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Georgia-China Free Trade Agreement – New Economic Opportunities or Major Risks?

Georgia-China free trade agreement was signed on May 13, 2017. As a result, Georgia has got an access to the market with 1.4 billion consumers.

After simplification of Georgia-China trade-economic relations, Chinese products inflow to the Georgian market may extremely increase and Georgia’s negative trade balance may deepen further. A part of economists show skepticism concerning the agreement, contrary to the Government.

Government of Georgia calls the agreement to be a historical document. A part of economists expects Chinese products to oversaturate the Georgian market.

Free trade agreement with China is a very mimportant document that opens very interesting opportunities for attracting investments, Prime Minister Giorgi Kvirikashvili told Government meeting.

Georgia is taking back its historical geostrategic functions, Georgian Prime Minister added.

“We have signed free trade agreements with our neighboring countries, as well as with EU. This factor makes Georgia a very interesting country for investments. We believe that free trade agreement  with China is of crucial importance for attracting new investments and developing exports-oriented production. This is an important new door that has opened for Georgia for developing export potential and exports-oriented production. Georgia is taking back its historical geostrategic function stage by stage. Our country should be open for similar economic cooperation and we believe this is significant breakthrough”, Giorgi Kvirikashvili noted.

The agreement document was developed for several years and I thank everybody, who has taken part in developing this document, Kvirikashvili said.

Historical Agreement and Figures

According to Geostat, national statistics service of Georgia, in 2016 Georgia-China external trade marked 717.090 million USD, including exports made up 169.586 million USD, while imports constituted 547.503 million USD. Negative trade balance marked 377.916 million USD, which is 52.7% of bilateral trade turnover.

In the first quarter of 2017, Georgia exported 49.384 million USD products to China and imported 126.512 million USD products from China. Negative trade balance marked 43.8%.

These indicators show that Georgia-China export-import correlation is not very favorable. After full enactment of the new stage of trade-economic relations with China, it is not ruled out exports-imports mismatch increase further. Economists do not rule out similar scenario.

Professor Rati Abuladze, doctor of economics, explains that signature of Georgia-China free trade agreement is a positive step in Georgia’s economic diplomacy. It should be noted that China was the first country that recognized independence of Georgia and developed dynamic relations with our country. Today China is Georgia’s major trade partner. This agreement is an important strategic step that stresses enhancement of political contacts between countries, dynamic development of economic relations, Abuladze pointed out.

The expected economic dividends from this agreement are as follows:

  • Mutual economic dependence of China and Georgia, development of economic relations and cooperation;
  • Shaping favorable environment for doing business (fast-growing exports market with 1.388 billion residents, growing solvency, favorable competitive environment, Know How opportunities);
  • Coincidence of Georgian business potential with Chinese market demand structure, expansion of activities of companies and development of external trade;
  • Existence of favorable trade and economic infrastructure for sales of Georgian products (in China), that will grow exports of products. Under the agreement, 94% of Georgian products will be exempted from customs tax;
  • Growth in foreign investments and implementing new investment projects (In 2016 Chinese FDI inflow marked 27.4 million USD);

Abuladze explains that Georgia should shape economic and trade relations, however, achievements of economic diplomacy should be determined by the agreement conditions that is to:

  • create preferential conditions for Georgian business. This agreement is to determine how competitive environment will be ensured for Georgian business, which resources will move under simplified regime and which production will grow.
  • Ensure a growth in Georgian product exports scales, as compared to Chinese products imports, under “Mutual beneficial principle”.
  • reflect the Chinese market benefits in economic indicators. It is worth noting that in 2016 exports marked 169.6 million GEL and imports totaled 547.5 million USD;
  • Turnover of products, capital or workforce between China and Georgia should ensure “competitive advantage conditions” for Georgian environment;
  • ensure preferential condition for Georgia resources, especially when implementing budget-financed projects (both in Georgia and China).

According to Abuladze,  the following factors need economic and political analysis of Georgia’s economic diplomacy:

  • Effect of China’s trade-economic activation on Georgia’s economic policy;
  • How china will be perceived in Georgia’s development perspectives, as China represents “Factory of the World”.
  • How China’s major and competitive companies (including China-based foreign companies) will affect domestic players in Georgia. What will be the effect of globalization of the mentioned companies. Research works show that Chinese companies strive for becoming global companies;
  • What will be the “place” of China, as a leading actor, in terms of geopolitics, besides economic aspects.

“Free trade agreements always make positive effect on enhancement of trade relations between countries in terms of external economic integration, enhancement of cooperation in various fields, intense movement of capital or workforce. As a result, all these factors will ensure Georgia’s economic stability and steadiness”, Rati Abuladze said.

Economic expert Akaki Chargeishvili states that enactment of the mentioned agreement is a positive event. Despite the agreement was signed several days ago, Georgian products had penetrated Chinese market long before, mainly alcoholic beverages, including wine. Both private and state sectors have serious expectations, Chargeishvili said.

This is serious advancement for economic development of our country and the private sector should make a maximum use of this opportunity, Chargeishvili noted.

«We have huge potential in agriculture sector, because today the world suffers from food shortage. Therefore, Georgia is a real chance», Chargeishvili said.

Government of Georgia should shape an institution of trade-economic representatives at least in Chinese provinces that will operate as representations of the Georgian state and will support private sector. Georgian embassies will not be able to valuably perform all these goals, he said.

Economic expert Gia Khukhashvili says that the free trade agreement with China creates certain strategic opportunities for Georgia, based on Georgia’s geopolitical function.

“As to specific economic effect, certain risks may arise. Similar agreements are always bilateral. When the contractual parties are on different economic development levels, the less-developed party may bear losses. In this case, we will be more vulnerable. This signifies our economy will  be more saturated by Chinese products and we will not have any instrument to balance this. We do not have much exports potental compared to China and therefore, expansion of Chinese products is inevitable.

Moreover, this agreement may bring heavier outcomes. Our economy is being shaped today. Real sector of economy needs development to make the country attractive for investors. To this end, we should place competitive products. If we set such preferential regime to Chinese products, the country will lose the interest of investors, as any investor will fail because of competition with Chinese products. This is a main risk and this agreement may lower Georgia’s investment attractiveness and we will never build the real sector of economy”, Khukhashvili said.

If we had configured all these factors in right way from strategic point of view, we could raise interest of Chinese investors  in making investments in Georgia’s real economy sector to make our country an exports instrument for Eastern European market and even for Russian market, Khukhashvili said.

“But this agreement confers trade privileges to China. Therefore, China  will not have much interest to make investments in Georgia’s real sector. Many European countries have refused to sign similar agreements with China because of simple reason – it is difficult to compete with Chinese products and similar agreements destruct domestic economic sector. Instead of thinking about these threats, we are taking such major risks for  populist PR, without due weighting expected risks”, Khukhashvili said.

Economist Paata Sheshelidze shows different position. Georgia has long signed free trade agreement with the world. Our market is open for products of all countries and 88% of these products enjoy zero-rate regime, while all other products are subjected to 12% tax rate.

“As to export products and our potential, we cannot make preliminary forecasts and this is less important. A new window has opened and the tomorrow will outline talented people. They are given opportunity to sell their products on the new market. It is a peripheral issue how these opportunities will be used. If someone fails to make a use of this chance, then we have problems with education. Our ambitions have grown in wrong way and so on. Government was to open this window definitely and it has performed this job”, Sheshelidze said.

As to private sector, Georgian entrepreneurs provide various assessments around free trade agreement with China. Several months ago a major par of them asserted hat the agreement would create uncompetitive environment for domestic entrepreneurs in Georgia.