EASTERN PARTNERSHIP AND CONVERGENCE WITH EU POLICIES IN GEORGIA

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2 EASTERN PARTNERSHIP AND CONVERGENCE WITH EU POLICIES IN GEORGIA Analytical study report on: Foreign Trade Migration Agriculture Tbilisi 2014

3 ESIDG Eastern Partnership and Convergence with EU Policies in Georgia Authors: Kakha Gogolashvili Natia Daghelishvili Nino Elizbarashvili Oleg Shatberashvili Project Coordinator: Ekaterine Meskhrikadze The study is produced in the scope of the project financed by Friedrich Ebert Foundation Stimulating the Eastern Partnership Work in Georgia. The implementing organizations are: Georgian Foundation for Strategic and International Studies Georgian Association Woman and Business European Studies for Innovative Development of Georgia ISBN: proeqti ganxorcielda fridrix ebertis fondis mxardawerit. publikaciasi warmodgenilia avtorta piradi mosazrebebi. dausvebelia fridrix ebertis fondis mier gamocemuli masalebis komerciuli miznit gamoyeneba fondis Tanxmobis garese. The project has been implemented by the support of the Friedrich-Ebert-Stiftung. The views expressed in this publication are those of the authors. Commercial use of all media published by the FES is not permitted without the written consent of the Friedrich-Ebert-Stiftung. Friedrich-Ebert-Stiftung 2014

4 C O N T E N T S DEEP AND COMPREHENSIVE FREE TRADE AREA: GRADUAL TRANSITION TO A TWO-WAY MARKET LIBERALIZATION Kakha Gogolashvili Natia Daghelishvili...5 LABOUR MIGRATION AND PROBLEMS OF REINTEGRATION IN GEORGIA Nino Elizbarashvili...19 AGRICULTURAL POLICY IN GEORGIA AND EUROPEAN INTEGRATION Oleg Shatberashvili...29

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6 DEEP AND COMPREHENSIVE FREE TRADE AREA: GRADUAL TRANSITION TO A TWO-WAY MARKET LIBERALIZATION INTRODUCTION Kakha Gogolashvili Natia Daghelishvili From 1 September 2014 the Title IV of the Association Agreement between Georgia and the EU establishing Deep and Comprehensive Free Trade Area (DCFTA) entered into force. The DCFTA offers partners a wide liberalization on goods and services with the full elimination of tariff barriers. 1 In this context, it is an unprecedented agreement not only for Georgia but also for the EU. According to the EC s chief negotiator Philippe Cuisson: This is the most ambitious agreement, just in terms of tariff rates elimination degree. The EU has not given in to anyone full elimination of tariffs by negotiations. 2 An important matter of the Agreement are the rules of origin, which are rather beneficial for Georgia in terms that they do not limit fully export of goods jointly manufactured with other countries to the EU exempted from customs duties under conditions usually established by the Agreement. Minimization of non-tariff barriers is also achieved by practical elimination of quotas and licenses, minimization of anti-dumping and countervailing measures, simplification of customs procedures, etc. However, the main factor of actual trade liberalization, especially in view of assessing the European market, is to cope with the problem of sanitary and phytosanitary standards (STS) and technical barriers to trade (TBT). A liberal approach being carried out by our country for years has left the consumer and the environment practically unprotected from the adverse effect domestic and foreign goods placed on the market. All types of technical regulations, sanitary inspections, market surveillance, food safety regulations and institutions carrying out them have been practically abolished in the country; the quality infrastructure was absent. Such an approach completely excluded the making of any kind of agreement with the EU, which would simplify the access of our products on its market. Therefore, the country from 2009, after prospects of negotiations with the EU concerning the free trade treatment have appeared, has intensively started the recreation of the quality infrastructure and product safety system. A significant preparatory legislative and institutional building work preceded the making of an agreement with the EU in spheres affecting trade protection of competition, public procurement, protection of intellectual property, labor legislation, environmental protection, etc. In all these areas, according to the recommendations of the EC presented in spring 2009, Georgia significantly lagged behind. The Association Agreement and, in particular its Title IV, contains proper provisions concerning these spheres and requires from a partner country to ensure the environment compatible with that of the EU Internal Market. For example, articles of the EU-Georgia Association Agreement introduce competition protection standards to be complied by Georgia; Chapter 9 concerns the protection of intellectual property. Its main provisions are based on the WTO s TRIPS 3 Agreement, while introducing higher standards; Chapter 8 (Public Procurements); Chapter 10 (Trade and Sustainable Development, which contains provisions concerning protection of the environment and labor rights, more specifically Article 229 (Multilateral labour standards and agreements) and Article 230 (Multilateral environmental governance and agreements). The establishment of free trade area with the EU has both an economic and political dimension. It is clearly manifested against acute discussions held by the supporters of an alternative project of a regional integration such as the Euarisian Custom Union set up under the aegis of Russia. In this 1 EU-Georgia Association Agreement. Title IV. Trade and Trade Related Matters. Article 26 Elimination of customs duties on imports 2 Statement was written down in August 2013, in Tbilisi. 3 Trade-related Aspects of Intellectual Property Rights See: 5

