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Free Trade Regime with China: Economist Overviews

Georgia will export more than 95% of its goods and services to the world’s biggest market without additional taxes.

Georgia and China have completed negotiations on free trade regime. More than 95% of Georgian goods and services will enter the Chinese market without additional taxes. Since China represents Georgia’s 4th biggest trade partner, we should expect that foreign trade intensity will further increase with this country.

The list of products that will be exempted from imports taxes, include wines, mineral waters, agriculture  products as main exports items.  This information was released by the Georgian government.

Negotiations lasted 7 months and were conducted in 3 stages. The Georgian Authorities are proud to have conducted one of the  shortest free trade negotiations with China. Minister of Economy and Vice Prime Minister Dimitri Kumsishvili told the news conference on September 13 that Georgian wines and agriculture products will be admitted to the Chinese market without any customs taxes. Seven-month negotiations with China have ended successfully and this signifies that Georgian products will penetrate the world’s biggest market accounting for about 1,5 billion consumers.

‘This is an unprecedented case, when China has removed all customs tariffs on wines and agriculture products of its partner country», Kumsishvili noted.

Lately, the Authorities and official statistics widely covered positive sides of this agreement with  exports growth expectations. Even before the agreement conclusion, according to the 2016 January-July indicators, the ratio of China in Georgia’s trade turnover makes up 6.3%, while the figure accounts for 9.7% in terms of exports. In the mentioned period the ratio of Georgia’s top ten trade partner countries in Georgia’s total foreign trade turnover made up 70%. Georgia’s major trade partner countries are as follows:

  • Canada (1304 million USD),
  • Turkey (891 million USD)
  • Russia (460 million USD)
  • China (413.1 million USD)

At the same time, China surpasses Russia in terms of exports (109.2 million USD against 101.6 million USD).

It is also interesting that wine is a leading product in Georgia’s exports to China. According to the Wine Agency, as of July 2016, Georgia exported 23 932 067 bottles (0.75 liter) wines to 44 countries , up 42% compared to the same period of 2016. In the reporting period Georgia exported 5.3 million USD wines, up 16% compared to the same period of 2015. In the reporting period exports increased to EU countries, traditional and new markets.

One of the major growth indicators is recorded on the Chinese market — 152% (2 475 000). As a result, Chinese market has equaled to traditional market of Ukraine.

Prior to commencement of free trade regime negotiations with China, Georgian  government hired PMCG research company for conducting research work. The report has showed that Georgia’s exports will considerably increase in a short period by about 9%, including wine exports are expected to grow by 28.5% and exports of nonalcoholic beverages are expected to rise by 36.7%.

At the same time, Chinese imports to Georgia will increase by 1.7%. 48% of the increased Chinese imports  will be based on the so-called «Replacement Effect», while the remaining 52% will be adjusted to «Demand Effect». Chinese imports are expected to replace imports from Turkey. It should be noted that in case of imports tax removal, budget revenues will decline by about 12%, that is by more than 8 million USD. In the event of conclusion of free trade agreement, Chinese investment inflows to Georgia are supposed to hike immediately, specially in the finance, hydro power, communications and Internet, medical industry, transport infrastructure, natural resources and wine sectors.

As to investment inflows, at this stage, several Chinese companies have entered Georgian market, including Hualing Group, which has bought Basisbank and tried to purchase a stake in Bank Republic, but in vain. Nevertheless, the fact is the Chinese company owns a commercial bank in Georgia and this company adheres to development strategy and this signifies that Georgia becomes an attractive country for Chinese investments.

It should be noted that a part of economists warn of cheap Chinese products’ ability to flood the Georgian market. However, we should not forget that Georgia is an import-dependent country and about 70% of foreign trade is recorded for imports. Moreover, the Georgian market has been already flooded by Turkish goods. Therefore, Chinese goods will have to compete with Turkish products, while competitive environment will be very useful for Georgian consumers, because they will have option for better tariffs and quality. At the same time, exports to China gains momentum at high paces. Taking into account that 10 years ago Georgia did not carry out exports, in practice, today it ranks among top three wine exporter countries with annualized 15% growth.

The Chinese market should become a serious stimulus to boost Georgia’s exports potential thanks to applicable regulations in China that are less severe compared to European ones.

For example, our country is able to export more than 7 000 products to EU under tax-free regime, but because of strict requirements to the products, Georgian companies are  facing difficulties for establishing HACCP and other similar standards. Therefore, foreign trade relations with China will intensify in the nearest years.

Georgia-China negotiations on free trade agreement will be finished in October, finally, after Trade Minister of China will arrive in Georgia to sign memorandum with the Government of Georgia. Then the agreement text will pass 2-month expertise period. The Georgian government expects that the agreement will be signed in December 2016 and will come into force in the midst of 2017. After parliaments of both countries  ratify the agreement, Georgia will become the first country in the region with which China will have signed the free trade agreement.

By Merab Janiashvili
Economic Analyst
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