Issue 5, 2014. October-November


Careful Analysis, Planning Needed to Make Most of Trade Deal

As Georgia works to simultaneously attract investors and implement EU-approved trade regulations, the United States and the European Union continue negotiations over the Transatlantic Trade and Investment Partnership (TTIP). Georgian politicians, businesspeople and citizens are united in determining how Georgia can get a piece of the trade pie.

Cordelia Ponczek, Kościuszko Foundation research grant recipient

Over the summer, Tbilisi hosted a joint Georgia-EU international investment conference. Attendees were greeted with a gleaming, 21-page booklet detailing answers to the question, "Why Invest in Georgia?" The response came not only in the form of a cohesive list of Georgian companies, but also in an eloquent point-by-point explanation of Georgia's investment position. The latter touted such things as Georgia's DCFTA with the EU (signed June 27), its strategic location ("a bridge between Europe and Asia"), and its investment-friendly environment ("setting up a business in Georgia is a straightforward process"). The reader could then look up from his or her packet to see the manifestation of these promises: a variety of Georgian businesses splayed across the dramatic backdrop of the Mtkvari River. This was Georgian entrepreneurship at its best.

While the conference was filled with people in suits bantering (as ever conference inevitably is), the real weight of the conference was outside its panel format: businesspeople would rather discuss investment over coffee while lingering in the lounge, than listen to yet another speech about the political benefits of the DCFTA and deeper Georgian-EU relations. Why? Here a dialogue was forged between what Georgia had to offer—economically, not politically—and what it hoped to gain in return.

One may wonder: if the DCFTA is an economic agreement, why would politicians be a representative group of speakers at all? Why was it the President of the European Commission, President José Manuel Barroso, who gave the keynote speech, rather than Karel De Gucht, EU Trade Commissioner? Why was it Dr. Maia Panjikidze, Georgian Minister of Foreign Affairs, who gave the Georgian keynote speech, rather than Giorgi Kvirikashvili, Georgian Minister of Economy and Sustainable Development? Indeed, the representative group of speakers was comprised of EU Commissioners, while the attentive audience was mostly private businesses.

Trade Relations Abroad: Economics or Politics?

Throughout Georgia's EU integration process, certain reforms have been rolled out, primarily under the auspices of European values. Indeed, the European Union testifies loudly and firmly to bringing Eastern Partnership countries closer to a European-based values system. And what resides on the other end of the scale? Some critics may point to Ukraine as the response. While they may be right in terms of values-based political policy, how can a for-profit company be a bearer of morality? On September 18, the Polish Institute of International Affairs (PISM) asked that very question in its conference on Polish-Turkish relations in the common Eastern Partnership neighborhood. A project planner for the Turkish BOTAS energy corporation pointed out that companies cannot weigh in too heavily on policy; likewise, it is difficult for government to weigh in on the profit pursuit.

Analyzing the Costs, Preparing for the TTIP

The challenges that Georgia faces over DCFTA or TTIP engagement are economic, not political, and it is important to draw the distinction as such. On June 6, the policy institute at the International School of Economics in Tbilisi (ISET) commented on the costs and benefits of the then-proposed (now ratified) Deep and Comprehensive Free Trade Agreement (DCFTA): "If [...] a decision is made to join a particular union, it should be implemented on the basis of careful analysis and discussion with domestic stakeholders, and after tough negotiations, as opposed to a process rushed for political reasons." A similar argument can be made for in pursuing the TTIP.While Georgia may want to focus on the political possibilities of joining an exclusively Western trade partnership, politicians and businesspeople alike need to focus on the greenbacks, and the politics will follow.

Amidst the political-economic benefits debate, there is yet another group to be considered: Georgian citizens. Within the DCFTA, regulations may impose a burden on markets still working to establish market norms. Would sellers at the bazaars of Tbilisi still be at liberty to sell milk in old Nabeghlavi bottles? Last year saw a rise in egg prices on account of origin-stamp requirements—and this is one simple example. Consider labor costs, procurement, and other regulatory frameworks that Georgian parliament is still working to overhaul. While Georgia strives to be a Westward-leaning regional hub, it also needs to consider the effects such policies have on its own citizens, effects like raised product costs, increased oversight, and potential distrust in a system that many still view as bureaucratic.

