Tsukuba Economics Working Papers
No. 2011-005

The Extensive Margin of International Trade in a Transition Economy:
The Case of MongoliabyChingunjav Amarsanaa and Yoshinori Kurokawa
August 2011
This version: March 2021

UNIVERSITY OF TSUKUBA
Department of Economics
1-1-1 Tennodai
Tsukuba, Ibaraki 305-8571
JAPANThe Extensive Margin of International Trade in a
Transition Economy: The Case of Mongolia*
Chingunjav Amarsanaa†

Yoshinori Kurokawa‡

Bank of Mongolia

University of Tsukuba

March 13, 2021
Abstract
Using the Kehoe and Ruhl (2013) methodology, we investigate whether the variety oftraded goods, which is the extensive margin of trade, has actually changed in a transition
economy, such as Mongolia, as predicted by recent theoretical models. Answering thisquestion would be interesting especially for the transition economies that still have anobserver status in the World Trade Organization (WTO). We find large increases in theextensive margin of Mongolia’s trade with 10 major trade partners from 1997 to 2002, when
Mongolia was undergoing significant structural reforms. We also find further increases in theextensive margin for the Mongolia-China and Mongolia-EU pairs after trade liberalizations
due to China’s accession to the WTO (2001) and Mongolia’s eligibility for the EU
Generalized Systems of Preferences (GSP+) scheme (2005). We, however, find no or
relatively small further increases in the extensive margin for the Mongolia-Russia pairduring the period 2002 to 2007, when there was no major change in the trade regime of thesetwo countries. Our robustness checks indicate that methodologies other than that of Kehoeand Ruhl’s overstate the extensive margin growth in Mongolia with small trade relationships.
Keywords: Mongolia, transition economies, extensive margin, structural change, tradeliberalization, business cycles, small trade relationships
JEL classifications: F13, F14*

We are very grateful to Seki Asano, Gantuya Jugdersuren, Timothy Kehoe, Kozo Kiyota, Sawako Maruyama, Mari
Minowa, Hisahiro Naito, Kim Ruhl, Yao Tang, and Hisashi Yokoyama for their helpful advice and suggestions. We
also thank seminar participants at the Research Workshop at the University of Tsukuba, the Academy ofManagement-Government Agency of Mongolia, the Bank of Mongolia, the International Scientific Conference on“Trade Policy Reform of Mongolia,” and the 70th Annual Meeting of the Japan Society of International Economics
for their useful comments. However, the remaining errors are exclusively ours. The views expressed herein are thoseof the authors and not necessarily those of the Bank of Mongolia. This paper previously circulated under the title“The Extensive Margin of International Trade: The Case of Mongolia.”†
The Bank of Mongolia, International Department, Balance of Payments and Research Division, Ulaanbaatar 46,
Baga Toiruu 9, Mongolia. Tel.: +976-11-319532. E-mail: chingun@mongolbank.mn.
‡
Corresponding author. Faculty of Humanities and Social Sciences, University of Tsukuba, Tsukuba, Ibaraki 3058571, Japan. Tel.&Fax: +81-29-853-7426. E-mail: kurokawa.yoshi.fw@u.tsukuba.ac.jp.

11. Introduction
Since 1990, Mongolia has been undergoing a dramatic transition from a centrally planned
economy to a free market economy. During the period 1997 to 2002, Mongolia underwent
significant structural reforms. To enhance and strengthen its trade relationships, Mongolia
became a member of the World Trade Organization (WTO) in 1997 and applied for the
Generalized Systems of Preferences (GSP) of several large economies.1 As a result, in 2008,
Mongolia was a beneficiary of preferential schemes of Japan, the U.S., the EU, and Canada.2
Thus, the composition of Mongolia’s trade most likely drastically changed during this transition
period.
In fact, recent theoretical models (e.g., Melitz, 2003; Yi, 2003; Arkolakis, 2010) predict thatsignificant structural changes and trade liberalization have an effect on the extensive margin of
trade.3 Changes in the extensive margin of trade are changes in the variety of traded goods driven
by countries starting to trade goods that they had not traded before. Changes in the intensive
margin of trade, on the other hand, are changes in trade volumes of goods that were previously
traded.
This raises the empirical question: Has the extensive margin of trade actually changed in
response to structural reforms or trade liberalization in the transition economy of Mongolia?
Answering this question would be interesting especially for the Central Asian transition
economies such as Uzbekistan, Turkmenistan and Azerbaijan that still have an observer status in
the WTO as well as other small economies that still have trade barriers.
This paper uses the Kehoe and Ruhl (2013) methodology to answer this empirical question.
Kehoe and Ruhl (2013) have proposed a methodology for measuring changes in the extensive
margin of trade. They measure the growth in the extensive margin by the growth in the least
traded goods. They classify the set of goods, which accounts for only 10 percent of trade, as theleast traded goods. Growth in the least traded goods indicates that a country started exporting1

See Milthorp (1997) for Mongolia’s commitments as a WTO member and the particular issues for transition
economy applicants for accession to the WTO.
2
Mongolia has not yet signed any regional or bilateral free-trade agreements (FTAs), but the government is
considering several FTAs with its main trading partners.
3
The extensive margin has recently been proven useful in understanding firm-level export patterns (Melitz, 2003;
Arkolakis, 2010) and the growth in aggregate trade volumes (Yi, 2003). Kurokawa (2011) demonstrates the possible
importance of the extensive margin of imports in understanding the increase in skill premium in wages.