7 respect, of much importance is further research of these matters, so that to avoid distortion of the real essence of the matters and their incorrect communication. The research objective: 1. To establish what kind of treatment offers the DCFTA in respect of tariff advantages, the rules of origin, non-tariff and technical barriers; 2. DCFTA with the EU and the Eurasian Union what effect will have the conflict between these two trade arrangements on Georgia? The research has been conducted mainly on the materials retrieved from the formal and open sources, also based on in-depth interviews. 1. Tariff preferences, non-tariff barriers Article 22 of Title IV of the Association Agreement speaks on the objective of establishment of the Deep and Comprehensive Free Trade Area (DCFTA) as follows: The Parties shall establish a free trade area starting from the entry into force of this Agreement, in accordance with the provisions of this Agreement and in conformity with Article XXIV of the General Agreement on Tariffs and Trade 1994 (GATT 1994). 4 This Article of the General Agreement of the World Trade Organization (WTO) says nothing of the Deep and Comprehensive Free Trade Area allowing only a simple free trade, 5 as an exception to the most-favoured-nation-treatment. Notwithstanding this, the establishment of the DCFTA fully meets the spirit of WTO agreements. In particular, we may cite as an example the WTO Agreement on Technical Barriers to Trade ( TBT Agreement ) 6, which directly calls the participant states to approximate or mutually recognize technical regulations and standards of one another, to which, aparently, the DCFTA facilitates as far as possible. The same holds true in relation to such agreements as the Trade-related Aspects of Intellectual Property Rights (TRIPS), the Agreement on the Application of Sanitary and Phytosanitary Measures ( SPS Agreement ) 7. These and about ten other agreements in the international trade 8 serve to the mitigation of complete elimination of the so-called non-tariff barriers restricting effect. The term Deep in the proposed full name of Free Trade Area may be considered exactly in light of the aforementioned WTO agreements on the lowering of respective barriers. At the same time, it should be noted that if the WTO agreements are of a reccomendatory nature and outline the main direction, towards which the countries should address their efforts, the DCFTA sets bilateral mandatory obligations, which give a full guarantee for implementing these calls Customs duties The purpose of any free trade area is primarily to eliminate tariffs and other trade restrictive measures. In this chapter we shall dwell on the matter of elimination of customs tariffs as provided by Title IV of the Association Agreement. First of all it should be mentioned that the Parties have agreed that the classification of goods in trade between them shall be that set out in each contracting party s respective tariff nomenclature in conformity with the 2012 Harmonised System based on the International Convention on the Harmonised Commodity Description and Coding System of 1983 (HS) and subsequent amendments. This will in iself exclude any possible inaccuracies caused by the classification of goods and disputes arising on its basis. 4 EU-Georgia Association Agreement: Title IV, Article 22 5 GATT (47), Art. XXIV, 8 (b). See: 6 WTO. Agreement on Technical Barriers to Trade. See: 7 See: 8 Such, for example, as on the anti-dumping or countervailing measures, the rules of origin, etc. 6

8 However, a question may be raised, if all categories of good are unconditionally exempted from customs duties, why should any dispute originate because of non-compliance with the commodity classification? In reality, no unconditional and complete exemption takes place, for Article 26 of Title IV of the Agreement states: The Parties shall eliminate all customs duties on goods originating in the other Party as from the date of entry into force of this Agreement except as provided in paragraphs 2 and 3 of this Article and without prejudice to paragraph 4 of this Article. These exceptions are: 1. The products listed in Annex II-A to this Agreement shall be imported into the Union free of customs duties within the limits of the tariff rate quotas set out in that Annex 9. Garlic is quoted for export to the EU (whose annual import quota makes 220 tons). Said amount is low, making about half million US dollars in money terms (by market prices), whereas the total Georgian import to the EU exceeded USD 600 million in Garlic production in Georgia amounted to 7.5 thousand tons in , which approximately 30 times exceeds the EU import quota, yet its export is carried out only at the limited rate. For example, in 2012 Georgia exported USD worth garlic 11, which, given its wholesale price (US cent/kg) 12 ), amounts to about 80 tons. One could say that in the near future Georgia s export will not be able to cope with the given (220 ton) quota. It is interesting to know, why has the EU imposed the quota on such product on Georgia? According to the Georgian government representatives, the answer to this question asked in the course of negotiations was that too much dumping garlic had been found on the international market (particularly due to its bumper harvest in China), because of which the EU producers suffered great losses. Therefore, such restrictions have been applied to all partner countries. Notwithstanding this explanations, resorting by the EU to such a restrictive measure in trading with a small country is a rather negative action. Under conditions of such treatment (which in itself is not strange), the approach of Georgia, which does not impose the import quota on any product, should not be justifiable, especially when our producers (farmers) frequently bear losses from completely free entry and placement on the domestic market of cheap foreign imports (sometimes even at the dumping price). 2. The products listed in Annex II-B to this Agreement shall be subject to an import duty when imported into the Union with exemption of the ad valorem component of that import duty. 13 Two types of customs duties are in force in the EU ad valorem 14 (according to the commodity value/price) and non ad valorem, which can be specific, combined and alternative. 15 The EU uses rather intensively these types of customs duties on agricultural products. To calculate the taxable base of a product, the EU uses on some positions the minimum price index, from which the amount payable with the tariff rate interest is computed. At the same time, on some products the customs rates comprise two components monetary and specific. The monetary (ad valorem) component is computed from the price declared at the customs (where it exceeds the minimum price), while the specific (non ad valorem) from its physical volume. Depending on the kind and physical properties of a product, other units of measure can be used, e.g. kg, liter, meter, etc. The mentioned Annex II-B contains 28 kinds of agricultural products in total, such as tomatoes, cucumbers, artichokes, courgettes, oranges, mandarines, tangerines, citrus hybrids, lemons, table grapes, apples, pears, apricots, morellos, nectarines, plums, grape juice. The title of the Annex is Products subject to the entry price for which the ad valorem component of the import duty is exempted. The market entry price under conditions of the exempted ad valorem duty is not important. More important is the indication that (only) the ad valorem component 9 EU-Georgia Association Agreement: Title IV, Article Source: GeoStat. Production of Annual Crops. See: 11 Source: GeoStat. Exports of Georgia by HS Commodity Groups. 12 See: 13 Ibid, para 3 14 Ad Valorem (Lat.) according to value 15 Tariff rate forming procedure is given in the Council Regulation (EEC) No. 2658/87, 23 July 1987 (OJ L 256, 7 September 1987). Viewed at: 7