Given Georgia's choice to pursue one trade agreement—the DCFTA, with the EU—another is approaching on the horizon. The opening salvo of the Transatlantic Trade and Investment Partnership (TTIP) negotiations has begun. Given its promises—lower costs, open markets, hundreds of millions of potential customers—it is natural for Georgia to be taking stock of its entrance feasibility. However, Georgia also needs to assess its own political stake in the matter. First and foremost, it has been clearly conveyed that TTIP negotiations are currently not open to non-EU or non-U.S. countries. So a country like Turkey may be obligated to open its market to U.S. goods without reciprocal access to the U.S. market for Turkish goods. Georgia could face a parallel situation.

It is expected that the TTIP, when implemented, will have a "trickle-down" effect on neighboring countries that have preferential trade agreements. It has even been suggested that preexisting trade agreements, like the North American Free Trade Area (NAFTA) and the European Free Trade Association (EFTA), be honored and eventually enveloped in the TTIP to create an even larger free-trade area. This would increase the aforementioned market potential for products, but it is completely contingent upon the ability of Georgian products to gain a foothold in the EU and U.S. markets. On the other hand, Georgian products would again need to compete with presumably cheaper U.S. and EU products, while also needing to adhere to the same regulations.

The usefulness or uselessness of regulations is in the eye of the beholder. They are either an excellent foundation for future growth or a project for overhaul. If Georgia is interested in pursuing TTIP inclusion down the road, now is the opportunity to plan. As Georgia is aligning its regulations with the EU, it would behoove the country to conduct the overhaul with the TTIP in mind. Georgia could even take a huge hint from the regulations negotiations between the U.S. and EU.

There are three proposed solutions.The first is that one market would give reciprocity to business adhering to similar regulations in the other market. The second is consolidation of regulations using a problem-based approach. The final proposal is to come to a consensus on practical application of disparate regulations to find common ground. Using these proposed solutions as a benchmark, policy makers, economists, and businesspeoplemay come to a consensus on how best to prime Georgia's market for future cooperation.

When asked about why he chose to invest in Georgia, Ian Hague, co-founder of Firebird Management, LLC, responded that it was "for the green." He further explained that he saw Georgia's investment climate, understood the opportunities, and invested—to great success. What about the political course of Georgia? A Polish businessman at the investment conference noted that "there is always risk, but the challenge comes in mediating, accounting for, and planning for any market shocks." He noted political unrest, transportation disruptions, or outside interference as his top three concerns in Georgia

Such words are valuable takeaways for Georgian politicians and businesspeople alike. They explain the mindset behind investment and the willingness to cooperate. For all of Georgia's eagerness to implement reforms, when it comes to appeasing both the economic regulators and the investors, dialogue is perhaps the best course of action. Experts at PISM's Polish-Turkish conference suggested that countries like Poland and Turkey offer to help Georgia in implementing reforms. These countries have been in Georgia's shoes in the past 20 years; they know the strengths, the weaknesses and the challenges of being a country undergoing reform. It is in this spirit that Georgian politicians and entrepreneurs must engage DCFTA regulations and TTIP aspirations.

Cordelia Ponczek is a graduate student and analyst in Warsaw, Poland. She is the Kościuszko Foundation research grant recipient for 2014-2015.

Transatlantic Trade and Investment Partnership: an Overview from AmCham EU

• An ambitious TTIP will provide EU consumers with a wider choice of goods to buy at more competitive prices across a wide variety of sectors
• TTIP will improve all aspects of online shopping across borders
• TTIP will reduce time and cost for certain product (such as life patients
• EU and US regulators environment) and duplication
• Many EU degrees and qualifications are not recognised by the US, something which TTIP could change
• TTIP could create more than 500,000 new jobs in EU and US

The more than 20 million SMEs in the EU represent 99% of businesses, and are a key driver for economic growth, innovation, employment and social integration. SMEs' contribution to EU GDP was trillion in 2012.
In the EU, SMEs provide two thirds of all private sector jobs and 85% of net new jobs between 2002 and 2010 were created by SMEs.
SMEs are expected to gain significantly from TTIP because SMEs tend to dominate high tariffs sectors (food, machinery, automobile) where increased trade is expected to result from an agreement.