2

(importing) goods that it had not exported (imported) before or had exported (imported) only insmall quantities, indicating that the variety of exports (imports) increased in this country.4
Applying their methodology, we find large increases in the extensive margin of Mongolia’s
trade with 10 major trade partners during the period 1997 to 2002, when Mongolia wasundergoing significant structural reforms.5 We also find further increases in the extensive margin
for the Mongolia-China and Mongolia-EU pairs after trade liberalizations due to China’s
accession to the WTO (2001) and Mongolia’s becoming eligible for the EU GSP+ scheme(2005), respectively.6 We, however, find no or relatively small further increases in the extensive
margin for the Mongolia-Russia pair during the period 2002 to 2007, when there was no majorchange in the trade regime of these two countries. The results support the Kehoe and Ruhl (2013)
hypothesis that the extensive margin growth is driven by trade liberalization or structural change
but not by the usual turbulence of business cycles. The results are also compatible with those of
Helpman et al. (2008). Estimating a gravity equation, they show that the effect of the extensive
margin of trade varies across country pairs according to the characteristics of trade partners.
Of course, there are other studies that also apply the Kehoe and Ruhl methodology tomeasure the extensive margin of trade, as does our paper. Mukerji (2009) studies theliberalization of trade in India in the 1990s. Sandrey and van Seventer (2004) study theliberalization of trade brought about by the Closer Economic Relationship agreement between
Australia and New Zealand starting in 1988. Dalton (2014) studies the change in the extensive
margin of trade between Japan and China after China’s entry into the WTO in 2001. Dalton(2017) studies the change in the extensive margin of trade between Austria and the ten new
entrants to the EU in 2004. Cho and Díaz (2018) analyze the role of the extensive margin in theBaltic countries’ trade growth between 1995 and 2008. Cho et al. (2018) analyze the changes inthe extensive margin of bilateral trade following the FTAs signed by Korea between 2004 and4One may be concerned that the total number of traded goods can decline if most of the traded goods become to be
un-traded anymore as the least traded goods become to be traded more. We, however, confirmed that, in theepisodes to be studied in our paper, there were much more births than deaths of traded goods when the share of theleast traded goods increased.
5
Japan’s share in the Mongolian total trade was 22 percent in 1996.
6
China’s share in the Mongolian total trade was 40.5 percent in 2001, and the EU’s share 11.3 percent in 2005. The
EU GSP is the system of preferential trading arrangements through which the EU extends preferential access to its
markets to developing countries and economies in transition. In 2005, the EU introduced a new GSP+ scheme thatenvisages additional tariff privileges. The GSP+ scheme includes approximately 7,200 descriptions of goods that areadmitted to the EU market without customs taxes.

3

2008. As does our paper, all of these studies show that extensive margin growth coincides withtrade liberalization.
There are also many studies that have determined the importance of the extensive marginusing methodologies other than the methodology by Kehoe and Ruhl (2013). 7 Evenett and
Venables (2002), for example, find that one-third of the increase in exports of developing
countries between 1970 and 1997 can be explained by the extensive margin growth. Kang (2004)shows that the extensive margin played a more important role in export growth than did theintensive margin in Korea and Taiwan. Hummels and Klenow (2005) investigate cross-country
differences in trade and find that the extensive margin accounts for 60 percent of the increased
exports of larger economies. Studying the growing varieties of U.S. imports from 1972 to 2001,
Broda and Weinstein (2006) find that ignoring the increase in varieties leads to an overstatementof inflation by 1.2 percentage points per year, which is equivalent to an extra 2.6 percent increasein the GDP during the period. Felbermayr and Kohler (2006) find that the extensive margin was
more important in the world trade growth between 1950 and 1970 and again in the mid-1990s,
while the intensive margin was more important during the intervening period. Besedes and Prusa(2011) examine and compare the developed and developing countries based on their extensive
and intensive export margins.
In this line of literature, our paper makes the following contributions. First, the methodology
by Kehoe and Ruhl (2013) for measuring the extensive margin has been applied to developed
countries or economically large developing countries with large trade relationships. Our paper
now applies the methodology to the transition economy of Mongolia, which is an economicallysmall developing country with small trade relationships. To the best of our knowledge, this paper
is the first to apply the Kehoe and Ruhl methodology to Mongolia. In fact, it is the first to
provide a comprehensive analysis of the extensive margin of Mongolia’s trade.
Secondly, our paper provides a more detailed analysis of the extensive margin growth thanthat of Kehoe and Ruhl’s (2013). The least traded goods may incorporate some traded goods insmall trade relationships, and thus, the extensive margin growth, measured by the least traded
goods growth, may come from the growth of these goods. Hence, by decomposing the least
traded goods into three parts—zero traded, little traded, and relatively traded goods—we check if

7

In Section 2, we will explain the methodology by Kehoe and Ruhl (2013) and other methodologies for measuring
the extensive margin.

4the extensive margin growth in Mongolia, measured by the least traded goods growth, is actuallya consequence of the increases in the trade volumes of previously zero or little traded goods. We
also determine types of goods that contributed to the extensive margin growth. In particular, wefind that mineral resources and resources coming from livestock herding contributed most to theincrease in the extensive margin of Mongolia’s exports across country pairs.
Thirdly, our robustness checks support Kehoe and Ruhl’s (2013) prediction that countryinvariant methodologies (Evenett and Venables, 2002; Hummels and Klenow, 2005; Broda andWeinstein, 2006) overestimate the extensive margin growth for countries with small traderelationships.8 In fact, our results show that the extensive margin growth measured by using
country-invariant methodologies is much higher than that measured by using the Kehoe and Ruhl
(2013) country-variant methodology.
The rest of this paper is organized as follows. Section 2 presents the Kehoe and Ruhl (2013)
methodology that we apply in our analysis of the extensive margin. In Section 3, we show theextensive margin growth results for the three episodes—structural change episodes, tradeliberalization episodes, and business cycle episodes—in the case of Mongolia with its main
trading partners. In Section 4, we present the robustness check, that is, the decomposition of the
trade growth consistent with the Hummels and Klenow (2005) methodology. 9 Section 5
concludes the paper and mentions future work.

