The Mongolia Third Neighbor Trade Act (H.R. 2299/S. 1188), which would provide duty-free access to the U.S. market for products made in Mongolia using Mongolian cashmere, stands to be a win-win for the U.S. and Mongolia, a stalwart democratic American ally in Northern Asia. Passage of the legislation, currently languishing in Congress, would benefit both sides by facilitating increased trade.

Specifically, the Act would provide U.S. retailers and consumers improved access to Mongolian cashmere, considered the finest in the world for its high quality and softness, and support a critical sector of the Mongolian economy. And most importantly, it would reduce U.S. imports of cashmere products from China.

Sandwiched between China and Russia, Mongolia is an island of democracy and free-market economics in Northern Asia. And, during these times of trade tension between the U.S. and China, the Third Neighbor Act can play a crucial role in strengthening Mongolia’s position as an outpost of democratic and economic freedom in the region.

In fact, the Third Neighbor Act gets its name from a rhetorical gesture of support made by U.S. Secretary of State James Baker during a visit to Mongolia in 1990 when he referred to the United States as Mongolia’s ‘third neighbor.’ That term has defined U.S.-Mongolian relations for thirty years as both countries have sought to attenuate the influence of China and Russia in Mongolia. During this time, Mongolia has aspired to an outsized role in international affairs — it joined the WTO in 1997, and has deployed peace-keeping troops to Afghanistan, Iraq, and Kosovo.

As an expansive, sparsely populated nation, Mongolia is unduly impacted by the actions of its larger and more powerful neighbors. With China’s accession to the WTO in 2001, producers that had used Mongolia to avoid quota restrictions pulled back across the Chinese border, devastating the nation’s processing economy. The cashmere industry was especially hard hit, with the loss of over 30,000 jobs.

The Mongolia Third Neighbor Trade Act would signify and solidify the crucial role of Mongolia as an outpost of democratic and economic freedom and ally of the U.S. in Northern Asia.

In turn, this made Mongolia even more dependent upon China as a trading partner and upon the domestic mining industry as the primary source of revenue, as the nation began to tap world-class mineral resources that extend from rare earth metals to gold. Yet growth from mining has been inconsistent, and today over 100,000 Mongolians rely in some way upon the cashmere industry for their livelihood.

Unfortunately, the vast majority of Mongolia’s cashmere is exported to China because processors there, with access to cheap labor and U.S. and other critical markets, can pay higher prices for raw cashmere than Mongolian processors and still turn a profit. And because value-added processing of this raw or combed cashmere occurs outside of Mongolia, there is a minimal return to the Mongolian economy. As a result, the country has been denied a real chance to reinvest in its cashmere industry, despite the fact that pure, high quality Mongolian cashmere could generate significantly higher returns through local value-add processing.

The Third Neighbor Act — introduced in both the 115th and 116th Congresses with strong bi-partisan support — addresses the fact that Mongolia and China are worlds apart in both their approach to the cashmere industry and their relationship with the U.S. While the Chinese garment industry has come under sustained criticism for unethical labor practices, Mongolia is actively pursuing a policy of sustainable agriculture, fair job creation, and investment in small and medium enterprise.

Although Mongolia is a minor U.S. trading partner, the legislation represents potential for a rare trifecta: a net gain for consumers, retailers, and foreign policy. Tariff-free imports of pieces or finished cashmere goods — from coats and hats to sweaters, shawls, and scarves, made in Mongolia using local cashmere — provides an incentive to substitute imports of these relatively low-volume luxury goods away from China with minimal fiscal impact on the U.S.

Mongolia’s vast territory (one sixth the size of the U.S.) is home to over 29 million cashmere goats, which in 2018 generated approximately 20 percent of the world’s total cashmere production. This included 10,945 tons of raw cashmere, 5,413 tons of washed cashmere, and 509 tons of dehaired cashmere.(1)

Over 98 percent of that washed cashmere — 5,311 tons in 2018 worth $254 million — was exported directly to China.(2) In addition, a smaller but significant amount of raw cashmere is smuggled out of Mongolia by and for Chinese traders and not reflected in official statistics. After further processing, much of the cashmere exported or even smuggled out of Mongolia to China will make its way into Chinese export markets, including a significant percentage to the U.S.

In The Spotlight

Although most of its cashmere goes directly across the border into Chinese factories, Mongolia also exports partially processed cashmere (all the way up to yarn) to Italy, South Korea, Switzerland, Japan, the U.K., and the U.S. But, while imports from China made up over three-quarters of total U.S. cashmere garment imports during the last decade, imports from Mongolia barely registered. From 2010 to 2019, while cashmere goods imported to the U.S. from China averaged nearly 2,580 tons per year, imports from Mongolia averaged a paltry 58 tons per year, or just over 2.2 percent of the Chinese total.(3)

Improved access to higher value markets for cashmere garments, including the U.S., would allow Mongolian producers to leapfrog the hurdles put in place by China’s dominance in the global cashmere market (see sidebar below). This would barely change supply chains into the U.S. and in fact de-risk them, while new direct demand would allow Mongolian processing plants to make use of significant excess spinning, knitting, and weaving capacity, already developed with domestic and foreign investment but dormant due to a lack of materials and end markets. In short, the elimination of U.S. import tariffs by the Third Neighbor Act will allow import of Chinese cashmere products to be replaced with those made in Mongolia.

