Georgia is the only country in the region that has signed free trade agreements with both the EU and China. Preparations for conducting negotiations for an upgraded DCFTA trade regime started in 2009.
The European Commission submitted recommendations for implementing reforms in various fields. After fulfilling these recommendations, DCFTA began on September 1, 2014. Today, Georgia is able to export 9,600 products without customs taxes as part of the improved trade regime.
Unlike other Georgian free trade agreements, DCFTA implies a liberalization of trade in both goods and services. This agreement calls for harmonizing Georgian legislation with EU legislation via trade relations. DCFTA enables Georgia to gradually receive three (of four) freedoms of the EU market: free transportation of goods, services and capital. The fourth freedom allows Georgian citizens to travel freely, thanks to visa regime liberalization.
Under the DCFTA regime, Georgia-produced goods and services that satisfy certain conditions gain access to the world’s major market, which unites 28 countries. The free flow of goods and services will improve Georgia’s export potential.
The Georgia-China agreement is of crucial importance to the Georgian economy, as about 94% of Georgian products are exempted from customs taxes in China. Exempt products include wine, hazelnuts, honey, mineral water, beer, soft drinks, tea, fish and other marine products, cereals and medications, cables, washing machines, fertilizers and locomotives. The Georgia-China free trade agreement is also a significant stimulus for implementing new investment projects, developing entrepreneurship and encouraging the export of Georgian products.
In addition to these bilateral and multilateral trade agreements, various forms of free economic zones have been created in the world, including free industrial zones (FIZ). The above-mentioned trade agreements enable FIZ to operate successfully in Georgia and make the country attractive for investors. Thanks to DCFTA, the Georgian market has gained access to the 500 million market of the EU, while through the agreement with China, Georgia will enter the 1.4 billion Chinese market.
The Role of Poti FIZ
It is interesting to note the role Poti FIZ may play in Georgia-EU and Georgia-China trade agreements for transforming the country into a trade hub. Prior to addressing this role, the potential of Poti FIZ must be explained.
The formation of free industrial zones (FIZ) is directly related to the stimulation of Georgia’s economic growth. FIZ formation has a positive influence on such macroeconomic indicators as volume of production, level of unemployment, inflation and trade balance. Therefore, Poti FIZ is a crucially important component of the state economy. Why is Poti at the center of this economic growth? The simple answer is based on the geographical location of Poti FIZ, which is attractive for both west and east. It connects the Caspian Sea with Europe and Asia, making it a key point in the New Silk Road transport route. Poti FIZ was founded in June 2008 on the extensive development zone of the seaport (a 3,046,037 square meter land plot), and it was transmitted to an investor for a 99-year period.
Under Georgian legislation, FIZ is a variety of free economic zone with additional conditions and tax preferences. Poti FIZ is part of the territory of Georgia with established borders and a law-determined special status. The zone-owner company issues land to investors via lease.
According to the tax code, companies registered in and operated within a free industrial zone enjoy various preferences, for example:
- Profits earned in a Free Industrial Zone are exempted from profits tax, excluding the cases determined by the Tax Code;
- Delivery of foreign products into the zone is exempted from VAT;
- Fulfilled operations are exempted from VAT;
- Property in the zone is exempted from property tax;
- Delivery of property into the zone is exempted from import tax;
- Delivery of products from FIZ to other territories of Georgia (outside of FIZ territory) is exempted from imports tax;
- The employee pays an income tax based on income declaration.
Poti FIZ becomes more relevant due to the signature of free trade agreements, as it gets the chance to transform the trade process into investments and promote not only general Georgia-China and Georgia-EU trade relations, but also growth in Europe-China trade relations. In order to make use of free trade benefits, Chinese and European parties must realize that it is necessary for products to have the “Made in Georgia” classification – otherwise, the agreements will not match. As a result, both interested parties will have to relocate production to the Georgian economic space either partially or in full, because this status is conferred to a product only if at least 51% of its production is performed in Georgia. FIZ establishes special preferences for making investments, which will be attractive for foreign capital, assuming efficient institutional and legal support and FIZ management’s capable strategy.
Chinese investors show an active interest in Georgian production. Seventy five percent of Poti FIZ is owned by CEFC China Energy, a major Chinese company, which operates in the fields of finance, commerce, trade and logistics. The company plans to further develop Poti FIZ, including goods production, as well as export to markets with which Georgia has free trade agreements. FIZ is located near Poti Seaport, and this factor considerably reduces logistic expenditures, a factor which increases its potential and attractiveness.
Taking into account the gravitation factor, under the trade agreement with China, Poti FIZ will potentially produce goods for export to EU and CIS member countries with which Georgia has signed free trade agreements.
EU participants may have different strategy, because Poti FIZ directly borders the European market. The EU may use this zone, as part of DCFTA, not only to export its products to China, but also to export goods to its own market. Unlike for China, the geographical proximity of the EU and relative low price of production, resources and workforce in Georgian will stimulate the implementation of this strategy.
Poti FIZ may raise interest in other countries (like Iran, Azerbaijan, Armenia, Turkey and the USA) which do not have comparable agreements with the EU and China, but want to participate in these markets.
European and Chinese investors are already familiar with Poti, as it is an important part on the New Silk Road. Therefore, it is absolutely logical to shape a logistics hub in Poti FIZ.
For successful fulfillment of this plan, the FIZ requires institutional and legal support, infrastructural platforms, establishment of international connections and modern strategic systems for the zone’s management. Focusing only on legal challenges:
In the Georgian law on Free Economic Zones, it is necessary to specify that FIZ is arranged for a certain period, which must be at least five years. Investors should be sure that no changes are expected and the government will not nationalize the zone to serve internal or foreign fiscal liabilities. Moreover, a paragraph should be added to Article 9 of this law covering exemption of excise products from the excise tax when delivering product from the territory of Georgia into the zone. This norm is practiced in most free industrial zones around the world.
Paragraph 4 in Article 7 of the above-mentioned law should also be revised to allow the use of buildings in the FIZ for residential purposes. In successful zones, like Jebel Ali in the United Arab Emirates, the investor is able to choose from one of about 9,000 hotel suites operating in the zone. A similar practice occurs in Chinese zones, too. Therefore, it is not expedient to ban living in Georgian free industrial zones.
The operation of FIZ must be subjected to EU-Georgia DCFTA implementation, and legal agreements with China should be also taken into account. In the near future, it is therefore necessary to establish EU standards and technical conditions in Georgian FIZs. Issues among economic agents in the zone should be resolved by international arbitration norms. Moreover, it is necessary to develop a special program for developing territories via a special investment regime and free economic zones, which will expand the functional part of the zone. Based on the international practice of complex free zones, which represent a combined model of several zones, it will be beneficial to add a service zone to the existing Poti FIZ. A service zone is a specialized region with preferential rules for various services.
The implementation of these activities will result in regions of Georgia where businessmen from Asian countries will invest capital and export Georgia-assembled products to the EU with Made in Georgia certification. Georgia will become a place for the production of cheap products in free economic zones through outsourcing. Finally, special trade zones will ensure investment in Georgia’s strategic infrastructure sector.
Irakli Danelia – Business and Economic Centre (BEC)