2. Data and Methodology
We study detailed annual trade statistics and more specifically, Mongolian bilateral commodity
trade data with its main trading partner countries. The data were obtained from the Mongolian
Custom’s Office disaggregated at the six-digit level of the harmonized system (HS). The HS sixdigit level is the most detailed level that can be compared internationally. As Hummels andKlenow (2005) argue, by using more detailed export data, we can do better job of assigningvariety differences to the extensive margin. Here, we note that as will be mentioned later, it is8

Section 4 will compare results from other methodologies with those from the Kehoe and Ruhl (2013) methodology.
Hummels and Klenow (2005), using detailed trade data, decompose a nation’s trade into an extensive component
and an intensive component for a large cross-section of countries. They find that the extensive margin is importantin explaining why big countries trade more varieties of goods than smaller countries.
95

fortunate that the HS code consolidations that became effective in 2002 and 2007 have no effecton our results.
For a given pair of countries, we study the 1996 to 2007 disaggregated data on annual trade
flow values by good. We define a good as a six-digit code of the HS. We study different time
periods depending on the episode to be considered. To measure the extensive margin, we use the
Kehoe and Ruhl (2013) definition of a non-traded good. Kehoe and Ruhl classify the set ofgoods that accounts for only 10 percent of trade as the least traded goods. The set of non-traded
goods is defined by the least traded goods, which include goods with very small amounts of tradeas well as goods with zero trade.10 The Kehoe and Ruhl definition of a non-traded goods takes
into account the relative importance of a good in a country’s trade, rather than imposing countryinvariant dollar-value cutoffs for determining whether a good is traded or not.
According to Kehoe and Ruhl (2013), to construct the set of the least traded goods for aparticular trade flow, we order the HS six-digit codes by their average value of trade over the
first three years of the sample. By averaging over a few years, we eliminate the ordering’s
dependence on the choice of the base year. We cumulate the ordered codes to form 10 sets, each
representing one-tenth of the total exports (imports). The first set is constructed, starting with thesmallest codes, by adding codes to the set until the sum of their values reaches one-tenth of thetotal export (import) value. The next set is formed by summing the smallest remaining codes
until the value of the set reaches one-tenth of the total export (import) value. The first set consistsof the least traded goods: the codes with the smallest export (import) values, including all the HS
codes with zero trade value.11
Given this system of partitioning the codes, we study two features of the data. First, we
compute the change in the trade share of each of the 10 sets of codes during the sample period.
The resulting statistics show the change in the distribution of the goods being traded. Second, we
compute the evolution of the set of the least traded goods to find the timing of the growth in10

According to Kehoe and Ruhl (2013), there is no absolute concept of zero in trade statistics. For example, export
shipments from the U.S. (import shipments to the U.S.) are, in general, required to be reported only if the value ofthe shipment is greater than 2,500 U.S. dollars (2,000 U.S. dollars). A good could have trade with a number of
shipments smaller than this limit and be reported as having zero trade. The minimum reporting level tends to varyacross countries.
11
To create sets that account for exactly 10 percent of total trade, some codes had to be split.

6

these goods. Here, we note again that fortunately, the HS code consolidations that became
effective in 2002 and 2007 have no effect on our results.12
Figure 1, for example, shows the values of the 10 sets of codes in 1996 for Japan’s exports to
Mongolia; the total value of each set of codes is equal to 0.10 of Japan’s total exports to
Mongolia by construction. The numbers above each bar in the figure are the number of goods
needed to account for 10 percent of the trade flow. The distribution of trade is skewed, that is, it
requires 1170.74 least traded goods, 526 codes (Table 1.a) of which have zero recorded export
value in 1996, to account for 10 percent of the total exports from Japan to Mongolia.
The bars in Figure 1 are the fractions of trade in 2005, after 9 years, which include the period
1997 to 2002, which is the period of structural changes. To interpret these statistics, we consider
the following two extreme cases. First, if the growth in trade were driven only by a proportional
increase in the value of all the already traded goods, that is, if the growth in trade were entirelyon the intensive margin, each set of codes would retain its one-tenth share in trade. Thus, the bars
in Figure 1 would all be 0.10. Second, if the growth in trade were driven only by trade in goods
that were not previously traded, that is, if the growth was only on the extensive margin, the set ofleast traded goods would gain trade share. The trade shares of the other sets, on the other hand,
would decline.
As shown in Figure 1, the movements of the trade shares of the highest 9 sets of goods are
not uniform, but the data have a very large positive spike in the share of trade accounted for by
the least traded goods. The 1170.7 least traded goods that account for 10 percent of Japan’s
exports to Mongolia in 1996 account for 28.4 percent of those same goods in 2005.
In addition, in Table 1.a, we present the decomposition of the Kehoe and Ruhl extensive
margin in three parts. These include zero traded goods, little traded goods or goods with positive
traded values that are less than or equal to 50,000 U.S. dollars, and relatively traded goods or
goods with a trade value that is greater than 50,000 U.S. dollars. In this way, we are able topresent the origins of the actual growth. As Table 1.a shows, the increases in Japan’s exports of
the least traded goods to Mongolia are spread across many goods. The 526 least traded goods
12

According to the HS consolidation check file provided by Cebeci (2012), if a specific HS six-digit code appears inthe ‘Sorted by original HS’ sheet, the code was affected by the consolidation operations. Otherwise, the code did
not change across HS 1996, 2002, and 2007 classifications and thus it was not affected by the consolidation
operations. We checked that in our data, all of the HS six-digit codes that do appear in the ‘Sorted by original HS’
sheet were zero traded during the periods to be studied, and thus these codes do not affect the change in the tradeshare of each of the 10 sets of codes.

7that have zero recorded export value in 1996 have positive recorded export value in 2005, andexports of these goods account for 12.0 percent of the exports from Japan to Mongolia in thatyear. The share of the 618 least traded goods that were little traded in 1996 increased from 6.1
percent to 10 percent in 2005.
Using the same division of codes, our second computation focuses only on the set of the least
traded goods. For each of the sample years, we compute the share of the total trade flow
accounted for by the codes included in the least traded goods. Figure 3, for example, shows theevolution of the least traded goods in 1996. As in the first computation, if there was an extensive
margin growth, we would observe an increase in the share of the least traded goods. An increasein the share of the least traded goods that coincides with the implementation of structural reformor trade liberalization indicates the link between the reform or liberalization and the growth in
the extensive margin.
It is worth noting that the method by Kehoe and Ruhl (2013) applied in our study formeasuring the extensive margin is different from methods used in the few previous studies on theextensive margin. Hummels and Klenow (2005) and Broda and Weinstein (2006), for example,
classify a good as not traded if the value of trade is zero, and Evenett and Venables (2002)
classify a good as not traded if its yearly value of trade is less than or equal to 50,000 U.S.
dollars (1985), regardless of the country being studied. According to Kehoe and Ruhl’sdefinition of a non-traded good, goods with very small, but non-zero, amounts of trade can beconsidered, and the actual dollar value of the cutoff can differ across countries. In fact, as
mentioned in the introduction, the method by Kehoe and Ruhl has been widely used. Sandrey
and van Seventer (2004), Mukerji (2009), Kurokawa (2011), Dalton (2014, 2017), Atolia andKurokawa (2016), Cho and Díaz (2018), and Cho et al. (2018), for example, use their method tomeasure the extensive margin of trade as do we.

