TED Case Studies

GLOBALIZATION OF THE CASHMERE INDUSTRY IN MONGOLIA


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I. Identification

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1. The Issue

The cashmere industry in Mongolia is facing many challenges. These challenges range from outside forces such as globalization, the market, and trade. Inside forces such as the environment and the government are also affecting the cashmere industry in Mongolia. All of these forces are threatening the cashmere industry as well as the culture and future happiness of Mongolians. A look these factors will give an understanding of what is at stake here.

2. Description

The following description section will explain the life of herders, the history of Mongolia, Mongolia's culture and the importance of cashmere to Mongolia's culture, how globalization is and can effect the cashmere industry in Mongolia, the trade issues that Mongolia is facing, and environmental impacts on the land and cashmere industry.

Cashmere

Cashmere is one of the softest, warmest, and longest lasting materials on the market today. Cashmere fibers become softer as it is worn more. Cashmere is said to be eight times warmer than sheep's wool, and about that many times softer. Cashmere is also one of the most expensive cloth on the market today.

Cashmere originates from Kashmiri goats found in the Himalayas. Cashmere wool comes from the downy undercoat that grows on goats from midsummer to winter. The quality varies from goat to goat. The long hair on goats protects the cashmere down from the elements. It is removed each spring by shearing or gradual combing of the goats hair. Goats produce about three to eight ounces of cashmere per year. The average single ply women's sweater requires approximately ten ounces of wool, which is equivalent to about three or four goats.

The quality of cashmere wool is measured by its length, texture, and the diameter of the fiber. The quality is affected by the climate, and nutrients that the goats consume. The climate and geography of Mongolia is especially suited for herding goats because they thrive in harsh dry mountainous climates. The highest quality of wool is found in these climates. Goats cannot grow the downy coats that produce cashmere in moderate climates. #13

A Day in the Life of a Herder

In order to get a good understanding of the cashmere industry, it is necessary to explain the process by which cashmere is brought to the market. This process starts at the herder. For a herder, life can be very hard. The following is a story that I learned from an elder herder and his wife in the Darhat Valley in Mongolia on May 27, 1997. This couple had 16 kids, 7 of which died at birth. Most of their children are herders and live in the same area as their parents. They have one son who lives in Ulaanbaatur and is a middleman. Another son is a teacher in Richenlumbe, which is a small city in the Darhat Valley.

They have camped in the same spot for about ten years now. There are a total of three gers that camp together in that same spot. A ger is a traditional nomads tent, or home. Within a ger camp, there can be grandparents, aunts, uncles, and cousins. In one of the gers in this camp there are eight people who live there. The amount of time herders stay in a spot depends on the weather and vegetation growth each year. They may move to their winter/spring camp in late March to May if the weather is bad. During the winter, the family often slaughters two big animals and ten little ones. Big animals consist of horses, camels, and cows. Small animals are sheep and goats.

The couple have over 300 animals. They sell their animals and raw materials to middlemen most of the time and hope they get cash from this. Usually, they have to trade and barter in goods to the middleman for flower, sugar, rice, and other staples. The middleman, or traders come in the fall because that is when herders slaughter the animals for winter goods. In October to early November, they make skins and hides. During May to June, they remove the cashmere from the goats, and from late June to early July, they remove the wool from the sheep. #14

History of Mongolia

When one thinks of Mongolia, one of the main accomplishments that come to mind is that of Chinggis Khan, who conquered all the land in Korea, Southern Russia, parts of Europe, and into China. The Mongolians first arose to unify their nomadic neighbors, and once that was done they conquered most of Eurasia for more than a century.

Nomads have lived in what is now Mongolia from the third century B.C. Since the seventeenth century, Mongolia has been divided by China into southern Inner Mongolia which is part of China and Northern Outer Mongolia (Outer Mongolia is the country and the focus of my study). Tensions between China and Mongolia have existed since the days of Chinggis Khan.

