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Journal number 1 ∘ Emir Eteria
Economic Dimension of the EU-Georgia Association Agreement: Theory and Practical Implications

Annotation. This article aims to analyze an economic dimension of the EU-Georgia Association Agreement (AA), including its integral part on Deep and Comprehensive Free Trade Area (DCFTA) in the light of economic integration theories, as well as to observe results of the implementation of the Association Agreement in 2014-2019. In contrast to other bilateral trade agreements of the EU, a DCFTA is a new type of trade agreement, which aims at gradual economic integration of Georgia with the EU. A gradual economic integration encompasses trade integration, factor integration as well as sectoral integration, policy and institutional integration. However, trade data on the EU-Georgia relations demonstrate insignificant growth of trade integration of Georgia with the EU. In addition, data on capital movement does not reveal a significant increase in Foreign Direct Investments (FDI) from the EU countries to Georgia. Consequently, since 2014, despite an effective implementation of the AA/DCFTA by Georgia, gradual economic integration with the EU has been slightly increased.

Keywords: Georgia; EU; Association Agreement; Deep and Comprehensive Free Trade Area; Economic Integration. 

1. Introduction

In 2014, Georgia signed Association Agreement (AA) with the EU, which includes a part on Deep and Comprehensive Free Trade Area (DCFTA). The EU-Georgia Association Agreement entered into force on July 1, 2016. However, many titles as well as annexes of the EU-Georgia Association Agreement including those on Trade and Trade-related Matters (Title IV) have been provisionally applied since September 1, 2014. The EU-Georgia Association Agreement envisages creation of the Deep and Comprehensive Free Trade Area with a final objective to achieve Georgia’s gradual economic integration into the EU internal market [Association Agreement, article 1]. Gradual economic integration could be described as a process of successive trade integration, factor integration as well as sectoral integration, policy and institutional integration. The EU-Georgia AA, including DCFTA foresees progressive trade liberalization, legal approximation (including dynamic approximation), and regulatory convergence, which have been considered as major instruments to achieve gradual economic integration with the EU. Moreover, effective and timely implementation of the Association Agreement should ensure increased compatibility between economic systems of the EU and Georgia. Although, the EU-Georgia DCFTA goes beyond “simple” FTAs and envisages a more advanced form of integration, what degree of economic integration would be achieved between the EU and Georgia after the proper implementation of the AA/DCFTA remains ambiguous.

Therefore, this article focuses on the economic aspects of the EU-Georgia Association Agreement to clarify the form and degree of the AA/DCFTA induced economic integration on the one hand and to observe the practical implications of the Association Agreement implementation on the other. The next part of the article provides a review of major concepts of economic integration, the third part is devoted to the analysis of peculiarities of the economic dimension of the EU-Georgia AA, including the DCFTA. The last part of the article analyzes the respective data on trade and investments to observe some practical results of the implementation of the EU-Georgia AA.

2. Economic Integration: a short review of key concepts

Since the 1950s, topics of economic integration relating to stages, forms, economic, political and social implications etc. has become one of the most debate issues in various fields of social sciences such as economics, political science, international relations, international political economy etc. [Viner, 1950; Tinbergen, 1954; Meade, 1955; Myrdal, 1956; Röpke, 1959; Balassa, 1961; Machlup, 1977; Bhagwati, 1996; Panagariya, 1996, 1998; Lawrence, 1996; El-Agraa, 2011; etc].

It is noteworthy that economic integration has many definitions. As a distinguished scholar of economic integration B. Balassa [1961: 1] noted “In everyday usage the word “integration” denotes the bringing together of parts into a whole. In the economic literature the term “economic integration” does not have such a clear-cut meaning”. It should be noted that Balassa differentiates economic integration from the cooperation between countries and proposes “to define economic integration as a process and as a state of affairs” [ibid.: 1]. According to Machlup [1977: 3] “economic integration is a process of combining separate economies into a larger economic region”. Moreover, Machlup distinguishes some variations of global integration, regional integration as well as sectoral, functional and institutional integration [ibid.: 32-34]. El-Agra[2011: 1]argues that economic integration “is concerned with (a) the discriminatory removal of all trade impediments between at least two participating nations, and with (b) the establishment of certain elements of cooperation and coordination between them”.