3. Extensive Margin Growth
Following Kehoe and Ruhl (2013), in our analysis, we consider three types of episodes involving
bilateral country pairs: (1) structural change episodes involve periods of rapid trade growth thatare driven by significant structural transformation; (2) trade liberalization episodes involve amajor change in the trade regime between country pairs; and (3) business-cycle episodes are
8episodes in which neither country has a significant structural transformation nor a significant
change in trade policy. The business-cycle episodes allow us to observe how the extensive
margin responds to the usual turbulence of business cycles.

3.1. Structural change episodes

As mentioned in the introduction, recent theoretical models predict that significant structuralchanges are accompanied by a significant restructuring of the composition of a country’s trade,that is, the extensive margin of trade.
Since abandoning the central planning in 1991, Mongolia has made real progress toward
transforming itself into a market-based economy. Hence, the private sector share of the GDP has
been increasing.13 Raising the living standards by finding ways to overcome the constraints ofisolation, distance, and limitations of the domestic market due to the population size, however,remained Mongolia’s continuing development challenge. Policymakers recognized both the needfor further promoting private sector development and large-scale infrastructure investments aswell as restructuring Mongolia’s economy to make it more competitive and to enhance its growth.
Hence, policymakers took a set of important regulatory and economic measures during 1997 to
2002 that led to a new transition process. As a result, by 2005, the private sector share of the
GDP accounted for approximately 80 percent of the total economic output as compared with zeroin 1991, and the foreign trade was done almost at 100 percent by private companies.
One of the measures was the opening of the country and its mineral resources to foreign tradeand investment, which culminated in Mongolia’s accession to the WTO and its adoption of the
new minerals legislation in 1997 that was widely hailed throughout the global industry as aworld-class, investor-friendly legislation. Another important legislative measure was the
improvement of the foreign direct investment (FDI) law that accorded foreign investors greater
security. The last amendment to the FDI law was added in 2002. Besides the overall
liberalization, the government implemented social programs such as the Housing Program (19982005) to increase apartment supply in the capital city of Ulaanbaatar. The Housing Program had

13

Anderson et al. (1999) examine Mongolia’s post-privatization developments, such as ownership changes andenterprise governance.

9

a significant impact on trade as many construction materials need to be imported due to the lackof their domestic production.
As a result of these measures, Mongolia’s economy recovered by 2001, and the GDP
returned to its pre-transition level of 1990. Mongolian mineral resources began to gain more
attention within the country and internationally as the mining sector began to receive large FDIs.
As a result, 1997 to 2005 was a period of rapid growth for Mongolian exports and imports.
Exports of goods grew 6.8 fold from 155.5 million U.S. dollars in 1996 to 1,062.4 million U.S.
dollars in 2005. Over this period, imports of goods grew 4.5 fold from 261.0 million U.S. dollars
in 1996 to 1,173.7 million U.S. dollars in 2005.
In this section, we would like to investigate the impact of structural reforms on the extensive
margin of Mongolia’s trade with 10 major trade partners. We use the Kehoe and Ruhl’s (2013)
country-variant methodology and measure the extensive margin before and after the reforms.
First, we focus on Japan. The size of trade between Mongolia and Japan represents 22 percent of
the overall Mongolian trade turnover in 1996, which means that Japan was the third largest trade
partner of Mongolia in that year (after Russia and China).
Figures 1 and 2 show the effect that these reforms had on the extensive margin in bilateral
trade between Mongolia and Japan from 1996 to 2005. As we have mentioned in Section 2, theleast traded 1170.7 goods of Japan’s exports to Mongolia increased from 10 percent in 1996 to
28.4 percent in 2005 (Figure 1), which means that, as Mongolia liberalized and restructured, thecomposition of its imports from Japan changed. On the other hand, the least traded 286.2 goodsof Mongolia’s exports to Japan grew to 100.0 percent of over the same period (Figure 2), whichindicates that all of the non-least-traded goods became to be un-traded over the period.
In addition, we report the shares of the least traded goods in total exports for the base (1996)
and end of the period (2005) and their decomposition in Table 1.a. For example, the second lineof Mongolia’s exports to Japan in Table 1.a indicates that Mongolian zero traded goods of 105
grew from 0 percent in 1996 to 97.3 percent in 2005 and made the most contribution to thegrowth of the share of the least traded goods, whereas the share of little traded and relatively
traded goods among the least traded goods fell during that period.
Figure 3 provides details regarding the timing of the extensive margin growth. It appears thatstructural reforms first affected Japan’s exports to Mongolia. In fact, Japanese companies andcompanies with Japanese shareholders in Mongolia imported mining and construction equipment
10

such as heavy transporters and other transportation vehicles. The share of the least traded goodsof Japan’s exports to Mongolia increased dramatically during 1999 to 2000, while the set of least
traded goods of Mongolia’s exports to Japan rose from 2002 to 2004 as the mining sector started
exporting. As Figure 3 shows, the share of the least traded goods of both exports significantly
increased during the years of the structural reforms, ultimately reaching a higher level than
before and maintaining at that level for the subsequent years. It appears that structural changes
had a large effect on the extensive margin for both the exports of both countries.
This result is not unique only between Mongolia and Japan. The same growth patterns
emerged for the bilateral trade between Mongolia and its other 9 main trading partners as
evidenced in the results reported in Tables 1.a and 1.b. It should be noted that as the tradeenvironment changed between Mongolia and China due to the China’s accession to the WTO by
the end of 2001, the extensive margin calculations between these two countries in this structuralchange episode were made only for the period from 1996 to 2001, thus isolating the effect ofChina’s tariff reductions.
What were the specific growth areas? We identify the top 10 growth among the least traded
goods at HS 2-digit level for Mongolia’s imports and exports with its 10 main trading partners.
In the case of the least traded goods in Mongolia’s imports from main trading partners, the top 10
included oil, due to the large increase in the number of automobiles and mining vehicles,
equipment, machinery, materials, and other consumer goods. The top 10 growth least traded
goods of Mongolia’s imports from main trading partners increased their share in total imports
from 4.6 percent in 1996 to 9.2 percent in 2005. In the case of the least traded goods inMongolia’s exports to main trading partners, the top 10 included mineral resources, resources
coming from livestock herding, and cashmere and wool textiles. The top 10 growth least traded
goods of Mongolian exports to its main trading partners increased their share of 2.4 percent in1996 to 6.3 percent in 2005.
In this section 3.1, we have described an increase in the shares of the set of the least traded
goods in Mongolian trade with all of its main trading partners during the period of structuralchange, thus indicating the importance of these structural changes. In fact, almost all of the main
trading partners produced goods related to the Mongolian policy changes from 1997 to 2002.