Throughout the twentieth century, Russian and Soviet influence over Mongolia led to the development of a socialist state in the 1920s and early 1930s. This socialist state was highly influenced by the Soviet Union. In 1992, Mongolia transformed peacefully into republic government with a free market economy. 5

Culture

I4 Mongolian culture is greatly influenced by its geography. Mongolia is comprised of huge rolling plateaus, rugged mountains, Hovsgol Nuur (Asia's second largest freshwater lake) and the Gobi dessert. The dessert climate of Mongolia is cold and dry with two seasons: long winters that reach below freezing temperatures, and short dry hot summers.

Pastoral Nomadism, the mainstay of the Mongolian economy, is an ecological adaptation resulting from the harsh climate. Grain can be grown in Mongolia, but the crop will be lost once every ten years due to drought. Pastoral nomadism is characterized by highly mobile herding, with temporary exploitation of the resources that disappear so quickly in the harsh climate.

The nomadic society values mobility and the ability to cope with problems by moving away from those threats. When resources dry up, they move toward other resources. Therefore, cultivation of the earth and the accumulation of objects are frowned upon. Mongolian society and culture also developed in opposition to the Chinese culture of settlement and farming.5

The culture of Mongolia is tied to the land. The people of Mongolia see themselves as a part of nature. The land is not only a means of survival but also the backbone of their existence. People coexist with the land. The meaning of land is passed down through language, religion, and culture. The value of the land is equal to the value of people. 9

Globalization

Globalization is characterized by shrinking space, shrinking time, and disappearing borders. Peoples lives are becoming linked more deeply than ever before across the world. Globalization is leading to the integration of the worlds markets, culture, technology, and governance. People are now more and more effected by events around the world. 4

How is globalization affecting Mongolia? Globalization is affecting Mongolia in that the markets now fluctuate much more rapidly. It used to suffice for herders to get information on the cashmere market once every month or so. Now, the market can change so rapidly that it becomes necessary to get information day to day, hour to hour, and minute to minute. It is now imperative that herders have access to technology that they never before had to have access to, for example the internet.

Despite increasing urbanization, industrialization, and foreign influence, nearly half of Mongolia's population still live by traditional pastoral nomadism, or in close relationship with the nomads. This nomadic life has provided Mongolians with their national values, identity, and pride. Still, technology is influencing the nomadic lifestyle.

Government policies are seeking to modernize and cope with globalization without destroying the traditional nomadic lifestyle.5. The above technological influences are seen as very positive for herders. Unfortunately, many of these technological advances are only helping herders who have a lot of money and who are in areas of relatively good access. Herders without much money or who are in mountainous areas that are hard to get to can not get these technological advances as easily. These poorest herders are herders with less than 150 animals. Increasing inequality will most likely result from globalization.

I2Trade in Cashmere Products

The transfer from a Socialist economy to a capitalist economy led to a crash in the market. Mongolia is in the process of rebounding from this crash. Mongolia is the second largest producer of cashmere in the world, second only to China. Trade problems with China and globalization are exacerbating the cashmere crisis in Mongolia for a number of reasons, all of which will be discussed below.

 Mongolia produces about 3,000 tons of cashmere per year, about 21 percent of the world market. 1 Prior to Mongolia's transformation to a capitalist society, cashmere in Mongolia was processed at home or sent to Western countries for processing. Today, more than half of the raw cashmere in Mongolia is exported to China. This not only worries Mongolia's manufacturing industry but Mongolia as a whole. The processors are concerned because they are now only operating at about 50 percent capacity due to the large amounts of raw cashmere going to China. Since half of Mongolia's 2.5 million people raise the goats that make cashmere, there is an urgency to fix the cashmere industry in Mongolia. 2 Another concern is mix breeding for the goal of quantity not quality, which has led to a decline in the quality of cashmere. 3

