According to the latest GEOSTAT figures, merchandize exports from Georgia decreased by 1.63% between 2013 and 2014. This is certainly not great news for the country, but does it imply that Georgian goods have become less competitive on the world market? Recent trade data suggest that this is not necessarily the case.

The first thing to note is that much of the decline in exports is related to one particular activity – the re-exports of Georgian cars to Azerbaijan and Armenia. Beginning in 2009, this business has become a “cash cow”, capitalizing on the country’s geographic location, the efficiency of its newly reformed customs and registration services, and low import duties.

Car re-exports were for a few years a blessing for Georgia’s low-skilled, unemployed or underemployed workers. While essentially a dead-end activity – contributing nothing to productivity improvements in other sectors and future growth, – growth in car re-exports was also a major contributor to general export growth from 2009 till 2013 (see Chart 1).

Not any more.

The good fortune of Georgia’s car re-export business changed in 2014 when the main destination country, Azerbaijan, pulled the plug on the lucrative second-hand car trade by passing strict environmental regulations on car imports. Within just a year, Georgia’s total car exports decreased by 26.4%, contributing 6.4 percentage points to the total export decline in 2014.

The loss of this particular market is certainly bad news for Georgia, considering the abruptness of the change, and the fact that motor car exports accounted for nearly a quarter of Georgia’s total exports in 2013. Furthermore, car exporters invested large amounts of money into the purchase of carpools, and the value of their investment has now deteriorated. (For example, the gap between the value of exported vs. imported cars was approximately -$197.3mln in 2014 while it was only -$7mln in 2013).

Otherwise, 2014 was not a bad year for Georgia’s exports and the country’s competitiveness. Ignoring car re-exports, total Georgian merchandise exports actually added nearly 8% in 2014 (see Chart 1).

This growth in Georgian exports is particularly impressive given that it was achieved in the presence of another external shock – the economic and political crisis in Ukraine. One of Georgia’s top trade partners, Ukraine accounted for 6.6% of total Georgian exports in 2013. In 2014, the crisis year in Ukraine, Georgian exports to Ukraine dropped 27%, contributing 1.8 percentage points to the total export decline.

Taking out these two “external shocks”, namely the trade-in motor cars and exports to Ukraine, Georgia’s exports in 2014 actually grew by as much as 9.5%!

RUSSIA AND THE US IN NECK AND NECK COMPETITION FOR GEORGIAN EXPORTS?

Rather than signifying a competitiveness crisis, 2014 trade figures reflect changes in the structure of Georgian exports, both in terms of composition and destination markets. The two tables below make sense of these changes by providing a ranking of countries in terms of their contribution to Georgian export growth in 2014.

The first thing to note is that while Russia made the highest contribution to Georgia's merchandise export growth in 2014 (2.9 percentage points), the United States was close on its heels with a contribution of 2.4 percentage points. This suggests that Georgia is faring some success in hedging its bets in the geopolitical trade game – balancing its trade exposure between East and West.

Overall, Georgia’s export growth in 2014 heavily gravitated towards the East. The East, including Russia, contributed 8.1 percentage points to export growth in 2014; the West, including the US, contributed only 3.9 percentage points.

As discussed above, Ukraine and Azerbaijan contributed the most to the fall in Georgian exports. Another interesting development of note, however, is the significant decrease in Georgia’s exports to other CIS nations such as Kazakhstan, Armenia, and Moldova. This may suggest that at least some of these countries served as conduits for indirect Georgian-Russian trade prior to July 2013, when the Russian embargo on Georgian wine has been finally lifted. Overall, Georgia’s exports to CIS nations dropped 9.6% in 2014. 

2014 data suggest that Georgia has been able to balance its trade exposure and expand exports in several important directions. The hope is that the country will continue to do so in the future. As an old Chinese adage teaches us, every challenge brings about new opportunities for the future. One just needs to be able to recognize the opportunities and learn from the challenges.