9 of the tariff on these products is exempted, meaning that they will be taxed by specific (based on physical amount) rates provided for by a EU regulation 16 on corresponding products. Here we are interested in two things: a. How high is the benefit of the exempted ad valorem tariff on the given products? b. How heavy will be the ad volorem burden on our (listed) foods upon their import to the EU market? Concerning the first question, it can be said 17 that the average customs duty on the EU agricultural products (including the non ad valorem tariff) in 2013 made 14.8% of the value of the imported products. 18 Some products are subjected to a particularly high ad valorem tariff. For example, for grape juice it amounts to 22%. About half of it 19 falls on the specific (non ad valorem) duty. It can be thus simply concluded that Georgia greatly benefits from the DCFTA treatment. Also, given that only 28 categories of products are in the so called partial exemption list (mainly fruit and vegetables), a lot of products, including of animal origin, are totally exempted from the customs duties (although they are subject to other kinds of barriers, on which we shall deal below). To answer the second question, the EEC Regulation No. 927/2012, where the currently operating customs tariffs on all categories of products are given, should be thoroughly analyzed. The list below gives the respective data, which we have taken from the aforementioned regulation. CN Code Product Description Tomatoes Cucumbers Artichokes Courgettes Oranges Tangerines Lemons Table grapes Apples Pears Apricots Morellos Grape juice Specific rate (calculated lower than minimum price) (highest during season, e.g., for tomatoes 1 March 30 April) 2.5 to 29.8 /100 kg/ 2.2 to 37.3 /100 kg/ 1.9 to 29.9 /100 kg/ 1.4 to 15.2 /100 kg/ 0.7 to 7.1 /100 kg/ 0.6 to 10.6 /100 kg/ 1.1 to 25.6 /100kg/ 3.4 to 23.8 /100 kg/ 1.1 to 23.8 /100 kg/ 1 to 23.8 /100 kg/ 2.1 to 22.7 /100 kg/ MIN 2,4 /100 kg/ /hl/ The list shows that if the minimum price requirements are not met (which changes according to season), the product will be taxed by the ad valorem tariff, at the growing ratio. For example, if you enter the EU market with tomatoes priced less than 112 /100 kg, from 1 to 30 April, they will be taxed at 2.5 per each 100 kg. However, if the price of your product is below 103, than it will be taxed by a more serious amount (29.8 ) per each 100 kg. Such scheme has been simply designed to overcome the price competition. Presumably the aforelisted products represent a sensitive category for a number of Member States and the European Commission is trying to preserve on the internal market such prices on them that would be remunerative to local producers. It is clear that under such conditions our farmers would find it difficult to withstand such price competition and they 16 Commission Implementing Regulation (EU) No 927/2012 of 9 October 2012 amending Annex I to Council Regulation (EEC) No 2658/87 on the tariff and statistical nomenclature and on the Common Customs Tariff. see: 17 WTO. Trade Policy Review by Secretariat. European Union. WT/TPR/S/ , p Ibid p WTO Secretariat calculations, based on IDB database and Eurostat database 8