Why is there a crisis today in Mongolia? The world supply of cashmere raised considerably in the 1990s, but the world demand for cashmere has fallen. Part of this lack in demand is due to the recession in Japan, who as a result is not purchasing as many cashmere products. The prices of cashmere have fallen due to rising supply and lowering demand. To prop up the price of cashmere, the Chinese government is buying cashmere at an immense rate in Mongolia. Since the Chinese government is buying large amounts of cashmere in Mongolia, it is pulling the supply of raw cashmere out of Mongolia. This hurts the processing plants. To counter this trend, the Mongolian government after the transformation put an export tax on raw cashmere. This export tax does not work very well due to smuggling. In 1996, it was estimated that of the 1,000 tons of cashmere sold to China, all but 16 tons were smuggled. Therefore, collection of the export tax is a major concern. 3 The 30 percent export tax of raw cashmere was put into place to discourage the extreme flow of raw cashmere into China. Preceding the transformation, exports were discouraged with a ban on the sale of raw cashmere.1

There are a few options that herders in Mongolia have for selling their raw cashmere. Herders can sell their products to the Chinese, to Mongolian traders, or directly to Mongolian processing plants. Mongolian herders would rather sell to Mongolians rather than to China, but many can not because the Chinese pay more for raw cashmere than Mongolian traders and processors do and they pay in cash. Many of the buyers are unable to get cash because the cost of borrowing is extremely high, therefore the Mongolian buyers can only exchange goods for raw cashmere. The processing plants in Mongolia are going under because they do not have enough goods to run at capacity due to Mongolian herders selling their cashmere to China. Other Mongolian herders take their cashmere to the Chinese border themselves, or sell to those who do. 3

Environment

Mongolia has an abundance of natural resources. The environmental problems that Mongolia faces are caused by natural forces and human impact. An example of a natural force is a drought. A drought in Mongolia is called a zud. A zud is caused by a harsh winter followed by a very dry summer. The zud last winter killed hundreds of thousands of animals. Human impacts cause problems such as desertification, mining, logging, waste, and air pollution which threaten the livelihood of the country. Protection of the biodiversity and national parks are also a concern. Other concerns include sustaining the mineral, forest, and water resources.

Threats to the biodiversity of Mongolia and therefore future growth are: overgrazing which leads to desertification, over exploitation of animals and plants, pollution, soil erosion, and loss of land to oil and mining. Too often, development programs forget that the ecological health of the grasslands are vital to agriculture. When the ecology of Mongolia is not protected, it threatens the whole pastoral lifestyle that is inherent to the culture and happiness of Mongolians. 7 Another problem is that current laws need to be clarified and enforced in order to protect the environment. There also need to be effective mechanisms set up for inspecting, regulating, taxing, and collecting fees. 6

Desertification is the largest environmental threat to the cashmere industry in Mongolia. Many herders are losing their connection with the land, and over-grazing is one result of this loss. Over-grazing leads to desertification. Almost 30 percent of Mongolia's territory has the conditions necessary for desertification to occur. One percent of Mongolia is severely effected by desertification, three percent is considerably effected, 21 percent is effected to a medium extent, and 75 percent of Mongolia's land mass is slightly effected by desertification. About 13 percent of desertification is due to nature and the other 87 percent of desertification in Mongolia is caused by humans. Over the last four decades, the area of land covered by sand has increased 8.7 percent. Desertification has affected 30 percent of pasture lands in Mongolia. Pasture lands account for a total of 80 percent of Mongolia's land mass. The population of goats (where cashmere comes from) is a problem because goats destroy grasslands and soil. 8 These environmental problems are caused to a large extent by the very thing that Mongolians make their living by doing. Globalization may lead to a worsening of this problem because of the need to produce more and more products and also because the connection to the land is lost.

3. Related Cases

CASHMERE
SILKROAD
CAMELID
LEATHER
BISON
KARACHI
ECFURBAN
NUTRIA
DEER

4. Draft Author: Gretchen Warner (November 2000)

II.Legal Clusters

5. Discourse and Status:

There are currently no legal issues that have been brought to the WTO or any other trade grouping.