3.2. Trade liberalization episodes
11

It is difficult to specifically identify the partial impact of trade liberalization cases, such as
Mongolia’s accession to the WTO (1997) and Mongolia’s becoming eligible for the GSP
schemes of the U.S. (1999) and Japan (2000), from the impact of the structural changes during
the period 1997 to 2002. Thus, in our analysis of trade liberalization, we consider two otherepisodes where there were further changes in the Mongolian trade environment after the
structural reforms.
First, we consider a trade liberalization episode due to the accession of China to the WTO(2001). Next, we show the extensive margin changes in Mongolian exports to the EU as a resultof becoming eligible for the EU GSP+ scheme (2005). A plausible hypothesis for these tradeliberalization cases, according to prior research, would be that changes in the trade regimechange the composition of trade.
China became a member of the WTO by the end of 2001. China’s share in the Mongolian
total trade was 40.5 percent in 2001. To meet the fundamental principles of the General
Agreement on Tariffs and Trade (GATT) and the WTO, China committed to removing mosttariff barriers by 2004, with some minor exceptions; however, all barriers were to be lifted nolater than 2010. By 2004, China’s average bound tariff level was to decrease to 15 percent for
agricultural products, ranging from 0 to 65 percent, with the higher rates applied to cereals. For
industrial goods, the average bound tariff level was to decrease to 8.9 percent, with a range from0 to 47 percent, with the highest rates applied to photographic film, automobiles and related
products.
For measuring the extensive margin in trade between Mongolia and China, we use the time
period from 2001 to 2007.14 As can be seen in Figures 4 and 5, there is a significant extensive
margin growth between Mongolia and China when we compare results for 2001 and 2007. The
least traded 2,761.4 Chinese goods to Mongolia went from 10 percent of the total exports to
Mongolia in 2001 to 78.0 percent in 2007. The least traded 479.7 Mongolian goods to China
increased their shares from 10.0 percent to 40.0 percent of the total exports to China during thesame time period. Figure 6 shows the dynamics of these changes. As can be seen, the increases
were drastic just after China’s accession to the WTO in 2001.

14

The year 2007 is chosen as an end-of-period to control the macroeconomic effects that may come from the global
Lehman Brother’s shock.

12

Table 2 summarizes the results of the trade liberalization episode between Mongolia andChina. It should be noted that the Kehoe and Ruhl (2013) methodology measures the extensive
margin as a set of the least traded goods and, thus, may allow some traded goods in the case ofsmall trade relationships to account for the extensive margin growth. Therefore, we examine thedecomposition of the Kehoe and Ruhl’s extensive margin. Reported in Table 2 is thedecomposition of the base and the end-of-period shares of the least traded goods in total exports
and the number of goods that account for the shares. Upon analysis of this decomposition, we
find that the extensive margin growth in trade between Mongolia and China following China’s
import tariff reductions comes from zero or little traded goods among the least traded goods.15
What were the specific growth areas? The data are examined to determine what accounted
for the significant growth. We identify the top 10 growth among the least traded goods at HS 2digit level for China’s and Mongolia’s exports where we observe an enormous increase in the
traded value from 2001 to 2007. In the case of the least traded goods in China’s exports to
Mongolia, the top 10 included products of the printing industry, fuels, construction materials,
and mining vehicles. China’s top 10 growth least traded goods increased their share in totalexports from 5.6 percent in 2001 to 12 percent in 2007. In the case of the least traded goods inMongolia’s exports to China, the top 10 included mineral resources and resources coming fromlivestock herding. Mongolia’s top 10 growth least traded goods increased their share in totalexports from 4.2 percent in 2001 to 14.1 percent in 2007.
Another trade liberalization case that we consider is the change in the Mongolian tradeenvironment due to becoming eligible for the EU GSP+ (2005). The EU’s share in the
Mongolian total trade was 11.3 percent in 2005. We measure the Kehoe and Ruhl (2013)
extensive margin by comparing 2002 and 2007, which are before and after the change in the
trade regime only for Mongolian exports as it is a one-sided liberalization. Mongolia became
eligible for the EU GSP+ by the end of 2005.16 Because the status is granted for the next three
years only (2006 to 2008), we compare the trade statistics of 2002 and 2007. We do not consider
2008, thus eliminating the impact of the global financial crisis on the trade.
The results for the Mongolia-EU trade liberalization episode are summarized in Figures 7
and 8 and Table 2. Figure 7 shows that the least traded 519 Mongolian goods to the EU went
15

Only in the case of Mongolian exports of the least traded goods, we observe some traded goods (relatively traded
goods) incorporated in the extensive margin. But the share of these traded goods declines, as shown in Table 2.
16
Practically all Mongolian export products are granted tariff-free access to the EU as a result of the GSP+.

13

from 10 percent of the total exports to the EU in 2002 to 33.8 percent in 2007. Figure 8 shows
the timing of the increase in the extensive margin in Mongolian exports to the EU coincides withthe change in the trade regime. Table 2 reports that the growth on the extensive margin comesfrom the growth in the share of zero or little traded goods among the least traded goods.
What were the specific growth areas? We identify the top 10 growth among the least traded
goods at HS 2-digit level for Mongolia’s exports to the EU where we observed an enormous
increase in the traded value from 2002 to 2007. The top 10 goods included mineral resources,
cashmere and wool textiles, and resources coming from livestock herding. Mongolia’s top 10
growth least traded goods increased their share in total exports from 3.1 percent in 2002 to 24.4
percent in 2007.