Processing cashmere in Mongolia will create thousands of new jobs. The American Chamber of Commerce in Mongolia, which “seeks to build, strengthen, and protect business between the United States and Mongolia and to promote Mongolia as a destination for American investment,” estimates that the Third Neighbor Act will create 40,000 jobs in the Mongolian garment sector, most of which will be filled by women. It would also allow existing small Mongolian cashmere businesses to grow.(4)

While passage of the Third Neighbor Act would undoubtedly strengthen American retail and consumer interests, it would also improve American competitiveness globally. Since existing trade law allows Mongolian cashmere to be exported tax-free to the European Union and Japan, the legislation would create a more level playing field for the U.S. to compete in the high-quality cashmere sector, providing American businesses, retailers, and consumers new opportunities.

Both President Trump and his opponent in November, former Vice President Joe Biden, are aware of the importance of Mongolia to the U.S. Mongolian President Khaltmaa Battulga asked for Trump’s support in the passing the Third Neighbor Trade Act during his visit to the White House in July 2019.(5) And Biden, during a 2011 visit to Ulaanbaatar, noted the growing relationship between the two countries since Mongolia has embraced democracy and stated that, “the United States remains strongly committed to helping the Mongolian people build a better future.”(6)

In addition to the dozens of bi-partisan Congressional co-sponsors of the Third Neighbor Act, the domestic apparel industry has been enthusiastic in its support. When the legislation was introduced, the American Apparel & Footwear Association exclaimed that, “Mongolian cashmere is a brand in and of itself. This bill would provide a market for Mongolia’s authentic cashmere, supporting growth and creating jobs throughout the U.S. cashmere value chain. At the same time, by passing the Mongolia Third Neighbor Trade Act, Congress would forge a stronger partnership with our friends in Mongolia and provide American consumers with better access to these high-end products.”(7)

As trade disputes with China threaten structural changes in garment supply chains, the luxury cashmere garment industry could seek to manage risk by substituting and diversifying supply chains. Increased presence of Mongolian cashmere in global garment markets presents an opportunity for stronger alignment with retailers and consumers who are increasingly emphasizing ethical consumption and authenticity of product. The nomadic heritage of the “Made in Mongolia” garment represents a genuine opportunity in this regard.

Sen. Ben Cardin (D-MD), an original co-sponsor of the legislation in both the 115th and 116th Congresses, summed up its importance — “Mongolia remains a stable democracy in a sea of authoritarianism and contributes to U.S. national security goals in Asia and the Middle East. The Mongolia Third Neighbor Trade Act will facilitate job and economic growth that can help both our countries. I am proud that this bipartisan legislation will make that possible. Our bill also will help bring stability, employment, and economic empowerment to the women of Mongolia who comprise most of the country’s garment industry.”(8)

Passage of the Mongolia Third Neighbor Trade Act would be a win-win for both the United States and Mongolia. It would signify and solidify the crucial role of Mongolia as an outpost of democratic and economic freedom and ally of the U.S. in Northern Asia. As the bill states, “Mongolia’s success as a democracy, strategic location, sovereignty, territorial integrity, and ability to pursue an independent foreign policy are highly relevant to the national security of the United States.” And passage would provide significant economic benefit for businesses, retailers, and consumers – as well as creating jobs – in both the U.S. and Mongolia.

Young Mongolian Entrepreneur Reimagines Premium Cashmere Markets

Mongolia may be remote from the world’s fashion centers, but in its capital, Ulaanbaatar, a new generation of socially and ecologically minded entrepreneurs are reinventing the appeal of cashmere products for both premium and value-conscious consumers. One such entrepreneur is Ariunjargal Ganzorig, founder of ANNA Cashmere.(9) While Ariunjargal’s family has been trading raw cashmere for over 20 years, it was just three years ago that she began producing high-quality private label garments. She has since pivoted to global online retail sales with their own label products, and ANNA Cashmere has seen its income nearly triple year-on-year.

ANNA Cashmere already exports to buyers in San Francisco, New York, Seoul, and London, and aspires to enter markets in Holland, Germany, and Canada in the next year. While her garments currently retail for between US$300-$800, Ariunjargal is working on the means to diversify into additional, more affordable, market segments.

The vision Ariunjargal used to build ANNA Cashmere combines premium products with socially responsible production, heralding Mongolia’s potential impact on traditional global cashmere markets. ANNA Cashmere works with local small knitting companies, providing processed cashmere and purchasing finished products for export (which makes up 90 per cent of its current sales). This gives small, local businesses the opportunity to move up the value chain, creates employment opportunities in Mongolia, and brings premium fashion products to American and other international consumers. Passage of the Mongolia Third Neighbor Trade Act would allow all those — and ANNA Cashmere — to grow.

Endnotes 1. https://www.gschneider.com/2019/03/01/annual-cashmere-market-report/ 2. https://usatrade.census.gov 3. www.customs.gov.mn 4. http://www.amcham.mn/mtnta/ 5. http://www.amcham.mn/press-release-president-battulga-hosted-by-president-trump/ 6. https://www.reuters.com/article/us-usa-mongolia/biden-offers-u-s-support-for-democratic-mongolia-idUSTRE77L1A720110822 7. https://www.aplf.com/en-US/leather-fashion-news-and-blog/news/41523/cashmere-this-bill-could-reverse-the-cashmere-supply-chain 8. https://www.cardin.senate.gov/newsroom/press/release/cardin-sullivan-rintroduce-bill-to-increase-trade-with-democratic-ally-mongolia 9. https://annacashmere.com

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Alex Skinner and Bob Bissen
About The Author Alex Skinner and Bob Bissen
Alex Skinner, an economic anthropologist specializing in frontier and emerging markets, is Chief Financial Officer of IP Haus ADU Solutions in New York, NY, and Founder of RealSource Asia urban strategy in Ulaanbaatar, Mongolia. Bob Bissen, a public affairs and government relations practitioner, is Senior Vice President at Cannae Policy Group in Washington, DC, and the Founder and President of RJB Strategies in Annandale, VA.




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