Free Trade Policy

Nino ArvelaDZe

Under the initiative of the EU-Georgia Business Council (EUGBC), a discussion on the European Neighborly Policy took place at “Sheraton Metekhi Palace” hotel on 31 January 2007.

Participants of the meeting were the Vice-President of STATOIL, the Director of STATOIL’s Brussels Office for EU Affairs, a member of STATOIL’s Board of Directors – Arve Torvik Deputy State Minister of Georgia on European and Euro-Atlantic Integration – Tamar Beruchashvili, Germany’s Ambassador to Georgia – Hildegard Flor, Deputy Minister of Economic Development – Vano Nakaidze, the Head of European Commission’s representative office in Georgia and Armenia – Per Eklund, the Director of GEPLAC – Kakha Gogolashvili, the Executive Director of the Federation of Businessmen of Georgia – Giorgi Isakadze.
Deputy State Minister of Georgia on European and Euro-Atlantic Integration – Tamar Beruchashvili emphasized that the discussion on trade and business relations between Georgia and the European Union was held for the first time and that it is very important for businessmen to participate in such dialogues from the viewpoint of obtaining information on new prospects.
The EU-Georgia Business Council is a non-commercial organization and its main purpose is to contribute to improvement of trade and business environment between Georgia and the EU. It should render assistance to its member-countries in doing business in Georgia and the EU, advertise and protect the business of EUGBC members, promote the companies from Georgia and the EU countries and contribute to intensification of relations between nongovernmental organizations and institutions.

We present the report of the Director of the Georgian-European Policy and Legal Advice Centre (GEPLAC) – Mr. Kakha Gogolashvili:

