Georgia after EU Association Agreement

Georgia after EU Association Agreement

The FINANCIAL -- Local producers and economy researchers in Georgia are giving a controversial outlook about the effects of the EU Association Agreement on local economy, especially on how this will influence the Georgian local market which is full of non-EU standard products.

The EU is ready to sign an Association Agreement with Moldova and Georgia by August 2014, German Chancellor Angela Merkel said at the last EU summit of the year in Brussels, on 20 December. It is expected that the Agreement will allow the entry of Georgian exports into EU-member countries free of customs duties. EU exports will also enter the Georgian market free of customs duties. In the meantime local producers and economy researchers in Georgia are giving a controversial outlook about the effects of the EU Association Agreement on local economy, especially on how this will influence the Georgian local market which is full of non-EU standard products.

An impact assessment study has estimated that trade liberalization with the EU will result in an increase of GDP in Georgia of no less than 4.3% per year, a rise in exports by a significant 12.4% and increase of imports by 7.5%. Boris Iarochevitch, Deputy Head of the Delegation of the European Union to Georgia, told The FINANCIAL that the EU is and will remain for Georgia an important partner for imports.

  • A free trade zone could be the greatest challenge of 2014 for local Georgian producers who are not ready to enter the EU market

“One of the effects of the approximation to EU regulations is that it is likely to restrict the inflow of low quality products from third countries, creating the conditions to also boost domestic production or imports from the EU,” said Iarochevitch.

“Bringing European production to Georgia will be very good and useful for the economy,” Aleksi Aleksishvili, former Minister of Finance, told The FINANCIAL. Currently Alexishvili is the Chairman of the Board at PMCG Consulting Group providing services to governmental and international organizations worldwide.

“It can’t be harmful for Georgian goods, because the price and quality of Georgian products is in another operating segment. And such kinds of products cannot be a direct competitor. In addition, a large part of the imported produce is used as machinery, industrial machinery and raw materials. And such material with the help of the Georgian economy can only improve the level of productivity and the quality of manufactured products,” Aleksishvili believes.

“I think that a free trade agreement will not be good. It will hamper production,” Sandro Buadze, Deputy Director at “Campa”, one of the leading local producers of fruit juice, told The FINANCIAL. “The products will come from developed countries and will kill prospects here,” he believes.

Buadze says that the company currently imports tropical fruit and pays a 12% tax fee for it. Without tax import will not be limited for EU companies.

“Kula”, another juice producer, says that EU companies will not be able to compete with their products since European products are mainly unnatural, as opposed to theirs. “We are making juice from natural fresh fruits. They (the EU producers) do not produce healthy, natural fruit juices. The consumers will be able to choose which products are better to buy,” Kula Marketing Director told The FINANCIAL.

Kula is currently exporting products to some EU member countries. But the main market is in Georgia.

However, an examination of Kula’s products by a Eurasia Partnership-sponsored project recently showed that products marketed as 100% natural are not “totally” natural. They do contain water, according to a laboratory examination published on the consumers rights website Georgian legislation does not provide strict rules on marketing and advertising, but this situation might be changed after the EU Association Agreement.

It’s expected that EU producers will offer high quality products for better prices, though many local producers are ignoring this possibility, like one of the most popular wine companies - Tbilvino.

“The Georgian market is distinguished for its loyalty. 98% of the market is filled with Georgian wine because that is the demand. The level of competition will be low after entering the European Union. There will be no significant change,” President of JSC Tbilvino told The FINANCIAL.

“We have been exporting Georgian wines to Europe for 10 years, but that does not mean that we occupy an important place yet. In terms of our quality we can compete with European wine, but our product is less well-known. Entering the European Union would be good for us. If you gain a share of the market in Europe, growth in demand is likely to occur on an annual basis. Western European markets are more stable in regard to this. Of course we should not expect an instant boom in demand though,” Margvelashvili told The FINANCIAL.

“With the help of a free trade agreement it is expected that both European import and export will grow,” said Aleksi Aleksishvili of PMCG. “But exports will typically increase more, since it will open the European market to Georgian goods, while the Georgian market is already open to European goods.

In addition, to enter the European market Georgian products should satisfy certain standards, the adaptation and monitoring of European regulations will be needed. While for more European goods to enter the Georgian market we will need economic development, income growth for people and even more integration is needed in the region of the Georgian economy. Thus, for the short-term it will help to increase the export of Georgian products. This will also have a positive impact on employment. EU membership will help to increase European investment, productivity and business development,” he added.

“Out of what we produce we will export as much as is possible and those products which will have a client base in Europe. First of all, I think it will increase the share of exports of vegetable agricultural products. Then textiles and food products will be added. After that, more in the long run, if we develop quickly and properly, and we do not lose but gain technical and engineering potential, then engineering and technological production as well as export to Europe may be possible.”

“Everything will come of communicating with European business. They will do everything themselves, as long as we do not interfere by imposing unnecessary and useless regulations. Potential obstacles include: deterioration in the business environment, artificial market closure attempts, bureaucracy and state-sector growth, macroeconomic instability, economic populist decisions and so on,” Aleksishvili said.

“A European free trade agreement is a necessary and important step in the development of our economy. But, it will not be effective if our economic policies will not be based on a free and competitive market and the business environment will not be completely free. If the law and the judicial system are not at a high level, any agreement will be invalid.”

“A free trade agreement will not be a threat to the budget. First of all, it should be noted that the customs duty in any case shall not be a source of revenue for the budget. On the other hand, if we look at the structure of European product import, it is not the product (agricultural products and food), which falls within the area of ​​taxation. The share of the products which meet customs duties is very small. Also, it should be noted that with our neighbouring countries (including Russia and Turkey) and the Commonwealth of Independent States countries we have free trade agreements. Therefore if comparing European products to the products they produce, the tax applied is absolutely unreasonable and abnormal. This will also have a positive effect on the tourism sector,” Alexishvili told The FINANCIAL.

  • No positive impact on the Georgian economy in the short-term

Eric Livny, Director, International School of Economics at Tbilisi State University

"In the short run the association agreement will have virtually no positive impact on the Georgian economy. Georgia’s current economic structure is geared towards exports to Russia, not the EU market.

We simply don’t have much to offer beyond the few traditional products we’ve been exporting in recent years. If anything, the phytosanitary requirements to be imposed as part of the Deep and Comprehensive Free Trade Agreement with the EU will make Georgia’s agricultural products even less competitive compared to their European equivalents.

Compliance with EU regulations will require costly adjustments, driving up the costs of domestic producers and undermining their competitive position vis-à-vis imported goods originating in the EU. This is particularly true for Georgia’s meat products, for which compliance costs are likely to be the highest.

At the same time, Georgia may see significant benefits in a slightly longer timeframe, say, in 3-5 years. There is no shortage of capital looking for good projects around the globe. Access to the EU market could provide a strong incentive for some of this capital to land in Georgia. These incentives will be strongest for investors from countries that face restricted access to the EU such as India, China, Azerbaijan, Kazakhstan, Turkey and Iran. They will be the first to “discover” the advantage of using Georgia as a production base for exports to the EU.

While the opportunity may be there, Georgia is short on its own capital and qualified (skilled and disciplined) labour. Therefore, for the benefits of the Association Agreement to be realized, the Georgian Government must do everything it can to keep the country’s borders open for foreign investors and workers.

When seen in this context, the recent legislative initiatives to (i) ban foreign ownership of land, (ii) restrict entry and (iii) re-introduce limits on foreigners’ stay are all steps in the wrong direction. If implemented, these populist and short-sighted steps will rob Georgia of the chance to attract badly needed labour, capital, modern technologies and ideas".