Economic integration as a process encompasses several stages (forms). Balassa [1961: 2]differentiates following five forms ofeconomic integration: Free Trade Area (FTA), Customs Union (CU), Common Market (CM), Economic Union, and Complete Economic Integration. However, as Andrei [2012] points out Balassa’s five stages of economic integration could be combined into two large stages. According to this scholar, the first stage is incipient integration, which includes Free trade Area and Customs Union and the second, advanced integration, which includes other forms of Balassa’s stages of economic integration - Common Market, Economic Union, and Complete Economic Integration. Moreover, Balassa [1961: 15] discusses a partial or sectoral approach to integration determined as “…move from sector to sector, integrating various industries successively” and concludes that economic integration based on sectoral approach is inadvisable [ibid.: 17]. In addition to that Balassa distinguishes trade integration, factor integration, policy integration and total integration [Machlup, 1977: 15]. Forms of economic integration identified by Balassa determine various aspects of desired or already achieved integration, which vary based on the degree and scope of economic integration. Free Trade Area in its “simple” form and Customs Union deal with trade issues and therefore, are forms of trade integration. More advanced forms of economic integration such as Common Market or Economic Union envisage factor integration, economic policy integration as well as institutional and social integration. It should be noted that Balassa considered social integration as a form of integration, which increases the effectiveness of economic integration. Nevertheless, this form of integration was excluded based on assumption that lower forms of economic integration necessarily do not suppose social development.

It is noteworthy that only FTA and Customs Union are foreseen by the General Agreement on Tariffs and Trade [GATT, XXIV article] among forms of economic integration identified by Balassa. The WTO differentiates Preferential Trade Arrangements (PTAs) and Regional Trade Agreements (RTAs). According to WTO, PTAs refer to unilateral trade preferences, while RTAs are reciprocal trade agreements. However, WTO in publication on Preferential Trade Agreements notes that these terms (PTAs and RTAs) are often used interchangeably in the literature [WTO, 2011: 58]. Moreover, the World Bank describing regional integration processes apply the term Preferential Trade Agreements [Chauffour and Maur (eds), 2011]. It should be noted that some scholars [Bhagwati, 1996; Panagariya, 1996, 1998, etc.] favor the term Preferential Trade Agreements and note that PTAs “has the additional advantage of being wider in that it can be used to describe FTAs, CUs and arrangements involving partial trade preferences” [Panagariya, 1998: 2].

It is clear that advanced economic integration requires some compatibility of the regulatory systems and institutions among integrating economies. Therefore, one of the important features of successful economic integration is institutional integration. Regarding institutional integration Tinbergen[1954: 122]distinguishes “positive” and “negative” integration. According to Tinbergen negative integration refers to the removal of trade obstacles and therefore, it could be considered as a trade integration scheme. In contrast, positive integration foresees modification or the creation of new institutions and instruments, which increases economic integration and by its content could be described as institutional integration. However, according to El-Agra [2011: 2] distinction between negative and positive integration is oversimplistic considering that all forms of integration need some elements of positive integration.

It should be noted that the first step toward economic integration is liberalization of trade and therefore, trade integration is a starting point of all forms of integration. Accordingly, there are notions of “shallow” and “deep” integration, which describe depths and comprehensiveness of integration agreements [Lawrence, 1996]. A “shallow” integration agreement deals with tariffs and other barriers to trade occurring at the border and therefore, this is a trade integration scheme. In contrast, “deep” integration envisages issues “behind the border”, which impede trade between countries. Furthermore, economic integration process could be Market-Led or Policy-Led. The major distinction between these two types of integration is whether the integration process is based on and developed by market forces (spontaneous integration without involvement of governments) or integration is initiated by governments (integration through intergovernmental frameworks) to achieve some economic as well as non-economic goals [Goode, 2003: 122].

It is clear that all definitions, as well as forms of economic integration, depend on the degree of intended or already achieved integration. Moreover, concepts of economic integration differentiate integration processes based on depth, speed, scope, and institutional aspects of integration. A short review of major concepts of economic integration demonstrates various approaches to analyze economic integration as a process or as a result. Economic integration as a process is the gradual removal of barriers impeding trade and factor mobility, while economic integration as a result could be described as a stage of economic integration that would be achieved after desired integration processes are completed. 