Convergence of the regulatory framework – Important challenge for trade and investment
European Integration first of all lay in the economic dimension. This dimension is realized in such notions as free trade, customs union, economic union, monetary union, single market, etc.
All these forms of cooperation or rapprochement require different rate of harmonization of the legal and regulatory environment in partner countries.
At the global level the harmonization or convergence of the mentioned spheres is provided by WTO rules as well as policies carried out in accordance with recommendations of the International Financial Institutions.
Thanks to those institutions the minimum set of standards of commercial, agricultural or industrial, financial policy and the good governance requirements are established and respected by big part of countries (save those called “sole riders”). These rules have helped to establish a minimum level of economic integration between states, members of mentioned organizations. We can call the global process of trade liberalization as a process of integration in the world level as well. Obviously, and the statistics confirm this, those countries having more similar rules of game in their internal markets have also higher rate of economic exchange or cooperation. This concerns not only movement of goods, but services and capital as well.
In the EU, the basic motivation behind the regulatory convergence – in the form of approximation of national laws, as already mentioned, – is the need to avoid regulatory competition among member States1. Possibility of environmental or social ‘dumping’ may allow producers in countries with less strict environmental or social protection regulations have an ‘unfair’ advantage in international trade because their production costs are lower. Rising of process-oriented standards to EU levels is seen as possible solution of the problem. Same rational could be applied to such spheres as procurement or state aids. That’s why EU GSP + scheme require from Georgia and other 14 beneficiaries to fully adopt and implement respective international labour, social and environmental conventions.
There is also a very important reason for “imposing” strict regulations in certain spheres such as consumer protection, food safety, sanitary and phyto-sanitary measures, product safety standards and regulations. This concerns safety of citizens. The countries (EU in particular) with high level of regulatory control in such spheres will not naturally allow the goods originated from the countries with the lower level of safety standards to be imported in their market. The introduction of respective legislation rising standards in the mentioned spheres should be followed by creating adequate system of certification and conformity assessment. Mutual recognition of the conformity assessment rules and certificates is one of essential conditions for encouraging trade relations between the countries.
The first attempt to establish closer ties between Georgia and EU was signing of PCA. The trade part of the agreement was based on principles and rules taken from GATT provisions. No further integration was promised. But the well known art. 43 on Legal Approximation was aiming at creating in Georgia the legal environment close to that of the EC Internal Market. The article seems to be borrowed from the chapters of the Acquis and the proper application of the article by the country could ensure high degree of similarity of rules and standards with that of the EU Internal Market. This would help to create best possibilities for trade exchange and cooperation leading to the natural need for further integration. The mentioned attitude of the Union proves its implicit intention to provide ground for deeper relations than provided by PCA.
Gradual rapprochement with the Union could be tracked by looking at different models of cooperation that different countries have with the EU:
States like Georgia base their trade relations with EU on the Most Favoured Nation (MFN) treatment. Having a low rate of the regulatory rapprochement trade exchange with EU (for Georgia) reaches 25% (for EU trade with Georgia constitutes less than 0.07 % of its whole volume?). Even if Georgia’s trade turnover with EU reaches 70% having such a small GDP Georgia would still remain an insignificant trade partner. GSP+ treatment that Georgia enjoys is not a “gift for ever”. It will be lifted as the country overcomes economic difficulties. Naturally Georgia for the moment is more interested in integration than EU. But, if Georgia improves economic performance and the standards the situation may change. It is also worth to mentioning that such small states as Georgia while dealing with EU can not avoid importance of the regional context. Black Sea is becoming a serious fora for cooperation and it is under the countries interest to encourage whole region for establishing closer ties and moving towards Europeanization together. EU-Georgia ENP AP puts emphasis also on that cooperation.
Another model of cooperation is one of Barcelona process (1995). Most of South and East Mediterranean countries have free trade arrangements announced under Associated agreement, but none of them effectively implemented yet. Even though the trade between EU and those countries is very high, still incompatibility of the legal and regulatory framework makes not possible/economically unattractive for EU to fully open the market for them.
Then Turkey that has established a customs union (industrial products) with the EU has also been requested, being at the same time interested itself to harmonize main part of technical regulations and industrial standards with that of the EU.
Ultimate model that offers the highest degree of cooperation is the European Economic Area (EEA) . Igher rate The countries, members of the EEA have committed (by 22 annexes of the EEA Treaty, 1992) to apply in there countries significant portion of the Acquis communautaires. Such countries as Norway, Iceland, Lichtenstein, have almost 100% implemented the EU Acquis. These countries enjoy almost fully four freedoms. Having harmonized industrial, agricultural standards they recognize each-others conformity assessment rules, certificates, licenses and permits. The trade turnover between these states reaches 80% of their respective whole trade. Indeed Switzerland rejected being the EEA member however could achieve the same level of integration thanks to numerous bilateral agreements with EU.
The statistics can prove that the investments and the capital flow is higher between those states, which have: a) the best and non-discriminative treatment for investments and goods; b) similar rules and standards. This second comes from the very easy logic – business and especially small and medium business is keen to establish itself in places where environment is not only friendly, but also the rules are known and close to that of their origin.
The world two biggest competing trade actors US and EU try also to harmonize the standards2. Indeed the US system is “lighter” or less regulated, but it is not an easy reaching market as competition rules are very strict and the demand sophisticated.
This is a fact “that a country’s desired degree of compliance with the EU’s Internal Market Acquis is closely connected to the costs that such compliance will bear”3. Georgia is not an accession country and is free to choose an optimal degree of compliance after assessing and weighing the country’s overall objectives against the associated costs. Regulatory impact assessment practices are essential to this end4.
Experience of countries-participants of the Barcelona process have revealed existence of the dilemma between gradual approach by sectors of economy (for example compliance of all industrial standards, or regulatory norms) and another type of approach such as convergence in selected areas, which are of major commercial interest at time.
Convergence in certain areas such as, for example, food industry that is Georgia’s potential area of a comparative advantage and unfortunately, in the same time, the strongest protected field in the Union, may with a serious determination lead to penetration of country’s products into the EU Internal Market. It is well known that customs duties not constitute major impediment for Georgian wine to be sold in EU markets, but the NTBs, like recognition of geographic nominations, EU standards, recognition of certification and conformity assessment practices. Elimination of these problems by introducing respective regulatory framework would rise possibility of Georgian wines or other agribusiness products to be imported in the Union.
European Neighbourhood Policy offers to Georgia the exclusive opportunity to develop closer trade relations with the EU than it was envisaged by PCA. ENP as a political framework even goes beyond the associated partnership and calls for gradual involvement of the partner country to the EEA. Naturally being a European project ENP imposes a regulatory reform via Action Plans. The main points of the reform are customs legislation, development of standardization, certification and accreditation system, veterinary, phytosanitary and food safety standards; jointly identify priority industrial sectors for possible legislative approximation. Competition policy is also a subject for reform process offered by the ENP AP. All these regulatory spheres to be developed will directly influence the expansion of Georgia’s trade with EU. The success of the reform will also influence on the decision by EU institutions to deepen the trade regime with Georgia towards more openness.
It should also taken into account that the success of the European Neighbourhood Policy as such depends on the success of particular cases like Georgia, Ukraine, Morocco, etc. EU attributes to this a very high political importance and will most probably deeply differentiate between those states, which make strongest efforts to achieve real results and those, which are not shoving enthusiasm and energetical action to fulfil the agreed objectives. Our aim is to get as more as possible assistance and support in what we anyway are going to achieve by all means.

