Study Finds Huge Benefits in Georgia-China Free Trade

Georgia has been an economic bridge between East and West for thousands of years. The country was a key section in the “Silk Road,” by which exotic goods from China like silk and spices stopped off on their way to Europe. Now, Georgia’s political and business leaders are working to revive that historic relationship.

China is currently Georgia’s fourth-largest trading partner and third-largest source of foreign direct investment. Bilateral trade reached USD 823 million and Chinese companies invested USD 195 million in 2014. In June of this year Georgia became a founding member of the Chinese-led Asian Infrastructure Investment Bank. The EUR 500 billion fund will funnel investment capital into developing economies, including Georgia. Last month Prime Minister Irakli Garibashvili declared “Georgia is not just looking West” while touting the importance of strengthening trade and investment ties with China. According to the Tbilisi-based consultancy Policy and Management Consulting Group (PMCG), a closer relationship would benefit both countries.

The “Joint Feasibility Study on China-Georgia Possible Free Trade Agreement” by the PMCG projects that a Georgia-China free trade agreement would boost Georgia’s annual exports to China by 9 percent, and China’s by 1.7 percent. The study was produced in collaboration with the University of International Business and Economics, the Ministry of Economy and Sustainable Development of Georgia and the Ministry of Economy of China, and finds that a free trade deal would increase bilateral trade in goods as well as foster trade in services and foreign direct investment.

Such an agreement would work by reducing or eliminating tariffs and other barriers to trade between the two countries. “Georgia’s foreign trade policy is already one of the most liberalized in the world, so no important changes are expected in this regard,” Lasha Chochua, an economist at PMCG and author of the study, told Georgia Today. Georgia’s 1.5 percent average Most Favored Nation tariff (the tariff rate applied to goods from WTO members it doesn’t have preferential trade agreements with) is significantly lower than China’s average rate of 9.8 percent. Georgian producers are looking forward to accessing a 1.3 billion-person economy with ample room for tariff reduction. According to Chochua, a free trade agreement “will crucially decrease trade barriers for Georgian products to China.”

Georgia’s biggest winners would be producers of wine and non-alcoholic beverages. The study projects annual export increases of 28.5 percent and 36.7 percent in each respective sector. These products have become popular with China’s growing consumer class, but the existing 21.33 percent tariff on wine currently limits Georgia’s share of the market. The study also predicts a 4 percent gain for copper scrap, which is currently Georgia’s single-largest export to China. Exports topped USD 25 million in 2014.

Chinese producers also stand to benefit albeit on a smaller scale. Currently the main Chinese products imported in Georgia are electronics, steel and shoes. These industries would see modest gains, and the study projects an increase of USD 1.37 million in the import of doors and door frames. China’s agriculture sector is also expected to benefit, with frozen meats and dried vegetables being of particular note.

The Joint Feasibility Study emphasizes that a free trade deal would cover much more than goods, however. It finds that an agreement would also facilitate trade in services and FDI, the latter being of particular importance to Georgia. An agreement could streamline regulations in services and project financing, making it easier to do business across borders.

Twenty-five Chinese companies currently operate in Georgia, and China-Georgia FDI rose by 117 percent from 2013 to 2014 to account for more than 15 percent of the USD 1.273 billion total. Chinese company Hualing Group is currently developing a USD 40 million free industrial zone in Kutaisi, and state-run PowerChina is a leading bidder for the Anaklia Deep Water Black Sea Port Project. The port will handle 40 million tons of cargo per year, including large amounts of Chinese goods bound for European shores.

Negotiations have yet to begin on a Georgia-China free trade agreement. However, the PMCG study makes clear that a deal would benefit both countries and serve as a catalyst for Georgia’s continued economic growth. According to Chochua, free trade with China is yet another reason to be optimistic about Georgia’s future: “Free access to one of the world’s largest and fastest growing economy [sic] together with the FTA with EU … All these together create stable potential long-run economic development for Georgia.”

Joseph Larsen

27 August 2015 21:31