Understanding the Georgia-China Free Trade Agreement
With a population of 1.4 billion people, China is a global economic force. Currently the second largest economy in the world, China’s economy is expected to eclipse that of the United States in the next several years, with some economists predicting that it could happen even sooner. In September of 2013, Chinese President Xi Jinping introduced the ambitious One Belt, One Road initiative, which, if brought to fruition, will likely transform the global economic landscape, and tilt the economic balance of power – which has long favored the United States – in China’s favor. It is in this context that the recently signed China-Georgia free trade agreement (FTA) holds such promise and importance for both countries.
An overview of Georgia-China trade relations
Tamara Kovziridze, the former Chief Advisor to the Prime Minister of Georgia and Head of the Advisory Group on Foreign Relations (2010-2012), and now the Senior Director at Reformatics, an advisory firm that works closely with public sector leaders around the world, notes that over the last 10 years (2007-2016), trade between China and Georgia has increased 534%. During this span, Georgian exports to China have increased by a staggering 1,967%, while Chinese imports to Georgia have increased 164%.
“The average annual growth rate during this period was 35%,” she notes in a recently published paper entitled ‘Georgia-China FTA: A Side Effect of the EU-Georgia DCFTA?’
China is now Georgia’s third largest export market for Georgian products. In fact, Georgia’s chief export products, which include copper and manganese ores, wine, copper scrap and cars, grew in volume by 35% in 2016. Of these products, wine, in particular, holds great promise for Georgia. Through the first four months of this year (January-May), Georgia had already exported over 2.3 million bottles of wine onto the Chinese market, with China overtaking Ukraine as the second largest market for Georgian wines.
Furthermore, the vast Chinese market provides an important opportunity for Georgia to continue to diversify its wine exports, further insulating it from becoming overly reliant on the Russian market, which has been known to arbitrarily ban the import of Georgian goods over the years.
With the signing of the FTA this past May, Georgia-China trade and diplomatic relations will likely continue to grow. According to the report, the FTA, which still needs to be ratified before it goes into effect, is similar to the FTA Georgia currently has with Turkey in that it does not fully liberalize tariffs, and does not contain any legislative harmonization requirements between the two parties. The FTA does however, take existing WTO agreements and obligations as major points of reference in various areas pertaining to no-tariff barriers to trade. Nevertheless, the Georgia-China FTA provides both parties substantial tariff cuts.
As far as Georgia is concerned, it is not hard to see the potential advantages of having access to China’s vast, low-tariff market.
But what’s in it for China?
Georgia is a tiny country of fewer than 4 million people, whose total trade volume in 2016 was paltry $9.7 billion. On the surface, Georgia’s small market would seem to have negligible value to an economic hegemon like China, whose GDP is 555 times the size of Georgia’s and whose trade volume is 335 times greater than Georgia’s. Under these circumstances, what substantive benefit could an FTA with Georgia offer China, and why after numerous efforts on the Georgian side to negotiate a free trade agreement, is China suddenly amenable to the idea?
According to Kovziridze’s report, Georgia’s FTA with China is a direct consequence of the country's Deep and Comprehensive Free Trade Agreement (DCFTA) established between Georgia and the European Union as part of the EU Association Agreement (EUAA) which Georgia signed in June of 2014.
“In line with its liberal trade policy approach, Georgia has been proposing the establishment of an FTA to China for several years, but Chinese interest in free trade with Georgia emerged only after the DCFTA became a reality,” the report notes.
In other words, by signing the FTA with Georgia, China now has an opportunity to take advantage of Georgia’s DCFTA with the EU, potentially giving it duty-free access to the European market, which is something that has eluded China up until now.
However, the FTA does not just represent a potential boon for China. On the contrary, Kovziridze notes that the DCFTA between Georgia and the EU in combination with the FTA between Georgia and China could lead to more investment and trade opportunities for all parties involved.
“For Georgia, it could mean more Chinese investment in the processing of goods that can be exported further to the European Union using the benefits of the DCFTA. For China, it means increased access to the EU market via Georgia with fully liberalized customs tariffs, provided that the goods can qualify for the EU rules of origin under the DCFTA. For the EU, it could mean increased and diversified imports from Georgia, but more importantly, new business and investment opportunities for European companies that might be interested in joint business projects with China, whereby they produce in Georgia (with Chinese investment) and import to the EU.”
Time will be needed before the Georgia-China FTA can be accurately assessed. But one thing is certain, Georgia’s FTA with China marks a new era of Sino-Georgian diplomatic, trade and investment relations. And this is likely to lead to a new level of bilateral cooperation between the two countries that will span various sectors. China’s ongoing One Belt, One Road project, which Georgia plays an integral role in, will only further increase Georgia-China relations moving forward.