Enlargement of the European Union that took place on 1 May 2004 entailed historical changes in the union’s policy, geography and economy, as a result of which political and economic relations between the EU and Georgia became more intensive. New opportunities for the development of close relations appear against the background of cooperation between the EU and Georgia, which envisages economic integration and political cooperation. The European Union and Georgia are going to make use of these opportunities with the purpose of stepping up their relations and achieving stability and prosperity. This kind of approach is based on partnership, common property and differentiation.
European Neighborly Policy sets ambitious goals, which is based on common values and implementation of political, economic and institutional reforms.
Georgia is given an opportunity to ensure its political security and intensify economic and cultural relations with the European Union. It can extend regional and frontier cooperation and share responsibility in prevention and settling of conflicts.
The EU hails Georgia’s willingness to intensify cooperation in all spheres envisaged by the action plan. The level of ambitions in relation to common values will depend on the extent of Georgia’s obligations and the country’s ability, in particular – how it will inculcate the coordinated priorities that will be harmonized with the international and European norms and principles. The progress achieved in the relations will be a complete evidence of Georgia’s efforts and concrete results in relation to the assumed obligations.
Proceeding from the main aspects of the EU-Georgia action plan, this action plan represents the first step of this process. The EU-Georgia action plan is a political document, it contains the planned strategic goals of EU-Georgia cooperation and is intended for five years. Its implementation provides for PCA, establishing of new cooperation ties and Georgia’s goal – integration into the European economy and social structures.
The action plan will have a significant effect on the issues related to approximation of Georgia’s legislation, norms and standards to the European ones. In this context, the action plan will lay a serious basis for the economy’s integration that will rest upon adoption and implementation of the rules of economy and trade relations as well as regulations, intensification of trade relations, investments and development. It will have a positive effect on policy implementation and planning, contribute to economic growth, social unity, struggle against poverty and environmental protection.
Main aspects of the action plan:
European Neighborly Policy offers new prospects in many spheres to the partners. Trade and economic relations as well as lifting of the trade barriers are important for the development of attraction of investments and the country’s economic development. The action plan envisages intensification of cooperation in the spheres of energetics, transport and environmental protection. Along with partnership with the South Caucasus, bilateral and multilateral cooperation in the Black Sea space should be intensified and ,besides, regional economic cooperation in the regions of the Baltic, Black and Caspian Seas should be stepped up.
Georgia is given an opportunity to establish relations in the spheres of culture, education, environmental protection and science.
Much attention in the action plan is given to solving of problems related to the judicial system, penitentiary system, democratic institutions as well as human rights and freedom.
Important are the issues related to business, investment environment, privatization process and struggle against corruption: the business environment should be improved and developed, in particular this concerns starting of business; the issues related to hiring and discharge of labor force, property registration, obtaining of credits, protection of investors, intensification of contacts and closing down of business should be settled. Georgia’s Customs code should be harmonized with the European and international standards, it should simplify the customs procedures. The consultation-information mechanism of import and export regulations and procedures should be formed.
The action plan envisages strengthening of the abilities of the customs administration, which implies increasing of transferability of customs rules and tariffs and inculcation of risk control and purity control principles.
Simplification, computerization and modernization of the tax administration should be continued. Implementation of the recently adopted national anti-corruption strategy and continuation of the privatization process should be provided for by 2009.
The action plan envisages assistance to the development of Georgia’s economy, while struggle against poverty and social unity imply compatibility of the economic legislation and administrative practice. Full-fledged implementation of the currency and fiscal policy should provide for macroeconomic stability, which should take place by means of independence of the national Bank of Georgia. Effective management systems should be formed in the legislative, social security and health protection spheres and, with the purpose of development of human resources, the education reform should be continued and the quality of statistics should be improved. Bilateral trade relations should be intensified, which implies a possibility of introduction of free trade between the EU and Georgia. In this context the council will pay attention to the aspects of regional trade relations and economic integration.
Georgian transit potential is mentioned in the action plan, and creation of the EU’s transport and energy network is envisaged in order to provide for effective cooperation between the EU, the Black Sea countries and the Caspian Region within the framework of the “Baku initiative”.
As the Deputy State Minister Tamar Beruchashvili pointed out, the discussion on trade and business relations was held between Georgia and the EU was held for the first time and it is very important for Georgian businessmen to participate in this dialog. She spoke of the European Neighborly Policy and stressed that it offers new prospects for Georgia’s integration with the EU, which is important for Georgia. The Deputy State Minister said that it is true that the European Neighborly Policy is intended for the period of five years, but the Georgian government assumes an obligation to fulfill it in three years.
Tamar Beruchashvili pointed out that the action plan will assist in implementation of the Agreement on Partnership and Cooperation, accelerate approximation of the Georgian legislation to the EU’s norms and standards and lay a solid basis for further development of relations in the political, economic, social and cultural spheres. She made a brief review of the agreed action plan and stressed that one of the most attractive subjects for Georgia is setting a foothold on the EU market. The Deputy State Minister drew special attention to the prospects of cooperation with the European Investment Bank whose mandate has been applied to Georgia within the framework of the European Neighborly Policy and covers the period of 2007-2013. The bank contributes to the development of the trans-European network, which means that it will finance the construction of roads, ports, airports and the projects related to rehabilitation. Financial policy of the European Investment Plan envisages granting of long term loans to the public and private sectors. Tamar Beruchashvili touched upon almost all issues contained in the action plan and expressed hope that the EU-Georgia Business Council will continue the dialog within the framework of the European Neighborly policy. It will have a positive effect on further development of trade and economic cooperation, in which the Georgian government will actively participate.