Free Trade Agreement With China Boosts Georgia’s Security, Strategic Regional Importance

On September 13, First Deputy Prime Minister of the Georgian government and Minister of the Economy and Sustainable Development Dimitry Kumsishvili stated at a press conference that Tbilisi and Beijing had finalized a free trade agreement between their two countries. “China’s Commerce Minister Gao Hucheng plans to visit Tbilisi to sign a memorandum of understanding,” Kumsishvili said. The agreement will be signed in December and come into force in the middle of 2017, he added. The deputy prime minister emphasized that Georgia concluded its free trade negotiations with China in record time—only seven months. “It took other countries from five to ten years,” he declared (Civil Georgia, September 13).

The Georgian deputy prime minister noted that Beijing agreed to remove customs tariffs on 95.5 percent of all Georgian goods, including agricultural products, wine and mineral water. These exports will enter China completely tariff free without a significant transition period, within several months after the agreement is signed. “This is another unprecedented move, since, with other countries, Beijing normally introduces a lengthy transition period,” the Georgian official said (Civil Georgia, September 13).

Minister Kumsishvili especially highlighted wine as one of the main sources of export revenues for Georgia. “In 2015, we sold 2.6 million bottles of wine on China’s market. In 2016, the number will grow to 5 million bottles. This is despite the fact that our exporters pay a 40 percent customs duty. After the removal of such customs duties, Georgian wine will become one of the most competitive wines on the Chinese market,” he declared (Bpi.ge, September 13).

It is noteworthy that in 2016, China became the second largest importer of Georgian wine, having overtaken Ukraine. Between January and August of this year, China imported 3,368,361 bottles of Georgian wine, while Ukraine purchased 3,042,192 bottles. Russia remains the largest importer of Georgian wine, with 14,664,610 bottles this year, as of August (Kvira.ge, September 13). Georgian authorities are hoping that after China lifts its customs barriers to Georgia, exports will increase even further, thus reducing the importance of the Russian market to Georgian winemakers. Then, Moscow will lose its ability to easily damage the Georgian winemaking industry in case of the resumption of a trade embargo, as happened in 2006–2012 (Agenda.ge, August 5).

At the same time, Georgian Minister of Agriculture Levan Davitashvili stressed that the free trade agreement with China also removes customs duties on Georgia’s mineral water, which could transform exports of this product to China into one of the country’s most important sources of revenue. So far, no country has removed customs duties on Georgian mineral water (Vestnik Kavkaza, September 14).

In 2014, Georgian signed a Deep and Comprehensive Free Trade Agreement (DCFTA) with the European Union. However, unlike the agreement with China, the DCFTA allows the EU to restrict many types of agricultural imports from Georgia, and it introduces stringent norms for Georgian produce. The agreement with China has no such restrictions, which makes it more “comfortable” for the Georgian exporters to China’s market (Vestnik Kavkaza, September 14).

Prime Minister Giorgi Kvirikashvili, in his turn, called the free trade agreement with China “historic.” The head of the Georgian government said, “It is a great achievement that can positively affect the development of the ‘Great Silk Road’ during the new era” (On.ge, September 14). In referencing the Silk Road, Prime Minister Kvirikashvili was alluding to overland transportation links being constructed across the Eurasian landmass that will allow goods to travel from China’s Pacific coast to Europe, via the Central Asian states. From Central Asia, one planned route envisions goods traveling via the Caspian Sea, Georgia, and Turkey to the EU, thus entirely bypassing Russia. The first train demonstrating the viability of this Great Silk Road transit corridor from Asia to Europe arrived in Tbilisi on December 13, 2015 (Apsny.ge, December 13, 2015).

The government in Tbilisi had meticulously assessed the risks of a free trade agreement with China for the Georgian economy and its domestic market. In 2015, the Georgian government asked an independent company, PMCG, to assess the consequences of the agreement with China. According to PMCG, after the free trade agreement is implemented, exports from Georgia to China will increase by 9 percent, while imports from this East Asian giant will grow by only 2 percent (Tabula.ge, July 24, 2015).

That conclusion became an important argument for the Georgian government to fight off alarmist warnings of some experts who said that removing customs duties on Chinese imports would “destroy the Georgian market.” In fact, according to the president of the New School of Economics, Paata Sheshelidze, Georgia already removed all customs duties on Chinese goods several years ago. “Therefore, there will be no rapid increase in Chinese exports to Georgia. At the same time, Georgia will not only obtain access to the Chinese market, which is considered relatively liberal in the sense of its demands for agricultural products, but also Georgia will win access to the markets of China’s neighbors—Singapore, Thailand, Vietnam and so on,” the expert argued (Author’s interview, September 17).

During January–August 2016, the entirety of Georgian exports comprised $1.312 billion. Exports to China reached $117.682 million. Even before the free trade agreement was signed, China nearly outpaced Russia as the second-largest trade partner of Georgia. Currently, Turkey remains the largest recipient of Georgian goods with $134.405 million of Georgian exports, with Russia in second place at $118.187 million (Geostat.ge, accessed September 21).

The newly signed free trade agreement notwithstanding, Chinese businesses are already among global leaders of investment into the Georgian economy. In 2015, China was the fourth-largest investor after Azerbaijan, the Netherlands and Luxemburg (Geostat.ge, accessed September 21). The Hualin Group is the biggest Chinese investor in Georgia. Hualin owns 90 percent of the Georgian bank Basisbank, which has operated since 1993. In 2013–2015 Hualin Group invested $150 million into the construction of a 65,000-square-meter International Economic Zone in Tbilisi’s Basisubani district (see EDM, March 25, 2015).

The rector of the Free University in Tbilisi, Vato Lezhava, told this author that the Georgia-China free trade agreement would further increase Chinese direct investments. “This is logical, because, on its own, the Georgian market is too little for the enormous China; but Georgia might become a ‘vehicle’ for Chinese manufacturers’ exports to the EU since Georgia signed a DCFTA with the latter,” Lezhava noted (Author’s interview, September 17). Thus China may help Georgia to more permanently diversify its economy away from its heavy reliance on Russia.