Issue 6, 2013. December-January



In November 2013, Georgia initialed its Association Agreement with the EU—part of which included negotiations for a Deep and Comprehensive Free Trade Area (DCFTA). The DCFTA has significant implications for Georgia's economy; namely, Georgia is expected to become a portal to the EU for surrounding countries: a re-export hub of Eurasian products and investment.

Cordelia Ponczek

Georgia has finally carved out space for its self-promoted trajectory. It's about time. On the negative side of the balance sheet, unemployment numbers are up, GDP and growth numbers are down, and the public is restless. But a solid foundation for progress has been laid. Bolstered by two recent events - the democratic presidential elections in October and the recent Eastern Partnership Summit in Vilnius - Georgia has taken positive steps to modernize its political system and stabilize its social structure.

The October elections confirmed the sustainability of Georgia's political reforms and garnered international approval from organizations such as the OSCE and from various Western governments. The November Eastern Partnership Summit in Vilnius signified Georgia's initialing of the Association Agreement (AA) and the official adoption of a pro-European trajectory. The combination of the two was a tangible return on investment for those stakeholder countries and organizations that have sunk financial and political capital into the country's future.

International recognition is exactly the prescription Georgia needs to mend its ailing economy. Thomas de Waal, a senior association at the Carnegie Endowment for International Peace, asserted in an article on November 20, 2013, that "Foreign perception is definitely key: ... [Georgia]'s chief economic value is in its ability to be a hub and entrepot for the wider Caucasus and Black Sea neighborhood."

So, how does Georgia make itself a hub?

November's Association Agreement includes the Deep and Comprehensive Free Trade Area (DCFTA), a program that fosters improved trade balance in exchange for mandating EU legislation in areas like trade law cohesion, consumer protection, hygiene standards for agricultural products, and environmental regulation. Signatories are required to adopt approximately 350 EU laws within a time span of ten years - no small feat, but with big rewards. It would behoove the Caucasian country to use these opportunities to capitalize on its own future.

According to the Trade Sustainability Impact Assessment, a report published by the Warsaw-based CASE Center for Social and Economic Research, the DCFTA has the potential to increase Georgia's exports to the EU by 12% and increase imports from the EU by 7.5%. Furthermore, Georgia's national income is predicted to rise to around 292 million euros, which represents a 4.3% growth in Georgia's GDP. Numbers like this will have ripple effects in consumer purchasing power and labor wages.

The biggest gains of the DCFTA are found in the reduction of Non-Tariff Barriers to trade (NTBs). As in the WTO and NAFTA agreements, the DCFTA incorporates fundamental principles such as favorable national treatment, prohibition of import and export restrictions, disciplines on state trade, etc. Export duties will be prohibited from day one, which will have a significant impact on Georgia's economic activity and trade between itself and the EU. Furthermore, such measures will create immense opportunities for trade by lowering tariffs on imports to Georgia and exports from Georgia to the EU. The policies of the DCFTA aim to improve competitiveness through efforts to enhance market access for exports and foreign investment, facilitate trade, and strengthen the investment climate.

In its adaptation of the DCFTA, Georgia will undertake a three-pronged strategy to place itself as a hub for exports and investment: (1) by capitalizing on the benefits of unified EU-based policy, which will help to create standards for products and transparency of business in Georgia to attract new commerce; (2) by facilitating an increase in exports from Georgia to the EU and vise verca, which will normalize the flow of business; and (3) by using the reduction of NTBs to promote open dialogue with foreign neighbors, which will incentivize these countries to use Georgia as a re-export base, given its new preferential status with the EU.

Such reforms must be reinforced by increased trade, particularly in exports from Georgia. Georgia is the only county in its geopolitical zone to have new-found clout with the EU. Armenia, Azerbaijan, and Ukraine are waitlisted for any further steps, and did not initial Association Agreements at the November summit. Turkey's path to the EU is frozen, pending the deadlock over its proposal for integration, and Russia has not vocalized an intention to move forward with any association plan. Georgia's position allows it to be the initiator for increased trade in the region by presenting itself as a safe, business-friendly zone for surrounding countries wanting to do business with the EU. Its current business should facilitate the greater access of goods to the European market.

Georgia needs to come into the deal prepared. It can do this by capitalizing on the three-pronged strategy and deciding, up front, what it can do to strengthen its position. First, the country needs to determine both its areas of interest (e.g., agriculture, metals) and its negotiation objectives with respect to these areas of interest. It then must act on this strategy, keeping lines of communication open between the government, civil society, media, and the Georgian people. This can be done via information campaigns and a high level of transparency in the policy enactment process. Second, Georgia will need to educate and train its workforce (both white-collar and blue-collar) on not only the technical aspects of the soon-to-be-adopted policies, but also on the skills needed to facilitate business and inspire international confidence. Furthermore, Georgia will need to evaluate the operational costs of implementing the EU reforms and how those reforms can be most effectively structured into Georgian business. Finally, smile! Georgia is home to a charming and unique people: it will be up to the Georgian people and leaders to woo businesses and ramp up investor confidence in the area by touting its newfound economic advantage.

In November, the American Chamber of Commerce in Georgia sent a business delegation to Washington, D.C. There, the group of businessmen and women met with senators and congressmen and took part in a roundtable event co-hosted by the Carnegie Endowment for International Peace and the Atlantic Council. Its presence in the epicenter of US politics corresponds to Georgia's moment to sustain its international confidence. The ripple effects of the DCFTA need not be limited to trade between the EU and Georgia: in his December trip to China, David Cameron, the Prime Minister to the UK, more than hinted that the EU was very interested in trade agreements with China. Meanwhile, the US and the EU are already favorable trading partners, and by balancing out its trade strategy, Georgia may have more doors open to it in the future.

Keeping long-term goals in mind is essential, because the proviso to the DCFTA is that these prescribed events will not take place in a vacuum. The DCFTA is not a magic potion to change Georgia's international status, or its economy, overnight. Thus, the burden of action is on Georgia, along with its allies, to have the foresight to evolve with the effects that will result from its new trade agreement, both the good and the bad. It will be left to the negotiating parties to enhance any gains and lessen any potential losses by maintaining a cohesive strategy - the answers aren't on the table, but the tools for success are there.

Cordelia Ponczek is a researcher based in Warsaw and formerly taught in Georgia, where she was stationed outside of Zugdidi and later in Batumi. She earned her B.A. in Political Science at Miami University in Ohio, USA.