10 would succeed on the EU market only at the expense of better quality, special products and proper marketing. 3. The import of products originating in Georgia listed in Annex II-C to this Agreement shall be subject to the anti-circumvention mechanism set out in Article 27 of this Agreement. 20 Article 27 of the Association Agreement defines action of the anti-circumvention mechanism. Georgia is not the only country, to which the EU applies such a mechanism. The list gives over 200 agricultural products and processed agricultural products of the 15 product categories (beef, pork and sheep meat; poultry meat; dairy products; eggs in shell; eggs and albumins; mushrooms; cereals; malt and wheat gluten; starches; sugars; bran, sharps and other residues; sweet corn; sugar processed; cereal processed; cigarettes. The anti-circumvention mechanism implies the introduction of the upper limit on product imports, the exceeding of which might lead to a temporary suspension of the preferential treatment for the products concerned for the next six months, during which these products will be subjected to the so-called conventional (ordinary) treatment. To avoid such restrictions, the official authorities of the country concerned should provide robust and satisfactory evidence that the volume of the relevant category products imported in excess of the fixed volume results from a change in the level of production and export capacity of the country for the product(s) concerned. The reason for introducing this mechanism is the fear that the products imported from third countries under a counterfeit certificate could have enjoyed the special market access conditions as Georgia would in such a case. The agreed marginal volumes in respects of the products subjected to them are, as a rule, defined by the export capacity of the country. We have randomly selected three products to check the current production capacity of Georgia in respect of them. The chart below clearly shows that the set quotas for every product constitute about 10% of the volume produced in the country. True, Georgia is not currently engaged in exports of the given product to the EU, the reason of which are non-tariff barriers, it is, however, the fact that if the producers succeed in meeting the sanitary standards, the country will be quite capable of exporting much more products into the EU market than the marginal volume established by this mechanism. Product Production capacity Marginal level Meat t t Eggs 550 mln eggs t, approx. 50 mln eggs Dairy products 589 mln liters t In the end, such kind of restriction is not an unresolved problem and subject to proper efforts business could avoid the difficulties associated with products exports; nevertheless, energetic activities on the part of competent government authorities are necessary to ensure timely receipt of information from the business sector concerning their willingness to carry out the export of products into the EU subject to the anti-circumvention mechanism. The government shall establish a mechanism of information interaction with business, which will make it possible to promptly fix the growth tendency of production intended for export. Otherwise, the exporters planning fully bona fide business operations might be damaged Rules of Origin Ptotocol I of the Agreement 21 defines the rules of origin that provide the access of a product to the market under national treatment. The Protocol is very important because the rules laid down in 20 EU-Georgia Association Agreement, Title IV, Art EU-Georgia Association Agreement. Protocol I: Concerning the Definition of the Concept of Originating Products and Methods of Administrative Cooperation. See: 9

11 it are directly related to the country s export capacity in the context of international cooperation. Preferential rules of origin serve as a significant stimulus to local manufacturers to use foreign and frequently better quality components in the end product being placed on the EU market under the preferential procedure. On the one hand, it means more prospects for local production to manufacture fully competent products using foreign ingredients or components. On the other hand, it will stimulate foreign businesses to look for partners in Georgia for beneficial cooperation aimed at marketing joint products in the EU. Also, the Protocol will give impetus to investing and expanding production in Georgia. The Protocol defines the parameters of the categories that are related to the rules of origin, such as products wholly obtained in a country, cumulation of origin, sufficiently worked or processed products; it establishes units of qualification, explains the rules related to such categories as accessories, spare parts and tools, sets, neutral elements. Products shall be considered as originating in a Contracting Party if they are wholly obtained in the Party or their incorporating materials have undergone sufficient working or processing in the Party concerned. Of importance is to see what is implied under sufficient working. Article 5 deals with it, offering different rules for different products and their incorporating components. For this purpose it has Annex I containing a long list of the products and their components. It should be mentioned that generally the EU has developed two approaches in connection with the rules of origin non-prefrential and preferential. The both approaches are established by the 1992 EEC Regulation No. 2913/92 22, while the 2013 EEC Regulation No. 2454/93 23 defines the implementation procedure and specific parameters. The non-preferential approach answers the spirit of the WTO Agreement on Rules of Origin one of the annexes of the Marrakesh Agreement Establishing the World Trade Organization (1994), according to which a product can be considered as originating in a country if it has undergone a final substantail transformation in the country of origin. All Contracting Parties to the WTO Agreement on Rules of Origin, irrespective of the ongoing harmonization process, have not agreed yet the minimum marginal list of the concept-related products and their incorporating components (permissible percentage); however, the above-mention EEC Regulation gives a full list of commodity positions (List of working or processing required to be carried out on non-originating materials in order for the product manufactured to obtain originating status), 24 by which the EU lays down specific demands to third countries in connection with the origin of a product or its part. This list is not specifically intended for the preferential treatment. Numerous red-tape and other kinds of procedures, including the anti-dumping policy are associated with the rules of origin. Therefore, the EU equally applies this common list to all its Member States 25. As regards the preferential treatment, the list is used as an indicator of the products, to which the preferential tariff rates will apply, be it GSP, autonomous treatment or free trade area. The list established by the respective EEC Regulation 26 has been directly transferred into the EU-Georgia Association Agreement and envisages no special preference in this respect. Notwithstanding this, it is rather tolerant (including textile products) and, the demand of additional preferences in this direction in the course of negotiations on our part would not, probably, yield any result. The effect of cumulation, which envisages practical cumulation with several countries of the origin of product, is also rather important for facilitating trade. The above-mentioned EEC Regulation deals with several types of cumulation in this context: bilateral when products manufactured in 22 COUNCIL REGULATION (EEC) No 2913/92 of 12 October 1992 establishing the Community Customs Code (OJ L 302, , p. 1). See: PDF 23 COMMISSION REGULATION (EEC) No 2454/93 of 2 July 1993 laying down provisions for the implementation of Council Regulation (EEC) No 2913/92 establishing the Community Customs Code (OJ L 253, , p. 1). 24 EU-Georgia Association Agreement. Protocol I, Annex II. See id=30&info_id= COUNCIL REGULATION (EEC) No 2913/92 of 12 October 1992 establishing the Community Customs Code (OJ L 302, , p. 1). Annex 13a, p. 459 See 13: :EN:PDF. 26 Council Regulation (EEC) No. 2454/93 laying down provisions for the implementation of EEC No 2913/92 establishing the Community Customs Code. 10