3. The EU-Georgia AA/DCFTA as an instrument for gradual economic integration

Since 2006 the EU has mostly focused on bilateral trade relations based on economic criteria underlined in the trade strategy “Global Europe: competing in the world” [Commission of the European Communities, 2006]. Economic criteria were determined as “...market potential (economic size and growth) and the level of protection against the EU export (tariffs and non-tariff barriers)” [ibid.: 9]. Moreover, Communication underlined the scope of the new trade agreements as comprehensive meaning that new trade agreements should incorporate new areas beyond WTO disciplines [ibid.: 8]. Consequently, the EU’s approach aimed at geographical expansion of bilateral free trade agreements as well as broadening the scope of these agreements via including “WTO plus” (WTO+) and WTO extra (WTO-X) issues. According to Horn et al. [2009: 4] “…WTO+ corresponds to those provisions of PTAs which come under the current mandate of the WTO….  By contrast, WTO-X category comprises those PTA provisions that deal with issues lying outside the current WTO mandate”.

It is clear that Georgia was not among priority countries to sign a new comprehensive trade agreement with the EU based on economic criteria underlined in the EU’s trade strategy. However, Communication on “A Strong European Neighborhood Policy” [Commission of the European Communities, 2007] included trade issues and envisaged the possibility of signing a comprehensive trade agreement with those European Neighborhood Policy (ENP) countries willing to negotiate a new type of agreement as well as having ability to implement respective reforms. Moreover, according to this communication, new trade agreements with ENP countries should envisage legally-binding provisions on regulatory issues in trade and economic areas. EU’s declared policy goals towards ENP countries coincided with Georgia’s aspiration to have close political and economic relations with the EU and therefore, Georgia expressed readiness to implement reforms in many trade-related areas envisaged by the new agreement. The EU-Georgia Association Agreement, including part on Deep and Comprehensive Free Trade Area compared to the EU’s other new trade agreements was a result of the EU’s political rather than economic considerations and therefore, AA/DCFTA could be considered as politics-driven agreement, which reflects the EU’s policy priorities towards Eastern Neighborhood. Accordingly, despite that Georgia’s share in the EU’s total trade was not significant (0.1%) the EU started negotiations on DCFTA, which became an integral part of the EU-Georgia Association Agreement.

The EU-Georgia Association Agreement includes many provisions having both a direct or indirect impact on Georgia’s gradual economic integration with the EU. The EU-Georgia AA include the following Titles: Political Dialogue and Reform; Cooperation in the field of Foreign and Security policy (Title II); Freedom, Security and Justice (Title III); Trade and Trade Related Matters (Title IV); Economic Cooperation (Title V); Other Cooperation Policies (Title VI); Financial Assistance, and Anti-Fraud and Control Provisions (Title VII); Institutional, General, and Final Provisions (Title VIII) [Association Agreement, 2014]. It is obvious that economic dimension of the EU-Georgia AA is related to Title IV - Trade and Trade Related Matters as well as to the Titles V and VI - Economic Cooperation and Other Cooperation Policies respectively. However, it should be noted that other Titles of the Agreement (e.g. Political Dialogue and Reform; Freedom, Security and Justice etc.), also have a huge impact on economic development of Georgia and therefore, on gradual economic integration of Georgia with the EU.

An economic dimension of the EU-Georgia Association Agreement is based on conditionality and by scope it is comprehensive and multipart. In general, economic dimension of the agreement could be divided into two parts. First and most important part is DCFTA, which alongside the reduction/elimination of tariffs encompasses broad range of economic issues, including so-called “Singapore issues” (trade and investment, trade and competition policy, transparency in government procurement, and trade facilitation). It is worth mentioning that the EU DCFTA belongs to more advanced forms of trade agreements and therefore, the European Commission describes DCFTA as “a unique type of trade agreement” [European Commission, 2017a: 14]. Moreover, according to the respective communication of the European Commission “First Generation” trade agreements focus on trade liberalization, while “New generation” trade agreements “aim to develop stronger rules-based and values-based trade regimes…” [European Commission, 2019a: 5]. It should be noted that “First generation “and “new generation” trade agreements do not envisage economic integration with the EU, while DCFTA’s final goal is gradual integration of the respective ENP countries with the EU. As Kawecka-Wyrzykowska [2020: 9] pointed outDeep and Comprehensive Free Trade Areas (DCFTAs) with Georgia, Moldova and Ukraine aim to deepen political association and prepare the partners for gradual economic integration in the framework of the Eastern Partnership as part of the European Neighbourhood Policy”.

