Issue 2, 2017. April-May

   

HEADING TO THE EU: GEORGIA LOOKS FOR WAYS TO BOOST TRADE

Georgia has enjoyed mostly duty-free trade with the European Union (EU) market since July 2016, when the Deep and Comprehensive Free Trade Agreement (DCFTA) went into force. Investor.ge looks at what is being done to use and promote the trade scheme locally.

Lika Jorjoliani

Photo by Wines of Georgia


Georgian companies, government agencies and international donors are investing in the future of the country's trade potential with the EU market.

From wine to textiles, there are efforts afoot to build up Georgian exports, according to economists and sectoral experts.

"As regards the likely impact of the DCFTA, there have been several model-based studies. The latest one, conducted by the European think tanks Ecorys and Case (2012), concluded that in the short term the DCFTA would increase Georgia's exports to the EU by 9%," according to Deepening EU-Georgian Relations: What, why and how?, a book on Georgian-EU relations edited by Michael Emerson and Tamara Kovziridze.

The result of the first year is that it has fallen short of that forecast, Emerson and Kovziridze note, in part due to on-going economic turmoil in the region. The expectation remains that Georgia's exports will increase, however.

"In addition to wine, honey and nuts, we may export blueberries to the EU market as well. Also, the export of kiwi and bay leaves is possible. There are very great prospects for the export of processed products (jam and stewed fruits)," noted Chairperson of the Association of Farmers of Georgia Nino Zambakhidze.

"We aim to develop the primary production that is now financed with the help of state subsidies. In fact, within two years, we will see results with these projects... First of all, we should satisfy the demand for the local market, and then export. The process isn't very quick, but gradually the list of export goods is being supplemented by the products for which there is demand on the EU market," she said.

Zero Tax

Under the DCFTA, 12,000 Georgian products can enter the EU market without paying any tax, compared to the previous rates of 5-12 percent, depending on the product.

That has benefited many products, especially Georgian wine, which was previously charged an import tax plus VAT, according to Gvantsa Meladze, Chairman of the Council of Advisers of the Export Development Association.

Another sector with strong potential is the textile industry, Meladze said.

"The general problem is the absence of our own raw material. However, Georgia has great prospects in the development of textile production," she said, noting that the major precondition to qualify for the DCFTA is spending 35 percent of the cost of the of a product's production in Georgia itself (including salaries, electricity costs and others).

"The production of textiles is cheaper in our country than in Turkey. This is an advantage and due to our comparatively cheap workforce. If a minimal salary in this type of production in Georgia is 300 lari, in Turkey the salary is 700 euros. However, we should take into account productivity of the worker. If, for example, a Turkish worker annually creates products worth of $15,000, a Georgian worker will create goods worth $4,500," she said.

Meladze noted that a key to making Georgia attractive for the Turkish textile industry is "diagonal accumulation," which allows products made from Turkish material on the territory of Georgia to be considered as made in Georgia, and, accordingly, enjoy tariff-free trade.

Emerson and Kovziridze also underscored the potential impact of diagonal accumulation for Georgia's trade with the EU.

"It should be underlined that the diagonal accumulation envisaged by the DCFTA is very important for the diversification of Georgia's exports, given the economy's limited raw-material resources. Activation of diagonal accumulation with Turkey will thus substantially increase the benefits of the DCFTA with regard to export and investment promotion," they note.

"In order to activate diagonal cumulation, Georgia has already started consultations with Turkey on the relevant amendments to the bilateral free trade agreement that has been in force since 2008."

The Georgian parliament's EU Integration Committee approved the draft of an agreement on March 13 that would enable diagonal accumulation, according to the parliament's official website.

"Diagonal accumulation will allow Georgian exporters to introduce their own production to the EU market and use the preferences envisaged under Georgia-EU Free Trade Agreement," Deputy Minister of Economy Genadi Arveladze was quoted as saying.

Another challenge is educating Georgian farmers and producers about the potential of exporting goods to the EU, Meladze said.

"We have great potential in the agricultural sector ... Today, many agricultural projects are subsidized, but [farmers] lack training. It means that, in fact, our entrepreneurs have a lack of education. We also have problems in business administration and planning," she told Investor.ge.