3.3. Business-cycle episodes

We have, thus far, studied the country pairs in which there were significant structural changes ortrade regime changes. We can also study country pairs in which there were no significant
structural changes or trade regime changes so as to study the effects of normal business-cycle
fluctuations on the extensive margin. We expect that unlike significant structural changes ortrade liberalization, normal business-cycle fluctuations do not cause significant fluctuations in
the extensive margin. To see how the extensive margin changes during the business cycles, we
compute the same measures of extensive margin growth for the Mongolia-Russia pair during theperiod 2002 to 2007. Among the 10 main trade partners, only trade between Mongolia andRussia did not experience any type of liberalization during the time period that we consider.
Figures 9 and 10 demonstrate how the extensive margin changed between these twocountries. As can be seen, there is little change in the share of the least traded goods in Russian
exports to Mongolia during the period 2002 to 2007. In Mongolian exports to Russia, on theother hand, the share of the least traded goods increased during this period, although this increase
is relatively small compared with the increases observed in other episodes. A possible reason forthis increase could be the Northeast-Asian regional integration. In fact, the data show that used
Korean and Japanese cars started to be exported from Mongolia to Russia during the period.
Figure 11 shows that there is little or relatively small variation in the share of exports accounted

14

for by the least traded goods over this period. In Table 3, we show the decomposition of thechanges in the share of the least traded goods.
As mentioned in Kehoe and Ruhl (2013), little or relatively small change in the extensive
margin during the business cycles indicates that exporting decisions would not be trivial mattersfor firms. This is because firms usually face large sunk costs to establish an export operation as
in Melitz (2003). Temporal changes, such as business cycles, may not induce firms to make (orabandon) large sunk investments. Large permanent changes, however, may induce firms to enter(or exit) the export markets. Ruhl (2008), for example, constructs a quantitative generalequilibrium model of fixed costs under uncertainty and finds that much of the difference in the
response of exports to business cycles versus trade liberalization can be accounted for by thesefactors.

4. Robustness Check: Decomposing Trade Growth
Using the Hummels and Klenow (2005) decomposition of trade margins, we check how thecountry-variant Kehoe and Ruhl (2013) characterization of the extensive margin differs from thecountry-invariant characterizations in the case of countries with small trade relationships such as
Mongolia.17
Hummels and Klenow (2005) decompose the change in country i’s share of total imports tocountry j into that accounted for by the extensive and intensive margins. 18 To compute thisdecomposition, we define a non-traded good. Thus far, we have used the Kehoe and Ruhl (2013)
country-variant cutoff, that is, the least traded goods. We also use country-invariant cutoffs as in
Evenett and Venables (2002), Hummels and Klenow (2005), and Broda and Weinstein (2006).
We then compare the results of the decomposition under different definitions of a non-tradedgood.
We compute the decomposition of trade margins for the Mongolia-Japan pair in the structuralchange episodes and the Mongolia-China and Mongolia-EU pairs in the trade liberalization
episodes and report them in Table 4. To compute the decomposition, we need data on the17

Hillberry and McDaniel (2002) also use the Hummels and Klenow (2005) decomposition to examine the growthin U.S. trade with its North American Free Trade Agreement (NAFTA) partners, finding growth in both theextensive and intensive margins.
18
See Kehoe and Ruhl (2013) for the detailed procedure used to compute the Hummels and Klenow (2005)
decomposition.

15

country’s total imports by its six-digit HS code. Columns 1 and 2 report the decomposition whena good is non-traded according to a country-invariant cutoff value. Column 1 uses a zero cutoff
value, as in Hummels and Klenow (2005) and Broda and Weinstein (2006), and column 2 uses acutoff value of 50,000 U.S. dollars, as in Evenett and Venables (2002). The third column reports
the decomposition using the country-variant 10 percent cutoff values implied by the Kehoe andRuhl’s definition of least traded goods.19
As can be seen in Table 4, the decompositions that employ different cutoffs show different
results for the extensive margin growth. In contrast to Kehoe and Ruhl’s findings for large traderelationships, the decomposition that uses the cutoff of strict 0 U.S. dollars presents the highest
extensive margin growth while the Kehoe and Ruhl’s 10 percent cutoff presents the smallest
extensive margin growth among the three cutoffs. This finding reflects that countries with small
trade relationships, such as Mongolia, trade less than 50,000 U.S. dollars in many of the goods,that is, there are many non-traded goods. Kehoe and Ruhl, on the other hand, find that countries
with large trade relationships trade more than 50,000 U.S. dollars in almost every good, that is,there are no non-traded goods. There is thus an obvious contrast between Kehoe and Ruhl’s(2013) findings for large trade relationships and our findings for small trade relationships. This
supports Kehoe and Ruhl’s argument that a country-invariant cutoff may understate the extensive
margin in large trade relationships and overstate the extensive margin in small trade relationships.
According to Kehoe and Ruhl (2013), one possible resolution of this underestimation of theextensive margin in large trade relationships is to increase the cutoff value. However, if thisincreased cutoff value is country-invariant, this causes problems in small trade relationships. For
example, Kehoe and Ruhl (2013) show that the country-variant 10 percent cutoff implies thatany good exported from Canada to the U.S. at less than 76,122,400 U.S. dollars is non-traded,
and a good exported in the amount of 76,122,400 U.S. dollars accounts for only 0.093 percent of
the total trade flow. The country-invariant cutoffs, however, consider this good heavily traded.
To classify these heavily traded goods as non-traded under a country-invariant cutoff, we need toincrease the cutoff value. If this increased cutoff value is constant across country pairs, thiscreates problems measuring non-traded goods in small trade relationships. In the case of

19

Here, we take as the 10 percent cutoff value the average (over the first three years of the sample) amount of tradein the first good, which is not included in the set of the least traded goods. Of course, this 10 percent cutoff value
varies across countries.

16

Mongolia, for example, the cutoff value of 76,122,400 U.S. dollars implies that a good valued at
64.0 percent of total Mongolian exports to the EU would be considered a non-traded good.