12 two states are considered in both as manufactured in a partner state and deserves the same treatment as provided by a preferential agreement made between them. Regional cumulation implies the same relations within several countries and the extended cumulation, which extends the cumulative effect established for a partner country to other states as well, with which it has a FTA. Article 3 of Protocol I of the EU-Georgia Association Agreement states that...products shall be considered as originating in the exporting Party if they are obtained there, incorporating materials originating in the other Party or incorporating materials originating in Turkey to which the Decision No 1/95 of the EC-Turkey Association Council of 22 December applies, provided that the working or processing carried out in the exporting Party goes beyond the operations referred to in Article 6 of this Protocol. It shall not be necessary for such materials to have undergone sufficient working or processing... And further: It shall not be necessary for such materials to have undergone sufficient working or processing.... Of course, of much importance is that besides the EU cumulation also applies to Turkey, because it will give further incentive to the Turkish business to strengthen cooperative relations with Georgia. At the same time, the agreement lacks the opportunities of neither regional nor extended cumulation with other EU partner countries. For example, it would be rather interesting if the EU recognized cumulation between our and Moldovan and Ukrainian products. It would imply further integration of our countries. Also of importance would be cumulation with the EFTA countries and Switzerland. It is necessary that the Government of Georgia would also think about future approximation of the rules of origin with the pan-euro-mediterranean system of cumulation of origin, which is currently under discussion Technical barriers Technical barriers to trade are the most important form of non-tariff barriers representing one of the cornerstones of the EU s trade policy. It is universally known that access of industrial products to the EU market is very complicated because of numerous directives and regulations that establish technical regulations, standards and the conformity assessment rules and procedures. These regulations primarily serve the protection of man and the environment from products or their harmful components. The most ambitious objective of the Deep and Comprehensive Frree Trade Area (DCFTA) is exactly the overcoming of these technical barriers, so that the products originating in Georgia would be placed on the EU market without additional examination and procedures. To that end, the Agreement requires the introduction in Georgia of the EU s common technical regulations (technical regulations provided for the global and new approach directives and standards), the respective institutional environment (standardization, metrology, accreditation and conformity assessment), including market surveillance institutions, development that ensure the full implementation of these regulations. Articles of the Association Agreement (Title IV, Chapter III) clearly define the tasks of the Government of Georgia. Annex III-A of the Agreement reflects Georgia s priorities with regard to approximation of Georgian sectoral legislation with that of the EU, while Annex III-B the indicative list of horizontal legislation to be used by the Georgian Government for carrying out of reforms. Georgia shall also transpose on a stage-by-stage basis the European standards as national standards, including the harmonized European standards and withdraw conflicting national standards. The recognition by the EU of the certificates of conformity issued by the national accreditation authorities shall take place in two ways the Georgian institutions of quality infrastructure (Unified National Centre for Accreditation, the former Sakstandard) shall be united into the respective European organizations and an Agreement on Conformity Assessment and Acceptance of Industrial Products 27 Decision No 1/95 of the EC-Turkey Association Council of 22 December 1995 on implementing the final phase of the Customs Union applies to products other than agricultural products as defined in the Agreement establishing an Association between the European Community and Turkey and other than coal and steel products as defined in the Agreement between the European Coal and Steel Community and the Republic of Turkey on trade in products covered by the Treaty establishing the European Coal and Steel Community. 11

