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Veronika Movchan

Further steps necessary to fully utilise benefits of DCFTA

Georgia and the EU established a deep and comprehensive free trade area (DCFTA) in 2014, expecting to intensify trade links. However, the DCFTA effect seems to have been limited so far. Only 9% of Georgia’s domestic exports went to the EU in 2022, compared with 14% a decade ago. The positive changes in the structure of exports to the EU, like stronger orientation towards consumer and processed products and new products, are also featured in exports to other partners, suggesting that these are general Georgian export trends.

  • Georgia
NL 55 | November - December 2023
International Trade and Regional Integration

The modest developments in exports to the EU are attributed to several factors, including (i) low EU import duties even before the DCFTA and still uncompleted reforms reducing non-tariff barriers to trade; (ii) insufficient domestic production capacity to feed export expansion; and (iii) high attractiveness of other export markets. A further focus on expanding domestic production capacity and completing DCFTA-related reforms to reduce non-tariff barriers is needed to foster Georgian exports to the EU.

Georgia’s domestic goods exports to the EU

Georgia’s domestic goods exports[1] to the EU amounted to USD 0.2 bn in 2022, growing by a mere 2% since 2013, the last year before the DCFTA.

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Moreover, the EU share in domestic exports was only 9% in 2022, compared to 14% a decade ago, signaling that exports to other partners developed stronger.

The structural changes in Georgia’s exports

While staying flat in nominal terms, Georgia’s domestic exports to the EU changed structurally. The number of domestic products shipped to the EU increased by 23%, although the role of the new product remained limited in export value (11%). Moreover, the product variety increased not only for the EU. The same trends were in exports to Armenia, China, Russia, Turkey and the USA.

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Georgia’s domestic exports to the EU shifted towards consumers and processed goods. The share of consumer exports reached 44% in 2022 (+15 p.p. since 2013). The share of processed products increased by 21 p.p. to 54%. In both cases, the changes happened primarily thanks to expanded wine, water and processed fruit shipments.

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However, similar changes occurred in the structure of exports to other key destinations. Besides, the role of processed products in exports to the EU has remained lower than in exports to, e.g., Russia, Turkey, Ukraine and Armenia. Overall, the structural changes in exports to the EU, although significant, follow the general trends in domestic exports and cannot be attributed uniquely to the DCFTA.

Factors behind the limited DCFTA impact

Three groups of factors explain the (so far) limited DCFTA impact. First, trade liberalisation measures appeared (so far) insufficient to boost exports. On the one hand, Georgia benefited from preferential access to the EU market well before the DCFTA. Thanks to GSP+, an EU simple average import duty faced by GEO was 2.6% (2013), and only 6% of Georgian exports to the EU were subject to non-zero duties. On the other, reforms removing non-tariff barriers, especially related to technical barriers to trade (TBT) and sanitary and phytosanitary (SPS) measures remain to be completed, restraining exports of, e.g., animal-origin products to the EU.

Second, domestic production capacity is insufficient to feed export expansion to all destinations. According to business interviews, that is the critical constraint for export expansion. The limiting factors include a high labour deficit, especially for skilled labour, and insufficiently developed transport infrastructure. Moreover, FDI does not contribute much to expanding production capacity. Most FDI is related to services, while inflows into manufacturing accounted for only 6% of the total, and FDI in agriculture was close to zero in 2022.

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Third, other markets offer attractive export opportunities, making Georgian businesses choose other destinations given production capacity constraints. Georgia has free trade areas for all key trading partners (EU, Russia, Turkey, China, Armenia, Azerbaijan) except the USA. Moreover, with Armenia, Azerbaijan, Russia and Turkey, it has direct borders that significantly simplify logistics, especially in the post-Covid era.

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In 2022, Russia was the largest export destination for Georgia’s domestic exports. Its role has steadily grown over the decade after Russia lifted trade restrictions in late 2013. Other important factors have been familiar consumer preferences, established business links and less stringent regulatory requirements and/or their enforcement compared to other markets. However, the Russian market also remains the least certain.

Conclusions

The structural changes in exports to the EU follow the trends of exports to other destinations and reflect the general reshuffling of Georgian exports, becoming more oriented toward consumer and processed products. The limited domestic production capacity coupled with a (so far) small additional trade liberalisation after the DCFTA and attractive opportunities offered by other neighbouring markets jointly explain why Georgia’s exports to the EU developed slowly. Expanding domestic production capacity and completing DCFTA-related reforms to reduce non-tariff barriers are needed to foster shipments to the EU.

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This newsletter is based on the Policy Study “Georgia‘s exports to the EU under the DCFTA”.

Picture: ©AdobeStock #625956028 von Pla2na