5. Conclusion
Using the Kehoe and Ruhl (2013) methodology, we examined Mongolia’s trade data fromseveral structural change and trade liberalization episodes in which theoretical models predictchanges in the extensive margin of trade. We found large increases in the extensive margin in
Mongolia’s trade with 10 major trade partners during the period 1997 to 2002, when Mongolia
was undergoing significant structural reforms. We also found further increases in the extensive
margin for the Mongolia-China and Mongolia-EU pairs after trade liberalizations due to China’s
accession to the WTO (2001) and Mongolia’s eligibility for the EU GSP+ scheme (2005),
respectively. However, we found no or relatively small further increases in the extensive margin
for the Mongolia-Russia pair during the period from 2002 to 2007, when there was no majorchange in the trade regime of these two countries. Thus, our findings support the hypothesis thatthe extensive margin growth is driven by trade liberalization or structural change but not by theusual turbulence of business cycles.
The new Kehoe and Ruhl’s (2013) measure of the extensive margin may incorporate sometraded goods in small trade relationships, and the growth of the extensive margin may come fromthe growth of these goods. Hence, we decomposed the least traded goods into three parts: zero
traded, little traded, and relatively traded goods. Then, we indicated that the least traded goods
growth comes from the growth of zero and little traded goods rather than from the growth ofrelatively traded goods. Hence, the Kehoe and Ruhl definition of non-tradedness is also
consistent for the case of Mongolia.
To check the robustness of our results, we calculated Hummel and Klenow’s (2005)
decomposition of the import share using different cutoff values. Our results support Kehoe andRuhl’s (2013) claim that country-invariant cutoffs overestimate the extensive margin growth forcountries with small trade relationships. In fact, the extensive margin growth measured by using
country-invariant cutoffs is much higher than that measured by using the Kehoe and Ruhl
country-variant 10 percent cutoff.

17Based on our analysis, we conclude that policy measures taken by the government from 1997
to 2002 (the period of structural reforms) and the trade liberalizations have had an overall
important effect on the extensive margin of trade. In particular, we find that mineral resources
and resources coming from livestock herding contributed most to the increase in the extensive
margin of Mongolia’s exports across country pairs. Thus Mongolian government should keep theoverall favorable environment for FDI to allow international market access of country’s
resources. On the other hand, Mongolian government should develop industries that process
those resources and join with them the regional production network.
Finally, let us introduce briefly what we would like to do in the near future. As next, we
would like to investigate whether the increase in the extensive margin of trade has an impact onchanges in welfare in Mongolia. Arkolakis et al. (2012) show that Melitz-type models do notnecessarily entail large gains from trade. Thus it would be interesting to test quantitatively
whether this finding is true in the case in Mongolia.
We also would like to monitor carefully Mongolia’s trade. This is important because many
countries have recently begun to consider Mongolia as a new source of important materials, suchas rare earth and other minerals. As a result, the extensive margin of Mongolia’s trade may
drastically change in the following years. In addition, it is worth to note that Russia became a
WTO member in 2012. According to the Russia’s commitments, Russia has agreed to lower its
tariffs on trade and reduce its non-tariff barriers on a wide range of products. Hence, Mongolia
and Russia may start to trade new goods, and growth in the extensive margin may contribute to
the growth in trade between the two countries.

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20

Table 1.a. Share of least traded goods for the top 1-5 trading partners: Structural change episodes

PeriodTrade flow

Share in totalexports in base year

Share in totalexports in end of
period year

Number of least
traded goods

1996:2005

Mongolia to Russia
Zero traded goods
Little traded goods
Russia to Mongolia
Zero traded goods
Little traded goods
Mongolia to China
Zero traded goods
Little traded goods
Relatively traded goods
China to Mongolia
Zero traded goods
Little traded goods
Mongolia to Japan
Zero traded goods
Little traded goods
Relatively traded goods
Japan to Mongolia
Zero traded goods
Little traded goods
Relatively traded goods
Mongolia to Korea
Zero traded goods
Little traded goods
Relatively traded goods
Korea to Mongolia
Zero traded goods
Little traded goods
Mongolia to US
Zero traded goods
Little traded goods
US to Mongolia
Zero traded goods
Little traded goods

0.10000.10000.10000.10000.10000.02200.07800.10000.10000.10000.04770.05240.10000.06130.03870.10000.06070.03930.10000.10000.10000.10000.10000.10000.96830.94910.0192
0.99490.99260.00230.88220.86150.00640.01430.65970.49340.16621.00000.97340.01090.01570.28370.12030.1001
0.06331.00000.99860.0014
0.63750.43190.20180.83820.64540.19280.6416
0.26340.3782

278.7
154
124.7
986
473
513
251.1
124
109
18.1
1,420.9561
859.9
284.16105
171
8.16
1,170.74
526
618
26.74
144.87109
30
5.87
1,395.9
705
690.9
188.6
153
35.6
1,045.5
649
396.5

1996:2005

1996:2001

1996:2001

1996:2005

1996:2005

1996:2005

1996:2005

1996:2005

1996:2005

Source: Mongolian Custom’s Office: Annual trade statistics

21

Table 1.b. Share of least traded goods for the top 6-10 trading partners: Structural change episodes

PeriodTrade flow

Share in totalexports in base year

Share in totalexports in end of
period year

Number of least
traded goods

1996:2005

Mongolia to Germany
Zero traded goods
Little traded goods
Germany to Mongolia
Zero traded goods
Little traded goods
Mongolia to UK
Zero traded goods
Little traded goods
UK to Mongolia
Zero traded goods
Little traded goods
Mongolia to Italy
Zero traded goods
Little traded goods
Relatively traded goods
Italy to Mongolia
Zero traded goods
Little traded goods
Mongolia to Singapore
Zero traded goods
Little traded goods
Singapore to Mongolia
Zero traded goods
Little traded goods
Mongolia to Hong Kong
Zero traded goods
Little traded goods
Hong Kong to Mongolia
Zero traded goods
Little traded goods

0.10000.10000.10000.10000.10000.10000.10000.10000.10000.01530.08460.10000.10000.10000.10000.10000.10000.10000.10000.10000.10000.93440.86020.07420.79990.57530.22461.00001.00000.00000.95400.72020.23381.00000.99730.00270.53110.69980.2366
0.4021
0.40210.46540.34430.12120.99930.45330.5461
0.58270.51050.0722