13 (ACAA) shall be made between Georgia and the EU. 28 This Agreement may be effected sectorally, depending on the sectors where a real progress with regard to approximation of legislation has been observed. At the current stage, Georgia has adopted six out of the 21 directives, the adoption of which on a stage-by-stage within the next eight years is required by the Agreement. However, only the lawmaking is not enough for ten effective implementations. Particularly vulnerable is the system of conformity that needs a network of properly equipped laboratories for testing products, also the market surveillance operating currently on the basis of one specialized organization (construction inspection) under conditions of completely inadequate material, technical and manpower resources Sanitary and Phytosanitary Measures (SPS) The EU legislation on animal and plant health status (correspondingly human health status in terms of food safety) is rather developed and perfect. Georgia started to establish its legislation and institutions in this direction just several years ago and, correspondingly, much work is to be done in order to approximate the EU standards. The principal objectives of the Agreement in this sphere are just to ensure approximating the Georgian regulatory system to that of the Union and to establish, on this basis, a mechanism for the recognition of equivalence of measures maintained by the Parties. This will in itself facilitate the implementation of another important objective, development of trade between the Parties. According to the terms of the Agreement, the EU Party is practically accorded an opportunity of unrestricted imports to Georgia of its products of animal and plant origin. The reason of is the significant lagging of Georgia in terms of both legislative and institutional opportunities (that ensure the meeting of standards) as well as the ones in the industrial sphere rather than the asymmetric treatment List of establishments, provisional approval Upon entry of the Agreement into force, the Parties will be entitled to request approval of the processing establishments of animal products which are situated in the territory of the exporting Party, without prior inspection of individual establishments. At present no Georgian establishment has been registered in the EU, and so the implementation of this rule might serve as good incentive for them. However, also important is that in such case the requesting Party assumes the responsibility for meeting by its establishments of the established requirements and appears as the guarantor before the competent authorities of the importing Party. At the same time, this procedure does not seem to be easily implementable on the face of it. Annex VII introduces enough conditions for competent authorities of the exporting Party, who will have to verify the compliance of the listed establishments with the EU standards. According to the Annex, the importing Party reserves the right to carry out the respective verification, which concerns...the structure and the organisation of the competent authority responsible for the approval of the establishment. 29 The importing Party (and, of course, the EU is meant here) also reserves the right to disapprove the list, or modify it, etc. It also may, later, exclude from the list the establishments not meeting the requirements. The Annex also states that the competent authority of the exporting Party should deserve credit of the importing Party. As can be seen, this article simplifies, on the one hand, the registration of establishments exporting animal products, while, on the other hand, lays the heavy responsibility on the competent authorities of Georgia, who, in this case, themselves are to carry out testing and inspection and should, for this purpose, be equipped with proper laboratory facilities, personnel and experience. Their activities should be transparent, etc. Otherwise this privilege will remain unused. 28 EU-Georgia Association Agreement, Article 48. See: id= EU-Georgia Association Agreement. Annex VII, para d, p. 46, Art. 48. See: id=geo&sec_id=30&info_id=

14 Gradual approximation and recognition of equivalence The following two things are implied under gradual approximation stated in Annex XI: a) the approximation of legislation and b) the approximation of evaluation procedures. In both spheres the party (Georgia) shall notify the partner (Union), who evaluates this information. The same Annex states that: If the result of the evaluation is positive for an individual measure, a group of measures, a system applicable to a sector, sub-sector, a commodity or a group of commodities, the conditions of Article 57(4) of this Agreement shall apply 30. And the application of the conditions of Article 57 (4) 31 implies the right of Georgia to request initiation of the process of the recognition of equivalence of the above-mentioned group of commodities or measures. But what does the recognition of equivalence provide? First, it is important in terms of recognition of the certification procedure and correspondingly of the certificates issued by the competent authority of Georgia. Second, it is important for reducing the frequency of frontier checks of animal and plant products (that involves a special inspection charges). A decision on such reduction (in case of proper approximation) shall be made by the special SPS Subcommittee. 2. DCFTA versus Eurasian Union In 2011, Russia, Belarus and Kazakhstan agreed to transform the Eurasian Customs Union that into an organization similar to that of the European Union the Eurasian Economic Union (ECU). The political decisions of the Eastern Partnership countries failed to develop according to the predicted scenario; in particular, Russia s pressure has resulted in the following consequences: the activity of Belarus to establish together with Russia and Kazakhstan the Customs Union; Armenia s refusal to sign the Association Agreement and, correspondingly, its prospects of the Customs Union membership; Ukraine s statement (before the Vilnius Summit) to delay the signing up of the Association Agreement, which led to a revolution and further provoking of a civil war in the country; the Russia- Azerbaijan dialogue concerning the settlement of the Nagorno-Karabakh conflict at the price of joining the Customs Union; the activation of the Communist Party in Moldova and, finally, the strong will of Georgia of the economic and political association with Europe. In the end, Georgia, Moldova and Ukraine continue to proceed along the hard path of European integration, the final evidence of which has become the signing up of the Association Agreement with the EU on 27 June The joining of other Eastern Partners to the Customs Union (although the question of Azerbaijan is not yet on the agenda) will directly affect Georgia s trade and economic relations with the neighbouring countries, since the Customs Union member countries apply a common customs tariff and other joint measures when trading in goods with third countries Eurasian Customs Union The Eurasian Customs Union is composed by now of three main actors: Russia, Kazakhstan and Belarus, which decided on the establishment of a Customs Union on an informal summit of the Eurasian Economic Union held in August The establishment of the Customs Union envisages the creation of a common customs territory free from customs duties and restrictions of economic nature (except anti-dumping measures), the introduction of a common customs tariff and the unified standards regulating trade with third countries. By 2015, they plan to increase the GDP by 15-17%. An access to external markets for such unions is associated with higher competition and taxes. Therefore, trade is mostly concentrated within the union, the prices are unnaturally high and, correspond- 30 EU-Georgia Association Agreement: Annex XI-A, Part II, Para 1 (Evaluation). See: id=geo&sec_id=30&info_id= EU-Georgia Association Agreement: Title IV, Art. 57(4), p.25 See: id=30&info_id=

