Issue 5, 2011. October-November

   

GEORGIA: MOVING TOWARDS A FREE TRADE AREA WITH EUROPE

The European Union and Georgia have been engaged in an ambitious process for more than eighteen months towards achieving a "Deep and Comprehensive Free Trade Area" (DCFTA).

This has become one of the most important issues in Georgia's political agenda. Virginie Cossoul, EU Trade Officer at the EU Delegation to Georgia explains what this may mean for the country.

Explaining the "Deep and Comprehensive" trade agreement

Traditionally, standard free trade agreements foresee mutual opening of markets for goods and services. The reason that this agreement is called ‘Deep and Comprehensive' is that it would go much further. It would be "comprehensive" because it would cover a wide array of trade-related issues and it would be "deep" because it aims at eliminating ‘behind the border' obstacles to trade, thus partially opening/extending the EU internal market to Georgia.

The European Union's (EU) internal market consists of 27 member states. The removal of barriers faced by economic operators, as well as the introduction of high standards of consumer protection is the main foundation of the EU's operation. Notwithstanding the current difficulties in the Eurozone, most agree that this internal market has created enormous benefits for its members.

The free trade area will provide, as far as possible, the gradual integration of Georgia with the EU's internal market. Extending the internal market to Georgia will bring benefits for:

- Domestic and foreign investors and entrepreneurs: as more legal certainty creates trust and a fair and business-friendly environment, and reduces corruption (e.g. by introducing transparent rules on competition);

- Consumers: because EU internal market rules would institute modern standards in the field of industrial products and food safety, ensuring better product quality;

- Inventors and artists: because their ideas and creativity would be better rewarded, thanks to higher standards of protection and enforcement of intellectual property rights;

- Central and local government authorities: as they would spend more efficiently and hence save taxpayers' money, thanks to a competition-based and transparent system for public tenders.

The export potential of the DCFTA

On the export side, Georgian producers and exporters will be offered free access to the EU market with over 500 million high income consumers for almost all products traded.

At present Georgia enjoys unilateral trade concessions from the EU through the so-called Generalized System of Preferences (GSP+). This system offers limited preferences compared to the future DCFTA. Once the DCFTA replaces the GSP+, tariffs will be abolished for almost all products and on top of this both sides will address regulatory barriers. This would be a major improvement over the current GSP+ treatment which has a unilateral, temporary character and is not negotiable with the EU.

The new status would bring tangible benefits to Georgia, such as:


Substantial economic gains: a predictable legal and institutional environment initiated and strengthened by the DCFTA will greatly increase the attractiveness of Georgia as an economic partner. It will facilitate business-to-business contacts and encourage foreign and domestic investments.

A stronger external anchor for the reform process: Georgia is an economy in transition from a centrally planned to a market economy. The economic reforms in Georgia will have to continue in the future in order to put the country on the path to sustainable economic growth.

The DCFTA will establish a transparent scenario for economic operators who will be able to prepare their strategies based on the agreed calendar of regulatory compliance with the legal framework of the EU.

Encouragement for investment: DCFTA will help to create a favourable business climate and attract investors, thanks to its positive impact on eliminating or streamlining complicated, unpredictable and often poorly implemented business regulations.

Benefits for Georgian consumers: Phasing out existing customs tariffs and regulatory barriers will increase the variety and quality of products and services available to consumers. In addition, the competitive pressure stemming from the liberalisation of market access will encourage specialisation, thereby lowering costs and generating innovation. Better products enhance the overall standard of living.

Not just more regulations


It is true that the DCFTA is a very ambitious agreement and implies a lot of reforms by the government. Like any process of reforms it has a price, but one should view this short-term price against the long term benefits.

Closer integration with the EU will require short-term costs, but will significantly improve the competitiveness of Georgia's products along with the investment climate making it more conducive to attracting more stable FDI. This would, in turn, create a positive impact on Georgia's socio-economic development.

It is also important to think in broader terms. What is at stake is not simply the increase of trade flows between the EU and Georgia but market development, consumer protection and product quality; in other words Georgia's ‘modernisation'. Furthermore, this process is a gradual integration of legislation and standards. The EU is not asking Georgia to implement the full EU market rules within few months. Even when it comes into effect, it is expected there will be a transitional period in many areas.

Importantly, the EU trade related regulatory standards are used by many other countries in the world, notably (from the point of view of current Georgian exports) Turkey and the Balkan states, so compliance with those standards will help not only trade with the EU but with other significant partners of Georgia.