Georgia cooperation

Georgia-United States: Prospect of Free Trade

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The possibility of launching negotiations with Georgia on a free trade agreement was confirmed by U.S. President Barack Obama at a meeting in Washington with his Georgian counterpart on 30 January. “[W]hat we’ve agreed to is a high-level dialogue between our two countries about how we can continue to strengthen trade relations between our two countries, including the possibility of a free trade agreement,” the U.S. President said after talking with Georgian President Mikheil Saakashvili.

Calls for the Obama Administration to reach such a decision have long been heard in Washington. A bipartisan initiative to conclude a free trade agreement with Georgia was put forward by Democratic Senator John Kerry and Republican Senator David Dreier as early as May 2009. In their view, Georgia’s challenges in a setting of foreign aggression and attempts to stir up domestic unrest compel support for strengthening the country’s democratic institutions. That could be facilitated by developing trade and advancing economic ties with Georgia.

A Free Trade Agreement (FTA) involves lifting trade barriers between countries, opening greater investment opportunities and protecting intellectual property rights. The United States currently has a free trade regime with seventeen countries. Bilateral agreements have been signed with Australia, Bahrain, Chile, Israel, Jordan, Morocco, Oman, Peru and Singapore. In addition, regional agreements in force include the North American Free Trade Agreement (NAFTA) among the United States, Canada and Mexico, and the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR) with Dominican Republic, El Salvador, Costa Rica, Guatemala, Honduras and Nicaragua.

The first-ever Free Trade Agreement was signed by the United States with Israel back in 1985. As a result, the United States became the main export market for Israel in the following years. In the first half of the 1990s, Israel experienced an economic boom with a seven-percent industrial growth rate and industrial exports averaging a nine-percent growth per annum.

When NAFTA entered into force in 1994, it created the largest free trade zone in the world. The opening of new markets increased the economy and welfare of all three signatory countries with a 218-percent trade increase from 1994 to 2010. The NAFTA Free Trade Commission reported that the increase in exports within the first five years of the agreement created 14.8 million new jobs in the United States, 2.2 million additional jobs in Mexico and 1.3 million jobs in Canada.

The NAFTA also enabled Mexico to attract large new investments. Mexico’s access to the U.S. market convinced many foreign companies to move their production south of the U.S. border. Foreign direct investments in Mexico doubled between 1994 and 1999.

The CAFTA-DR and U.S. bilateral agreements with the other countries all entered into force between 2001 and 2011.

In October 2011, the U.S. Congress ratified FTAs with Korea, Colombia and Panama. The Free Trade Agreements with those countries were signed in 2007 during the George W. Bush Administration, but ratification was delayed due to opposition on the part of congressional Democrats. The Democrats were concerned that American producers (especially auto manufacturers) would be harmed by a significant increase in imports (mainly motor vehicles) from Korea.

By December 2011, Washington was ready to start negotiations on lifting trade barriers with the European Union and stepping up trade with EU Member States. Michael Froman, Deputy National Security Adviser to the President, said the U.S.-EU dialogue could develop in any number of ways – including in the direction of concluding a full-fledged bilateral agreement on free trade between the United States and European Union.

Concluding FTAs is often a source of controversy and friction in the United States and its partner countries. In November 2011, South Korean opponents of free trade with the United States staged mass protest rallies in the capital city of Seoul after the country’s ruling party ratified the long-stalled trade agreement. The opposition South Korea Democratic Labor Party had unsuccessfully tried to block ratification of the agreement. Opponents claimed that free trade would favor car and light industries but would damage agricultural production because South Korean farmers would never be able to compete with large American agribusiness production.

In the United States, trade unions were against FTAs with Korea, Panama and Colombia. The unions claimed the FTAs would cost American workers their jobs.

Protest rallies and strikes also marred the process in Costa Rica in 2006. Representatives of trade unions there complained that the FTA would benefit only the United States and would make Central American countries dependent on U.S. exports. By referendum, fifty-two percent of the population of Costa Rica voted anyway to ratify the agreement in October 2007.

At present, Georgia unilaterally maintains a preferential trade regime with the United States – the so-called Generalized System of Preferences (GSP). The GSP regime currently covers more than three thousand Georgian export commodities.

Tamar Kovziridze, Advisor to the Georgian Prime Minister, told Tabula that GSP is not a permanent regime and is subject to periodic review. Compared to the GSP regime, a U.S.-Georgia Free Trade Agreement would have the advantage of covering almost all commodities. Moreover, FTA is a permanent regime which is of utmost importance for investors.

The United States is now Georgia’s seventh largest trade partner by volume of trade, according to 2011 data. Georgian exports to the United States last year totaled USD 143 million. Most of those exports are commodities covered under the GSP regime, with Georgian ferroalloys and fertilizers comprising the largest share. Wines, fruit juices, scrap metal and other Georgian exports are also supplied to the United States. Goods imported from the United States to Georgia totaled USD 245 million in 2011, with motor vehicles and meat products accounting for the largest share of the import market.

Tamar Kovziridze believes that barriers to American imports in Georgia are insignificant even today. The threats and concerns that have accompanied the completion of Free Trade Agreements in other countries are not topical here because Georgia is already wide open to American exports.

It is difficult today to single out those sectors of the Georgian market likely to benefit the most from a Free Trade Agreement. According to Kovziridze, any business in Georgia could ultimately benefit from FTA. New trade preferences could encourage investors to show interest in manufacturing products in Georgia which have never been manufactured here before.

As experience has shown, the period from commencing negotiations with the United States on FTA until enactment typically ranges anywhere from two to four years. In the case of Chile, however, it took eleven years. After an FTA enters into force, the schedule of a gradual decrease in tariffs to their final nullification usually spans several years, but could even stretch for as long as ten to fifteen years.

“Countries sign free trade agreements with important partners not only because of economic but also for political consideration. The United States does not have such an agreement yet with any of the countries of the European Union or post-Soviet states, including the Central Asian space. Hence, that initiative is of great importance in terms of economic growth and increase in exports as well as in terms of attracting investments to the country, improving its image and stability,” Tamar Kovziridze believes.

Georgia has a rare opportunity to achieve a free trade regime simultaneously with the United States and the European Union. The only country which today enjoys free trade with both the USA and EU is Israel.

Heritage Foundation researchers Ariel Cohen and Bryan Riley note that Georgia is ranked as the 113th trade partner of the United States. In 2010, the United States collected USD 226,000 in tariffs on imports from Georgia. Consequently, FTA with Georgia will not harm the United States financially. Instead, as Cohen and Riley believe, “It would benefit Georgia, which gained independence in 1991, by making the country a more attractive destination for international investment. It would also send a signal to Russia that Georgia is viewed by Washington as an important friend.”

This article first appeared in Tabula Georgian Issue # 87, published 13 February 2012.

 

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