The EU market: lures and risks
05 December, 2013
The EU market: lures and risks
Free trade with the EU may come to Georgia now that it has initialed an agreement on associated membership on 28 November. But this implies lures and risks. Lacking trade protection tools, Georgia may be flooded by imports, without a strong export market to compensate. As the only country in the region with free access to the EU, it may lure investors, but unless it boosts local production, it may do more selling for the EU than to it.

Georgia certainly benefits from the Vilnius agreement and its Deep and Comprehensive Free Trade Agreement (DCFTA) with the European market of more than half a billion consumers. In July DCFTA negotiations were successfully completed, and it should go into effect once the agreement is signed next November.
But can Georgia compete on the EU market? Its dependency on imports is estimated at 80%, while its share in EU trade is scarcely above zero, at 0.1%.
Some economists in Georgia believe production can be boosted if it becomes a regional hub, especially since Ukraine and Armenia have chosen Russia over the EU. Meanwhile Azerbaijan covets the DCFTA, but must join the World Trade Organization (WTO) first. Turkey enjoys the Customs Union with the EU and some trade preference, but not the DCFTA.
“It turns out that Georgia is the single country in the region that has a real prospect to have free access to the huge EU market in the shortest period,” Ditrikh Muller, a co-founder of Georgian Investment Group +, said. “Plus it is the top reforming country in this region, corruption-free, and suggests easy procedures to start a business. But that may be nothing to investors taking into account the small size of the Georgian market of 4 million. However, free trade with the EU, coupled with a business friendly environment, may entice investment from both near neighbors and far Asian countries. They will set up production here to export to the EU via Georgia, and that will be a real impetus to Georgian local production.”
But to capitalize Georgia needs to insure strong protection of property rights, establish proper market competition laws, and develop its securities market. “Without these three key pillars no investor will take us seriously,” Muller elaborated. Without a securities market “investors cannot define where to invest or how to sell shares if they decide to quit.” Muller warned that if authorities in Georgia do not solve these problems before the EU market opens up, it will have nothing to export to the EU and will function only as a sales market.
Lia Eliava, a financial market analyst, is more pessimistic. She does not expect the EU to open up its gates completely; the EU has sophisticated trade protectionism tools that will be difficult to overcome for such an inexperienced country as Georgia. Nor does she expect a flood of investment; Georgia’s market is small, its labor cheap but unqualified, and its energy tariffs on business the highest in the region.
“What are we expected to export to the EU, while we cannot expand our exports to our immediate neighbors?” asked Eliava. “Our production is far below par, and it is a myth that we may get new technology from the EU - nobody gives out up-to-date technology willingly. To get innovations, China, for example, devised a scheme: it did not allow any investor into the country without granting a right of authorship on their product to China. But it is a huge and attractive market that can bargain, whereas we cannot.”

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