6. Forum and Scope:

Mongolia and Unilateral

7. Decision Breadth:

Mongolia

8. Legal Standing:

LAW

Mongolia is a member of the World Trade Organization. Agreements under the WTO Urugway round that could effect Mongolia are the following:

The Agreement on Textiles and Clothing integrates the textiles and clothing sector into GATT. Processed and manufactured cashmere would be affected by this agreement. In 1995, Mongolia exported about 541 tons of processed cashmere and about 219 tons of manufactured cashmere. This agreement sets up a safeguard mechanism for imports. This would effect Mongolia in their exporting to other countries because they would have to follow these new rules. Mongolia would have to follow the new safeguard rules. Since Mongolia exports about 30 percent of its raw cashmere to China, these rules would not be relevant until China joins the WTO. The agreement also states that all countries need to follow the rules of GATT to improve their market access, trade fairly and equitably and avoid discrimination against imports into their country. This rule could help Mongolia when China joins the WTO because currently China is not following these rules in their trade with Mongolia.

Agreement on Agriculture: This agreement strengthens the rules regarding agricultural trade. This agreement will help Mongolia in that it will improve market access, domestic support, and export competition. This agreement could also affect Mongolia because Mongolia must reduce its tariffs. Another part of the agreement, called the green box policies, ensures that the reductions in tariffs do not hurt the development of the country. The country can still have tariffs that have to do with development programs like environment, infrastructure improvements, and other programs necessary for development. These green box policies will help Mongolia in that it will ensure that it can have control over and help with its development.

Agreement on Subsidies and Countervailing Measures: In order to help the cashmere industry in Mongolia, the country can have certain types of subsidies. Subsidies that are okay include actionable subsidies and non actionable subsidies. Actionable subsidies are those subsidies that do not hurt another country. Non actionable subsidies are subsidies that are set up to assist development. This agreement recognizes that subsidies can be important for developing countries, especially those like Mongolia who are transforming from a centrally planned economy to a market economy.

III.Geographic Clusters

9. Geographic Locations

a. Geographic Domain: Asia

b. Geographic Site: East Asia. All of Mongolia is nomadic and grazes animals, although the majority of the goats used for making cashmere products are grazed in the Gobi Desert because they are very sensitive to the extremely cold weather in Northern Mongolia.

c. Geographic Impact: Mongolia. The areas effected by any legal instruments would be the whole globe, but most specifically Mongolia and China.

10. Sub-National Factors:

None.

11. Type of Habitat:

Cool. Dry steppes and deserts

IV.Trade Clusters

12. Type of Measure:

IMTAX

Also discussed was the EXBAN that was in effect before Mongolia's transformation to a Capitalist society.

13. Direct v. Indirect Impacts:

Direct

14. Relation of Trade Measure to Environmental Impact

Before the transformation, Mongolia had a ban on exports, which was much better for the environment than the current tax on exports because the new competition is leading to the realization that to make it, the herders need more animals. More animals leads to over-grazing which leads to desertification.

a. Directly Related to Product: YES. Cashmere.

b. Indirectly Related to Product: YES. Goats.

c. Not Related to Product: NO

d. Related to Process: YES. Habitat loss.

15. Trade Product Identification:

The trade product is raw cashmere.

16. Economic Data

17. Impact of Trade Restriction:

LOW

18. Industry Sector:

TEXTILE

19. Exporters and Importers:

Mongolia and China.

 Mongolia is an exporter of cashmere products, but not an importer of products.

V.Environment Clusters

20. Environmental Problem Type:

DEFOR: Grazing pushes the forests back. Deforestation is also a problem in Mongolia because grazing leads to desertification, which leads to a loss of forests.

HABIT and BIODIV: Biodiversity is threatened by overgrazing, overexploitation of animals and plants, pollution, soil erosion, and the loss of land to oil and mining. The ecological health of the grasslands is very important because overgrazing destroys pastures as well as wild species and biodiversity. 10

POLL: Pollution of the water supply is a major problem. Not only is the water supply affected by drought and desertification, and water sanitation is also a concern. Other pollution problems are caused by the use of coal in gers for heat. 11

21. Name, Type, and Diversity of Species

Name: Goats

Type:

Diversity: Many different types of goats. The goats that produce cashmere are the ones discussed in this case.

