not to impose tariffs on electronic commerce and not to discriminate digital products. Further, the contracting parties undertook to take measures in relation to anti-competitive behavior and ensure that their economies are market-based.
5. Conclusion
The EPA aims to promote trade and investment flow between the two countries by way of liberalizing and facilitating trade in goods and services, facilitating the free movement of persons, increasing investment opportunities, and enhancing protection for investment and intellectual property. It also creates a framework for further cooperation between the contracting parties to improve the general business environment. Thus, it should be set to increase trade flows between Japan and Mongolia. Indeed, since the implementation of the Mongolia-Japan economic partnership agreement in June 2016, US$8.2 million worth of products have been exported to Japan from Mongolia under reduced custom tariffs, over 300 product certificates of origin have been approved. Further, the annual trade turnover between the two countries reached US$344 million in 2016, a year on year increase of 17 percent.
It is hoped that the protection afforded under the EPA for investors will lower the perceived risk of doing business in Mongolia, although in practice it may take some time to effectively implement the EPA and achieve its desired results.
For further information, please contact:
Chris Melville, Partner, Hogan Lovells
chris.melville@hoganlovells.com
