EU-Georgia DCFTA: Results after 5 years and perspectives

Lali Gogoberidze

Op-ed No. 32/2019

 The Agreement between the EU and Georgia for the Deep and Comprehensive Free Trade Area (DCFTA) started to be applied (provisionally) five year ago in September 2014. This has represented a real opportunity for Georgia for to move closer to Europe and to integrate into the European market. The EU policies in various areas covered by the DCFTA is a solid basis for improving the competitiveness of Georgia’s economy in general, while the EU’s safety standards for products and processes are of high level and accepted internationally

 The Agreement between the EU and Georgia for the Deep and Comprehensive Free Trade Area (DCFTA) started to be applied (provisionally) five year ago in September 2014. This has represented a real opportunity for Georgia for to move closer to Europe and to integrate into the European market. The EU policies in various areas covered by the DCFTA is a solid basis for improving the competitiveness of Georgia’s economy in general, while the EU’s safety standards for products and processes are of high level and accepted internationally.

 The DCFTA also increases investment attractiveness of Georgia, which is important for diversification and modernization of country’s economy. Foreign investors can establish businesses in Georgia, produce products and, on condition that sufficient value is added locally, export to the EU duty-free.

  Integration into the EU market is important for Georgia in both export and import perspectives. Imports of European products to Georgia increases access to high quality and safe products. However, a large utilization of this opportunity is more long-term perspective, given income levels in Georgia are still low, and many people are not able to consume relatively high-priced products. As for export to the EU, there is progress, but full results can be expected in the long-run after Georgia will have fully approximated its legislation and practices to the EU regulations for industrial and agri-food products.

 The value of Georgian exports to the EU increased between 2010 and 2018 by 136%, reaching US$ 730,689. However, since 2014 Georgian exports grew much less fast, by 17%. One of the factors explaining the increase of Georgian export to new markets, including to the EU, in the recent past was the Russian ban on imports of Georgia’s agricultural products in 2006, as a result of which, Georgian producers reoriented to other markets. However, after the reopening of the Russian market in 2013, exports to Russia started to increase again.

Figure 1. EU-Georgia trade 2010-2018 US$

EU-Georgia trade 2010-2018

 At this stage, for Georgian companies, especially for SMEs it is still easier to export to CIS market, among others, because of easy access and soft regulations.

 After the DCFTA entered into force, the share of the EU in Georgian exports increased, reaching a peak of 29.25% in 2015. In following years, although exports to the EU were growing, the share of the EU in Georgia’s exports was declining trend, falling to 21.77 in 2018.

 Imports from the EU has an upward trend, but Georgia had liberalized imports unilaterally form 2006.

 The trade deficit with the EU remains high, reaching about US$ 2 million in 2018, constituting more than half of the trade turnover with the EU.  

 Since the provisional application of the DCFTA, Georgia has started exporting new products to the EU, for example primary and processed agricultural products such as fresh fruits (apple, quince, kiwi, persimmon), dried fruits and berries (cranberries, balsam, curry) as well as some industrial products, such as plastic dishware and animal houses. Georgia also started to export isotopes. By importing member states of the EU, nitrogenous fertilizers were exported to Lithuania and Poland; plants for perfumery and medicines to the Netherland, France and Poland; canned fruits and vegetables to Romania; fruit-berry jams to Austria and Belgium; orthopedic devices to Latvia; fresh vegetables to Lithuania; and processed aluminum to the Czech Republic and Lithuania.

 Overall Georgia’s main export commodities to the EU are:

  • Agricultural products: canned fruits and vegetables, alcoholic beverages, wine, fruit and vegetable juices, mineral waters.
  • Industrial products: ferro-alloys, nitrogenous fertilizers, cooper ores and concentrates.

 Among the main imported products from the EU are:

  • Agricultural products: sugar, dairy products, confectionery, meat products
  • Industrial products: motor cars, oil and oil products, medicaments, medical devices, calculating machines, phones.

 The 3 largest importing countries of Georgian products in the EU since application of the DCFTA are Bulgaria (about 31% of total exports to the EU), German (10%) and Italy (11%).

 The trend of European foreign direct investment (FDI) to Georgia fluctuates, but in general, the share of FDI from the EU is close to 45-50% of the total in most years. The largest sources of FDI into Georgia are the Netherlands and the UK, with about 30% shares in the total FDI from the EU.

 

Figure 2. FDI from the EU, US$ (left scale), % of total (right scale)

FDI from the EU, US$ (left scale), % of total (right scale)

 

 For better utilization of the export and investment potential given by the DCFTA, Georgia needs more active measures to improve the competitiveness of Georgian companies, including further simplification of business environment in order to balance the regulatory burden on companies, driven by DCFTA adaptation.

 It is essential to attract more FDI to the country, bringing new technologies, skills and knowledge required for export-oriented products enterprises. Competitive large FDI companies can become drivers for the development of SMEs through their inclusion in the EU value chains. The DCFTA alone cannot bring “quick wins” and it is important to couple it with FDIs.

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