15 ingly, economy fails to develop. The common Customs Union will further subordinate the member countries to the Russian economy. The agreement binds Belarus and Kazakhstan (also Armenia in the future) to raise external tariffs in order to bring them to conformity with those of Russia. The Union membership does not exclude the conduct of special anti-dumping and countervailing measures by the countries. 32 Recollecting our example, Georgia was still a CIS member country 33, when the 2006 embargo applied against it was associated exactly with the special safeguard standards and was justified by meeting of the food safety measures. For comparison, the DCFTA Contracting Countries have access to the EU market and its 500 mln consumers, the overall economy of which totals Euro 12.9 trillion 34, whereas the Russia-directed Customs Union has only 170 mln consumers and its total economy makes Euro 1.4 trillion Trade relations of Georgia and Eastern Partnership countries The share of these countries in the foreign trade turnover of Georgia made 27%, including 21% in exports and 29% in imports. (in , 15 and 31% respectively). 33% of trade deficit fell on the EU countries (38% in 2012). 36 In 2013, the export of agricultural products to the EU countries made EUR 123 mln, increasing by 30% as compared with 2012; exports of undustrial products increased by 10% and totaled EUR 539 mln. According to Eurostat, the export of Georgia to the EU in 2013 totaled EUR 669 mln. 37 Georgia has intensive trade relations with neighboring countries: during 2013, the share of ten largest trading partners in the total foreign trade turnover of Georgia made 66.2% (see Chart 1). Georgia's Main Trade Partner Countries 2013 (mln US Dollar) Export Import Source: Ministry of Economy and Sustainable Development of Georgia Eurasian Customs Union: one more brick in the foundation of the Russian Economic Empire, Journal Tabula, Tbilisi, 2010, 33 The country formally left CIS after the 2008 war Source: GeoStat, 2014 See: 37 Source: European Commission Directorate-General for Trade Units A4 / G2. European Union, Trade in goods with Georgia, p. 5. See: It is noteworthy that the data of Eurostat and Sakstat differ. For example, according to Sakstat, Georgia s exports to the EU made USD 607 mln in See: 14

16 The Chart 1 shows Azerbaijan as a second largest trading partner, while Armenia being the seventh. With both countries (and only with them) Georgia has a favorable balance of trade. The above underlines the circumstance that political decisions concerning accession of said countries to the Russia-Belarus-Kazakhstan Customs Union in exchange for the European integration will directly influence Georgia s trade relations. Georgia maintains with its neighboring countries 39 special trading relations, in particular bilateral free trade agreements. 40 The future prospect of the neighbors CU membership implies the worsening of Georgia s trading relations with them, or the status of a third country. It should be mentioned that Armenia s decision has not led to simple opinions in the country and beyond its borders; some experts view that as the decision made by Mr. Sarkisyan under Russia s pressure. For instance, Linas Linkevichus, the Foreign Minister of Lithuania, explains it as follows: We see the recent decision of Armenia to join the customs union in the context of the pressure that Russia has been and still is exercising not only on Armenia, but also on other partner countries. 41 The Armenian political scientist Richard Giragosian assesses the country s decision as a serious setback to Armenia s strategic aspirations and Western embrace, thereby limiting Armenia s options and more firmly locking the country within the Russian orbit. 42 As regards Azerbaijan, according to a study of the Baku based Center for Economic & Social Development 43, interrelations of Azerbaijan and the Customs Union are considered in the near-term and long-term outlook: if the country joins the Customs Union within a short-run period, the GDP of Azerbaijan will increase by 2%, the domestic market will expand to include the CU member countries and, accordingly, non-tariff barriers will decrease. All the above will lead to a reduction in the export products price and raising of the competitive capacity. Azerbaijan s membership within a long-run period will not be effective, because the country s economy is dependent to a great extent on the oil and gas sectors (94.49 % in the total exports, first half of 2013); accordingly, only a very insignificant part of export will enter the CU markets, mainly in Russia. On the other hand, the current harmonized trade policy of Azerbaijan with the CU will affect the EU-Azerbaijan trade relations. Let alone the low quality products dominating the CU markets, the more costly Turkish and European goods, the accession of Azerbaijan to the CU may also endanger in a long-run outlook independent management of natural resources Non-tariff barriers existing in Russia The economy of Russia is politicized, its development vectors being under the influence of the Russian government. To this can be added: the country-wide corruption, non-tariff barriers, the existing regulatory mechanisms to control foreign investments, etc. There are different views concerning the economic future of Russia. In two decades, Russia will become the most powerful economy in Europe and will rank fifth in the world economic rating, concluded analysts from PricewaterhouseCoopers LLP, the world s leading audit and consulting firm. According to this estimate, on the whole there will be a geopolitical revolution in the world economy in the coming years when a new group the E-7 will come to replace the traditional leaders the industrial powers of the West united in the Group of Seven or G-7 (the United States, Japan, Germany, France, Great Britain, Italy and Canada). The E-7 brings together countries with new, emerging markets - China, Russia, India, Brazil, Mexico, Indonesia, and Turkey Georgia has signed bilateral free trade agreements with Armenia, Azerbaijan, Kazakhstan, Russia, Turkey, Turkmenistan and Uzbekistan. 41 See at: 42 R.Girakosian strategic setback: Armenia and the Customs Union. RSC. p.1. available from: edu/ /strategic_setback_armenia_and_the_customs_union 43 Ziya Alili, MSc; Tural Abbasov, MPA; David N. Chang, JD; Max Hoyt, Accession to the Customs Union: Shaping the strategy for Azerbaijan, Center for Economic & Social Development (CESD), Baku,