The DCFTA part of the EU-Georgia AA envisages the regulatory convergence and legal approximation in many areas, such as intellectual property rights, sanitary and phytosanitary measures, customs legislation, trade in services and electronic commerce, public procurement, technical barriers to trade, standardization, metrology, accreditation and conformity assessment, competition policy etc. It is clear that the first part of the economic dimension of the AA is related to trade and market access and therefore, includes issues, described as WTO+ provisions. Therefore, considering the areas covered by the EU-Georgia the "depth index" of this agreement is 7, the highest possible index according to data on the Design of Trade Agreements (DESTA). It is notable that the DESTA measures the depth of trade agreements taking into consideration the areas covered under the Agreements such as services, investments, technical barriers to trade (TBT) and/or sanitary and phytosanitary (SPS) measures, public procurement, competition, and intellectual property rights [Dür et al: 2014]. Consequently, considering the so-called "behind the Border” issues DCFTA represents an instrument of trade integration, more specifically a "deep” rather than a "shallow" trade integration scheme. In addition to that the AA/DCFTA envisages factor mobility, namely DCFTA part of the agreement includes provisions on capital movement (Association Agreement: 62], while the labor movement is restricted and therefore, the EU-Georgia DCFTA also foresees partial factor integration. Furthermore, the EU’s DCFTAs with respective Eastern partners aim to support regional economic integration via including in the Agreements possibilities of diagonal cumulation among countries involved. Altogether, “DCFTAs are essential tools not only for mutual market access, but also to pursue a values agenda, to further democracy and transparent and independent institutional structures…” [European Commission, 2020a: 22].

The second Part of the Economic dimension of the EU-Georgia AA is composed of provisions/obligations under Title V and VI. These parts of the agreement foresee regulatory convergence and legal approximation in many areas, not directly related to the trade, such as taxation, public finances and financial control, financial services, environment, transport, energy, company law, industrial and enterprise policy, accounting and auditing, consumer policy, employment, social policy, etc. It is obvious that these sectors are beyond WTO regulated areas (WTO-X sectors). However, development of these sectors has a profound effect on the economic performance of Georgia and therefore, on economic relations between the EU and Georgia. Consequently, Georgia should approximate its legislation with almost 600 EU legislative Acts in many economic as well as non-economic areas. In addition, the AA foresees dynamic approximation of legislation [Association Agreement, article 418] and therefore, Georgia is obliged to the transposition of the new EU legislation in respective laws of Georgia. Furthermore, after Georgia’s legislation in respective areas will be fully approximated with the EU, AA foresees adding the Agreement on Industrial Products (Conformity Assessment and Acceptance of Industrial Products (ACAA)) as a protocol of the Agreement [ibid.: article 48]. Consequently, AA/DCFTA envisages sectoral integration as well as policy integration, namely in the areas where Georgia should approximate the legislation and therefore, this agreement could be considered as a tool of sectoral and policy integration. Moreover, AA/DCFTA foreseen regulatory convergence as well as the creation of new joint institutions (Association Council, Association Committee, respective Subcommittees) to supervise the implementation of the agreement indicates that the EU-Georgia DCFTA represents a “positive” integration scheme with institutional integration elements.