Government Outreach

The Georgian Ministry of Economy is working on getting the word out, and several EU-funded programs are helping local farmers and producers learn about EU standards and how to get the most out of the DCFTA.

"We have already visited Kakheti and Shida Kartli. We plan to visit all the regions by the end of the year and to meet with representatives of small- and medium-sized enterprises. In the scope of such meetings we talk about regulations to be implemented in the next three to four years. Our meetings are conducted as a dialogue between private and state sectors. The results of our meetings will be summarized by the end of the year," Arveladze told Investor.ge.

The government is also helping entrepreneurs expand production and meet EU standards through several funding programs, like access to inexpensive agro-credit and other funds.

"First of all, we need to implement EU standards for local production and then to think about the export of production to EU countries. Different instruments proposed by donor organizations are important too," Arveladze said.

Donors Help Private Sector

The EU and other donors have initiated several programs to help entrepreneurs and some sectors-especially agriculture-benefit from the DCFTA.

The EBRD and the EU joined forces with Bank of Georgia to help Georgia's private sector find new opportunities. Implemented by Bank of Georgia through credit lines, a 50-million-dollar facility aims to support SME (Small- and Medium-sized Enterprise) development in the context of the DCFTA, allowing companies to take full advantage of the opportunities offered by the trade deal.

In addition, the Georgian Chamber of Commerce and Industry (GCCI), the German International Co-operation Union (GIZ) and the Project "SMEs' Development and the DCFTA in Georgia" have a joint project supporting the establishment of five DCFTA information centers in Kutaisi, Zugdidi, Signagi, Gori and Tbilisi.

Five experts have been trained to work with SMEs in Georgia in information centers and will provide all the information regarding the free-trade regime with the EU.

"In addition to conducting consultations in the office, our specialists meet with local farmers. In Kakheti, we discuss opportunities for the export of wine, in Samegrelo - for the export of nuts. The priorities are formed proceeding from a list of our main exported products. In some regions we have our own offices, in others, the local municipality provides us with an office," noted Giorgi Vekua, the Head of the International Relations Department of the GCCI.

The project also includes television programs, advertisements and manuals on the export of eight specific products, including apples and citrus fruit, he said.

The Director of the Tbilisi Information Center on the DCFTA, Irakli Sulaberidze, noted that it is best to work with farmers individually to make sure they understand all the requirements and standards.

"The work is very hard. Take, for example, farmers who deal with the cultivation of apples. First of all, we explain to the farmers that they should know a customs code for the export of apples according to the international system ... Then we explain how to switch to the criteria of the origin of the product and why they need a certificate of origin for the commodity. We talk about the tariff policy of the EU and provide them with statistics on exports and a list of countries with their market prices of the fruit the farmers seek to export," he said.

Sulaberidze said they are working closely with another EU project, the European Neighbourhood Programme for Agriculture and Rural Development (ENPARD), which is being implemented by the EU in cooperation with the Georgian government.

ENPARD, which started in 2013, supports the development of agriculture in the country, and especially in rural communities, thorough cooperation with the government, civil society, and farmers. The total budget for ENPARD in Georgia, covering the period of 2013-2018, is €102 million.

MARKET ACCESS FOR GOODS AT A GLANCE

With the DCFTA, Georgia and the EU now enjoy almost completely tariff-free trade for exports and imports.

The first year of the DCFTA saw only a modest growth of exports to the EU. But this compares favorably with massive declines in Georgia's trade with Russia and Ukraine, resulting in a major shift in trade structure in the direction of the EU.

The positive effects of the DCFTA are likely to grow significantly over the medium and long term, with "diagonal cumulation" of rules of origin with Turkey and progressive approximation of EU legislation on SPS measures and technical barriers to trade.

Georgia is negotiating a free trade agreement with China, and could become a location of choice for Chinese direct investment aimed at exports to the EU market.

Republished from Deepening EU-Georgian Relations: what, why and how?, a book on Georgian-EU relations edited by Michael Emerson and Tamara Kovziridze. (http://bit.ly/2blimIF)

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