The FINANCIAL — While sharing Poland’s experience in the EU integration process, Andrzej Cieszkowski, Poland’s Ambassador in Georgia, told The FINANCIAL that the Association Agreement will raise Georgia’s competitive advantage resulting in Russia becoming a better partner for Georgia.
“Signing the Association Agreement and Deep and Comprehensive Free Trade Agreement (DCFTA) will not damage Georgia’s economic relations with Russia. The same myth was said in Poland but our export to Russia now, being a EU member, is much greater than it was before. German ties with Russia are considered to be very large, but we have the same trade turnover with Germany as we had before. However, the EU market is very profitable for all the businesses we have in Poland,” Cieszkowski said.
“The importance of the Russian market as a trade partner of Georgia is sometimes exaggerated. The difference between the EU and Russia is that in the EU we do not use embargo. Russia does and it is mainly politically-motivated. Georgia has already experienced a ban, in 2006, and Poland had a ban on meat and vegetables as well. Georgia has higher trade turnover with the European Union than in Russia and it is not comparable,” he added.
Andrzej Cieszkowski does not think that Georgia faces any danger from Russia because of its political decision to become an EU family member. “The fear that Russia will strengthen its ties towards Georgia like it did in Ukraine, is pointless. The worst scenario in this situation would be to lose the territories, which are effectively already lost. Today we see that 20 percent of Georgia’s territories are occupied by Russia. The best way forward is for Georgia to modernize its economy, to go down the EU integration path and to have the best conditions for its citizens. In Poland, we had a very bad experience with Russians. Millions were killed by Russians. There was always will from the Polish people to be free. Even though there is a fear of Russia, that does not prevent society from progressing in the best way. We chose this path in Poland and I think that this experience should be shared by Georgia,” Cieszkowski said.
The DCFTA will open up trade by immediately removing all duties on imports. As a result, EU importers will save EUR 10.8 million annually and their Georgian counterparts will save around EUR 84.2 million on imports from the EU, according to the European Commission.
Georgian agricultural products will become more attractive on the EU market thanks to the removal of EU import duties worth EUR 5.7 million on basic agricultural products and EUR 0.5 million on processed agricultural products. New market opportunities in the EU and higher production standards in Georgia will spur investment, stimulate the modernisation of agriculture and improve labour conditions, according to the European Commission.
Because Georgia has the most preferable tariff liberalization conditions worldwide, it will encourage foreign investors to invest and produce in Georgia, says Mikheil Janelidze, Deputy Minister at the Ministry of Economy.
“This will not only increase the export volume, but also diversify it. Local entrepreneurs will have the opportunity to expand their enterprises and production. On the other hand, Georgia might be used by the foreign companies as a place where they will produce within the framework of the EU market. Not only our neighbouring countries, but also those ones who do not have a DCFTA with the EU, will become interested in establishing enterprises in Georgia. Asian countries will be happy to open enterprises here because they will be closer to the EU. Market proximity and easy delivery capabilities are very important in today’s trade. Even EU member countries will be willing to come to Georgia as there are low taxes and a cheap labour force here,” Janelidze said.
After signing the Association Agreement Poland’s competitive advantage rose, says Andrzej Cieszkowski, and he expects the same will happen to Georgia. “Poland is currently the leading manufacturer of furniture and the biggest producer of LCD screens. Polish cities became an important location for business processes which did not exist before. Every new EU country has its niche and Georgia also has such potential. The most important thing is to choose the right economic strategy. Finding the right niche is up to the businesses and not the government. It depends on the creativity of the Georgian entrepreneurs. I think that agriculture is a very promising sector in Georgia which is not used and if good technologies are used here, the land is so fertile that it could become a niche of Georgia. Re-export of cars is dominated by Georgia businessmen and this could be an idea as well. Businesses should find where they are better than others,” he said.
Once the DCFTA comes into force, Turkish investments might boom in Georgia. “As there are not enough raw materials in Georgia to produce enough products for the EU market, it will buy the raw materials from Turkey. This process is called diagonal cumulation. Georgia will buy raw materials, and especially textiles, from Turkey and produce here, but the production will be exported to the EU as Made-in-Georgia. This will increase Turkish investments in Georgia.