174.8
147
27.8
1,481.7
788
693.7
62.96
58
4.96
312.01
230
82.01
39.03
22
15
2.03
375
210
165
55.1
53
2.1
713.8
352
361.8
70.1
39
31.1
562.1
398
164.1

1996:2005

1996:2005

1996:2005

1996:2005

1996:2005

1996:2005

1996:2005

1996:2005

1996:2005

Source: Mongolian Custom’s Office: Annual trade statistics

22

Table 2. Share of least traded goods: Trade liberalization episodes

PeriodTrade flow

Share in totalexports in base year

Share in totalexports in end of
period year

Number of least
traded goods

2001:2007

Mongolia to China
Zero traded goods
Little traded goods
Relatively traded goods
China to Mongolia
Zero traded goods
Little traded goods
Mongolia to EU
Zero traded goods
Little traded goods
Relatively traded goods
EU to Mongolia
Zero traded goods
Little traded goods
Relatively traded goods

0.10000.00440.09570.10000.10000.10000.0337
0.06630.10000.0351
0.06490.40000.24590.10190.05220.78000.31410.46590.33810.20170.07370.06270.41070.21580.13830.0565

479.7
321
110
48.7
2,761.4
1,606
1,155.4
519
206
299
14
2043
580
1075
247

2001:2007

2002:2007

2002:2007

Source: Mongolian Custom’s Office: Annual trade statistics
Table 3. Share of least traded goods: Business cycle episode

PeriodTrade flow

Share in totalexports in base year

Share in totalexports in end of
period year

Number of least
traded goods

2002:2007

Mongolia to Russia
Zero traded goods
Little traded goods
Relatively traded goods
Russia to Mongolia
Zero traded goods
Little traded goods
Relatively traded goods

0.10000.02440.07560.10000.0446
0.0554

0.26620.14040.09220.0336
0.09200.01040.03890.0427

427.6
253
158.6
16
1,562
218
1,344
170

2002:2007

Source: Mongolian Custom’s Office: Annual trade statistics
Table 4. Decomposition of trade growth under different cutoff values (growth)

Country pair
Mongolia to Japan
1996-2005
Japan to Mongolia
1996-2005
Mongolia to China
2001-2007
China to Mongolia
2001-2007
Mongolia to EU
2002-2007

0 cutoff
extensive
intensive
marginmargin50000 cutoff
extensive
intensive
marginmargin10% cutoff
extensive
intensive
marginmargin1.96470.4476

1.9613-0.9979

1.9586-1.6492

0.3546

1.37130.13310.41400.0251-0.30400.4626

0.49630.49230.56620.17700.86400.4626

0.57850.30490.73620.30470.73640.71251.49770.67850.61220.61250.2950Source: Mongolian Custom’s Office: Annual trade statistics

23

Figure 1. Composition of exports: Japan to Mongolia
1.00
0.90

fraction of 2005 import value

0.80
0.70
0.60
0.50
0.40
0.30

1170.74
3.06

0.20

12.72
33.38

3.83

0.10

15.6

9.55

0.3

0.4

2.12

0.00
0.1

0.2

0.5

0.6

0.7

0.8

0.65

1.34

0.9

1

cummulative fraction of 1996 import value

Source: Mongolian Custom’s Office: Annual trade statistics
Figure 2. Composition of exports: Mongolia to Japan
1.00

286.16

fraction of 2005 export value

0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
1.29

0.00
0.1

0.2

1.57

0.14

0.14

0.14

0.14

0.14

0.14

0.14

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

cummulative fraction of 1996 export value

Source: Mongolian Custom’s Office: Annual trade statistics
Figure 3. Least traded goods: Mongolia and Japan

Source: Mongolian Custom’s Office: Annual trade statistics

24

Figure 4. Composition of exports: China to Mongolia
1.00
0.90

fraction of 2007 import value

0.80

2761.36

0.70
0.60
0.50
0.40
0.30
0.20
77.04

0.10

34.73

18.29

12.24

6.93

3.99

2.41

1.62

1.39

0.4

0.5

0.6

0.7

0.8

0.9

1

0.00
0.1

0.2

0.3

cummulative fraction of 2001 import value

Source: Mongolian Custom’s Office: Annual trade statistics
Figure 5. Composition of exports: Mongolia to China
1.00

fraction of 2007 export value

0.90
0.80
0.70
0.60
0.50
0.40

479.70

0.30
0.20
0.10
6.49

0.00
0.1

0.2

2.05

0.79

0.3

0.4

0.16

0.16

0.16

0.16

0.16

0.16

0.5

0.6

0.7

0.8

0.9

1

cummulative fraction of 2001 export value

Source: Mongolian Custom’s Office: Annual trade statistics
Figure 6. Least traded goods: Mongolia and China

Source: Mongolian Custom’s Office: Annual trade statistics

25

Figure 7. Composition of exports: Mongolia to EU
1.00

fraction of 2007 export value

0.90
0.80
0.70
0.60
0.50
0.40

519.03

0.30
0.20
1.16

0.10
0.59

0.6

0.62

0.30

0.18

0.18

0.18

0.18

0.5

0.6

0.7

0.8

0.9

0.00
0.1

0.2

0.3

0.4

cummulative fraction of 2002 export value

Source: Mongolian Custom’s Office: Annual trade statistics
Figure 8. Least traded goods: Mongolia to EU

Source: Mongolian Custom’s Office: Annual trade statistics

26

1.0

Figure 9. Composition of exports: Russia to Mongolia
1.00
0.90

fraction of 2007 import value

0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10

0.47

0.45

0.42

0.42

0.7

0.8

0.9

1

1.41

1371.98
92.46

34.25

0.2

0.3

11.93

4.22

0.4

0.5

0.00
0.1

0.6

cummulative fraction of 2002 import value

Source: Mongolian Custom’s Office: Annual trade statistics
Figure 10. Composition of exports: Mongolia to Russia

Source: Mongolian Custom’s Office: Annual trade statistics
Figure 11. Least traded goods: Mongolia and Russia

Source: Mongolian Custom’s Office: Annual trade statistics

27