22. Resource Impact and Effect:

LOW AND PRODUCT

23. Urgency and Lifetime:

LOW AND ABOUT 10 YEARS

24. Substitutes:

SYNTHETICS

VI.Other Factors

25. Culture:

Yes.

See above section on culture.

26. Trans-Boundary Issues:

No.

27. Rights:

The right to keep their culture, stay happy, and self-sufficient is is very important to Mongolians. Happiness can be found in doing what one enjoys and what gives one a feeling of accomplishment. Mongolian herders are self-sufficient in that they live off the land and use the products that they herd. Mongolians will lose their self-sufficiency if the cashmere industry and the nomadic lifestyle is destroyed. One way this can happen is if they are coerced into building fences and owning property. This will destroy the culture, happiness, and self-sufficiency of Mongolians. Globalization is seen as one of the forces that could potentially harm the future happiness and self-sufficiency of Mongolians.

28. Relevant Literature

1. Gobi Regional Economic Growth Initiative. The Impact of a Ban on the Exports of Raw Cashmere. August 1999.

2. Gargan, Edward A. Not So Cozy / Competition, Cross-breeding thrust Mongolia's Cashmere Industry into State of Crisis. Newsday. August 27, 2000.

3. Smith, Lee. Industry in Distress: More Policy Options Need to be Explored. Gobi Business News. June-July 1999.

4. Jolly, Richard. Human Development Report, 1999. United Nations Development Program. Oxford University Press, New York. 1999.

5. ed. by Worden, Robert L., and Savada, Andrea Matles. Mongolia: A Country Study. Federal Research Division, Library of Congress. 1989. Library of Congress Country Studies webpage

6. United Nations. The Mongolian Action Programme for the 21st Century. a.k.a. Map 21. P.9. United Nations in Mongolia webpage Found 3/27/00.

7. Eastern Steppe Biodiversity Project. Threats. UNDP. P. 1-2. United Nations in Mongolia webpage Found 3/27/00.

8. ed. Jari Heikkila. Mongolia Environment. Mongolian Conservation Newsletter. Issue 8, July-August 1998. United Nations in Mongolia Found 10/09/00.

9. ed. Pohl, Kelly. The Darhat Valley Bioregional Management Plan. Fall 1998.

10. United Nations. The Threats. Mongolia Biodiversity Project. August 13, 1999. Eastern Steppe Biodiversity Project. Found 3/27/00.

11. UNDP. The Gobi Water Summit of 1999. Blue Sky Bulletin. Issue 11. December 1999. UNDP Newsletter.
Found 3/27/00.

13. Purcell, Theresa. Scotland and China and Cashmere Trade. TED Case Studies. May1996. CASHMERE

14. Warner, Gretchen. Information found through an interview when in the Darhat Valley in Mongolia. May 27, 1997.

Images:
#I1. Map of Mongolia: Lycos, Inc. 2000. Found 12/6/00. Lonely Planet
#I2. Flag of Mongolia: Mooney, Edward Jr. 2000. Found 12/6/00. Mooney's Miniflags.
#I3. Toddler and Baby Goat: Taken by Patrick Mangan during our visit to the Darhat Valley in Mongolia. May 1997.
#I4. Ger and Barn: Taken by Patrick Mangan during our visit to the Darhat Valley in Mongolia. May 1997.

Links:

This website provides links to many websites about Mongolia: Mongolia WWW Virtual Library
The following website gives news and information about Mongolia: Mongolia Online: Your Guide to Mongolia
The following is a good website about Mongolia, especially their youth: Mongolian Online Magazine
News: MONTSAME
United Nations Development Program in Mongolia: UNDP
United Nations in Mongolia: UN