Considering both parts of economic dimension of the EU-Georgia Association Agreement, the agreement is a unique instrument for Georgia’s gradual economic integration with the EU. A uniqueness of economic dimension of AA could be described based on the following four features of the agreement. The first is the conditionality of the agreement, which means the gradual opening of the EU market after all respective preconditions are fulfilled. Second, the economic dimension of AA/DCFTA includes WTO+ as well as WTO-X areas, which are interrelated and represent a mechanism for sectoral integration; third AA/DCFTA envisages binding legal approximation and regulatory convergence, which should increase policy and institutional integration of Georgia with the EU in respective areas. Finally, AA/DCGTA foresees dynamic approximation of legislation with those of the EU, which will further increase the compatibility of Georgia’s economy with the EU economic system. Therefore, these characteristics of AA/DCFTA, properly implemented could be seen as supportive factors of Georgia’s gradual economic integration with the EU. 

4. AA/DCFTA induced economic integration: what has already been achieved? 

As discussed above, the EU-Georgia AA/DCFTA should ensure trade integration, partial factor and policy integration as well as sectoral integration, institutional and market integration. However, the EU-Georgia DCFTA first of all is about trade integration. Other aspects of the economic dimension of the Association Agreement/DCFTA such as policy, sectoral or institutional integration should further increase trade relations of Georgia with the EU. It should be noted that Georgia has achieved some progress in the implementation of the Association Agreement/DCFTA. According to respective Association Implementation Reports on Georgia, issued by the European Commission, in 2015-2020 Georgia’s efforts to implement AA/DCFTA commitments, had been positively assessed [European Commission, 2016; 2017b; 2019b; 2020b; 2021]. Therefore, proper implementation of the AA/DCFTA first of all should support an increase of Georgia’s trade integration with the EU. Consequently, trade data should reveal increased trade integration between the EU and Georgia. The degree of Georgia’s trade integration with the EU could be evaluated based on data of Georgia’s exports-imports with the EU and growth rate of exports, dynamics of the EU’s share in Georgia’s total exports and trade turnover as well as changes in the top trading partners of Georgia by exports and trade turnover since 2014. Moreover, legal approximation and regulatory convergence envisaged by AA/DCFTA should increase the investment attractiveness of Georgia. As Kawecka-Wyrzykowska [2015: 88] pointed out legally binding nature of the Association Agreement “…will increase the attractiveness of Georgia as an economic partner for foreign investors”. Therefore, data on Foreign Direct Investments from the EU countries should reveal the second most important determinant of gradual economic integration of Georgia with the EU. Noteworthy, that data of 2020 and 2021 is excluded from the analysis because of Covid-19 Pandemic induced negative effects on foreign economic relations.

In 2014, Georgia’s exports to the EU amounted to 624.2 Mil. USD, while imports from the EU equaled to 2372 Mil. USD. For 2015-2019 Georgia’s exports to the EU has shown an upward tendency. In 2019, compared to 2014 Georgia’s exports to the EU increased by 33% and amounted to 834.9 Mil. USD. For 2014-2019 the average annual growth rate of Georgia’s exports to the EU was 5.8%. Notably since 2014 some new products (kiwi, blueberries, etc.) from Georgia have entered the EU market [European Commission, 2018]. In 2019, imports from the EU compared to 2014 increased by 0.01% and equaled to 2 408.4 Mil. USD (Fig. 1).

Figure 1. Georgia's exports-imports with the EU (Mil. USD) and growth rate of exports (%)

(2014-2019)

 

Source: Elaborated by the author based on data of the National Statistics Office of Georgia

In addition, since 2014 the EU’s share in Georgia’s total exports have shown a decreasing trend. In 2014 the EU’s share in total exports was 21.8%, which has increased to 29.2% in 2015, but during the next years decreased and amounted to 21.9% in 2019, almost the same as in 2014. Furthermore, since 2014 the EU’s share in Georgia’s total trade turnover has not changed significantly. In 2014 the EU’s share in Georgia’s total trade turnover was 26%. During the first year of the DCFTA implementation, the EU’s share has increased and reached 32%, but during the next years the EU’s share has shown a declining trend and in 2019 it amounted to just 24.2% (Fig. 2).