Diagonal cumulation operates between more than two countries provided they have Free Trade Agreements containing identical origin rules and provision for cumulation between them. As with bilateral cumulation, only originating products or materials can benefit from diagonal cumulation.
Although more than two countries can be involved in the manufacture of a product it will have the origin of the country where the last working or processing operation took place, provided that it was more than a minimal operation. Diagonal cumulation operates between the Community and the countries of the so-called “pan-Euro-Mediterranean cumulation zone”, according to the European Commission.
The DCFTA will cause a price increase in Georgia, says Andrzej Cieszkowski. “The DCFTA requires reforms from the government and serious investments from businesses. These investments have a cost, of course, and to result in the immediate aftermath of signing the Association Agreement, the price of certain products might even rise as businesses are forced to make investments. Meeting European criteria means that the Georgian Government and business must work together. The Georgian Government should prepare the institutions, good governance and this is an investment in people and institutions. Business should invest in their technology and produce high-quality products to be sold in the European market. The price could be raised on certain products, but not on every product. The same happened in Poland, but the competition of good quality companies made the prices lower again. That’s a healthy economy. We saw in Poland that even very small companies were very successful in selling to the European market and in having a good business,” he said.
However, economically the DCFTA is beneficial for Georgia, says the report conducted by Ecorys, the European research and consultancy company. The report is commissioned and financed by the European Commission.
In the long run, the change in national income for Georgia is estimated to be around EUR 292 million, according to the report. For the EU, the long term effects will be negligible, with a 0.00 percent change in EU GDP (minus EUR 47 million). For Georgia, the increase in national income is sizeable in relative terms – a 4.3 percent growth of GDP in the long run. Georgian exports are estimated to increase by 12 percent, while imports rise by 7.5 percent. Average wages in Georgia are projected to increase by 3.6 percent over the long run. Meanwhile, the overall consumer price index is expected to decrease by about 0.6 percent. The reduction of non-tariff measures (NTMs) are the single most important measure for reaping the benefits of the DCFTA for Georgia, while for the EU tariff liberalisation is most important, according to the report.
As is typical for all trade liberalisation, the impact of the DCFTA on economic sectors will differ. There will be both sectoral winners and losers. The biggest effect (in relative terms) is the expected 62 percent increase in the output of chemicals, rubber and plastic, which is due to a combination of tariff reductions and TBT reductions. Other important sectors, where output is expected to increase more than five percent, are other machinery and equipment and primary metals. Livestock and meat products, other processed foods, electronics & computers, and other manufacturing are all expected to contract by 8-24 percent in terms of output, according to Ecorys.
“What we are offering is a political association and economic integration, because the trade part is not only tariffs, but basically it is about very deep and regulatory approximation between Georgian and EU legislation,” Boris Iarochevitch, Deputy Head of Delegation of the European Union to Georgia, told The FINANCIAL. “Of course, we do not ask that Georgia adopt all of the EU legislation, but a part of it. It means that Georgia will become for a number of products and services a part of the internal market which has more than 500 million consumers. The positive effect of the Agreement will be felt progressively and it is not only about trade but more to improve the investment climate in Georgia because it will become more transparent, more attractive and it will give a lot of creditability. Investors from the EU will know that Georgia will adopt a certain number of EU-directed regulations and standards in a certain period of time. For seeing the final results and benefits of the agreements at least 6-7 years should pass. It is a long term effort. For instance, in the field of the environment a potential investor will know that such a directive, similar to the one in the EU, will be in Georgia in two years. It provides a very clear framework for potential investors,” he added.
In the context of the European Neighbourhood Policy, the EU and Georgia are in the process of negotiating an Association Agreement (AA). A Deep and Comprehensive Free Trade Agreement (DCFTA) will be part of this AA. Herman Van Rompuy, President of the European Council, confirmed that the signing of the EU-Georgia Association Agreement will be held in June. “Meeting PM Garibashvili in margins of the Nuclear Security Summit 2014. Association Agreement with Georgia to be signed in June,” Rompuy wrote on his Twitter page on 24 March.
Meanwhile, the challenges that Georgia might face within the framework of the DCFTA are linked to the implementation of the regulations and business adaptation to the new regulations, according to Janelidze.
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