17 On the other hand, according to Forbes, the American financial tycoon George Soros talked on Russia s collapse and warned investors not to invest in Russia. He stated his opinion at the World Economic Forum in Davos, Switzerland, as follows: It s a sinking economy and is being taken in the wrong direction by Putin Sanitary service as an instrument of political pressure A long list of the actual embargoes imposed by Russia on its trade partners using the so-called political-hygienic lever has been known, including: Trade Restrictions Imposed by Russia European vegetables The 2011 embargo lasted for about two months to be later lifted by the Federal Service for the Protection of Consumer Rights (Rospotrebnadzor) on condition that each consignment would avail a certificate concerning additional inspection. Belarusian dairy products 2009 was the year of the largest-scale embargo lately announced by the Russian Sanitary Service applying to about 500 products. The embargo was lifted at record time, in two weeks. Ukrainian meat and dairy products 2006: the war is still on. The Ukrainian enterprises willing to export their products to Russia should get a certificate that their products comply with the Russian veterinary legislation. Polish meat products 2007: Russia lifted the embargo only at the year-end. The trade war end coincided with the victory of Donuld Tusk s party in Polish parliamentary elections. The elected Prime Minister Tusk did not share the anti-russian views of President Lech Kaczynski and was prepared to make concessions to Russia. Georgian wine and mineral waters In 2006 export of Georgian wine to Russia decreased thrice. In two months Rospotrebnadzor also banned imports of Borjomi mineral water, justifying it by non-compliance with sanitary and gustatory standards. From the above it is clear that Rospotrebnadzor is a devoted assistant of the Russian government in international politics. In addition to care for the consumers health, political implications are clearly observable in the agency s activity. The last example of this are the sanctions against the Ukrainian confectionary giant corporation Roshen, the reason of which has become a deviation of the business from the Russian to the European market Non-tariff barriers in Russia Regulations of the Customs Union are practically built on the system of non-tariff barriers of Russia. In particular, as a result of harmonization, the CU combines the following common principles: list of common commodities subject to veterinary surveillance; the common veterinary (veterinary and sanitary) requirements; the common procedure of carrying out joint inspection of objects and commodities; the common procedure of veterinary surveillance implementation at the customs boundary of the CU border and within the customs territory of the CU; the common forms of veterinary certificates. Skeptics frequently say that entry to the EU market is connected with the overcoming of numerous technical barriers. In the chapters above we spoke of some forms of non-tariff barriers. Here we would like to show what kind of technical barriers has the Customs Union The loss of Russian market for Ukrainian company cost Mil. USD per year 45 Quality Control and Certification for Russian Markets, 16

18 Non-tariff Barriers of the Customs Union Standards The so-called. GOST 44 standards Technical regulations conformity standards / National technical regulations (TRS) / Technical Regulations of the Customs Union (CU TRS EAC). Sanitary Regulations and Standards (SanPiN) de facto compulsory standards. Certificate of Origin Certificate of origin is mandatory for all types of imported products; necessary for obtaining an import permit. Certificate of Analysis Necessary only in case of import of alcoholic beverages. Import Permit/License Required on imports on the customs territory of animal and plant products, medicines, animal feed and additives; issued by the Customs Union Commission in the name of the official physical or legal person who is formally registered with the CU. The exporting enterprise should appear in the list enterprises inspected by the Russian Veterinary Service. Quarantine and Phytosanitary Certificate Issued for plant products, including cereals, except for some deeply processed agricultural goods. General Veterinary Certificate Required for meat and meat products, also poultry milk and dairy products, eggs, animal products, as well as for animal feed and feed additives. Sanitary and Epidemiological Report Used for cereals, fresh fruit, fresh/frozen/processed vegetables, finished meat products and poultry. Sanitary and Epidemiological Examination and Examination of Alcoholic Drinks Importer should present a list of the following documents: samples of all types and kinds of products; a contract; documents evidencing origin, safety and quality (issued by competent agencies in the country of origin); ISO 9000 Certificate for a batch product; label samples; power of attorney made for Russian companies to settle the certification-related issues (for batch products). All kinds of documents, labels and markings should be translated into the Russian language and their copies and translations should be certified in the established procedure. CONCLUSION The Deep and Comprehensive Free Trade Area established by Title IV of the EU-Georgia Association Agreement, which was put into action from 1 September 2014, includes many advantages. It exempts partners almost fully from customs duties, with the small exceptions. These exceptions concern primarily agricultural products and they reduce the price competition opportunities. Therefore, our producers should be trying to find their place on the vast European market thanks to quality and other marketing means. The Agreement also gives a good advantage for overcoming the technical barriers. Concurrently, its actual effecient use asks for a prompt and effective harmonization of legislation and the regulatory system, making of a mutual recognition agreement, recognition of equivalence, maximum use of cumulation capacities. The work in connection with cumulation should continue to extend to Norway and Switzerland (like Turkey). 46 GOST- State Standard 17