Figure 2. Share of the EU in Georgia's total exports and trade turnover (%) in 2014-2019

 

Source: Elaborated by the author based on data of the National Statistics Office of Georgia

In 2014, two EU member states (Germany and Bulgaria) were among Georgia’s top 10 trading partners by turnover. During the next 5 years, the number of EU countries in Georgia’s trading partners by turnover has not changed significantly. In 2019 Germany, Bulgaria and Romania were among the top 10 trading partners of Georgia. For 2014-2019 just Germany and Bulgaria among the EU member states remained as Georgia’s top trading partners by turnover. In 2014 top trading partners by exports were Bulgaria and Italy, while in 2019 Bulgaria and Romania. As data reveals a number of the EU countries among Georgia’s top trading partners by turnover has shown a slightly upward trend, while a number of the EU countries among top trading partners by exports has demonstrated a downward tendency (Fig. 3).

Figure 3. Number of the EU countries among the top 10 trading partners of Georgia by turnover and exports in 2014-2019

 

Source: Elaborated by the author based on data of the National Statistics Office of Georgia

In addition, since 2014 data on Foreign Direct Investments from the EU countries has demonstrated a decreasing trend. In 2014, Foreign Direct Investments from the EU countries constituted 727.1 mil USD. In 2016, FDI from the EU countries reached its minimum level and amounted to just 327.8 Mil. USD. In 2019 FDI from the EU countries amounted to 426.9 Mil. USD. Moreover, in 2014 share of FDI from the EU countries in total FDI was 39%, while in 2016 share of the EU FDI in total FDI reached its lowest level (19.8%). In 2019 share of the EU FDI in total FDI in Georgia was 31.9% (Fig. 4).Therefore, as the respective report underlined “…positive impact of the DCFTA on attracting more investments from the EU is still ahead for Georgia” [European Commission, 2020c: 219].

Figure 4. Foreign Direct Investments from the EU countries (Mil. USD) and share in total FDI (%) in

2014-2019

 

Source: Elaborated by the author based on data of the National Statistics Office of Georgia

It is evident that trade and FDI are the most important tools to support the gradual economic integration of Georgia with the EU. As trade data reveals only Georgia’s exports to the EU has an upward tendency, while other determinants of trade integration such as the EU’s share in Georgia’s total exports and trade turnover as well as composition of major trading partners has slightly changed. Moreover, the structure of Georgia’s exports to the EU remains almost unchanged and since the provisional application of the DCFTA only a few new products have been exported to the EU Countries. Furthermore, already achieved legal approximation and regulatory convergence led to some degree of policy and institutional integration, is insufficient to attract more investments from the EU countries. It should also be noted that more legal approximation and regulatory convergence with the EU means the creation of a more regulated economic system in Georgia. However, both components are essential for Georgia’s gradual economic integration with the EU. Nevertheless, since 2014, as conducted analysis reveals there is no solid evidence of increased trade integration of Georgia with the EU and therefore, the speed of Georgia’s gradual economic integration with the EU is sluggish.

5. Concluding remarks

The EU-Georgia Association Agreement, including DCFTA, is a multidimensional and complex agreement based on conditionality. The EU-Georgia AA/DCFTA as an instrument of gradual economic integration incorporates trade integration, sectoral integration, partial factor integration as well as policy and institutional integration. Therefore, the EU-Georgia AA/DCFTA goes beyond “simple” trade issues and foresees progressive legal approximation and regulatory convergence in many areas. The legal approximation and regulatory convergence are instruments of sectoral, policy and institutional integration, which should increase trade integration as well as investment attractiveness of Georgia, including for investments from the EU countries. However, since 2014, data on Georgia’s exports-imports with the EU and on the share of the EU in total exports and trade turnover as well as data on composition of major trading partners of Georgia demonstrate insignificant increase of trade integration. Furthermore, during the same period data on Foreign Direct Investments from the EU countries does not reveal any positive changes. Therefore, proper implementation of the AA/DCFTA envisaged obligations by Georgia, including steps to align Georgia’s respective legislation with the EU as well as actions towards sectoral, policy and institutional integration in many areas covered by agreement has little effect on trade growth. Consequently, since 2014, considering the level of already achieved trade integration with the EU and volume of FDI from the EU countries, the degree of Georgia’s gradual economic integration with the EU has slightly changed. Nevertheless, in the long run, effective implementation of the AA/DCFTA envisaged reforms and legal approximation, including dynamic approximation should enhance the compatibility of Georgia’s economy with the EU and therefore, increase the degree of gradual economic integration through boosting trade and investments.

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