The policy brief presents a Computable General Equilibrium (CGE) model designed for Georgia by the ISET Policy Institute to evaluate the impact of potential new Free Trade Agreements (FTAs) with the USA, India, and South Korea.
Along with assessing the impact of eliminating tariffs, the CGE model incorporates the deep integration elements, assumed to be part of the potential FTAs, observing additional effects of: i) reduction in time in trade (border compliance) costs; ii) reduction in non-tariff barriers on goods; iii) reduction in barriers on Foreign Direct Investments (FDI) and cross-border business services. The model evaluates the impact of potential FTAs on welfare gain, real GDP, trade flows in aggregate and by sector, changes in the output of Georgian sectors, factor earnings, and tax revenues.
The results indicate positive impacts on the Georgian economy. The estimated annual recurring gain is a 0.82 percent increase in Georgia’s real household income, with the USA FTA being the most beneficial (accounting for 0.59 percent). The three FTAs jointly result in a 0.25 percent annual recurring gain in real GDP for Georgia. These positive gains are mainly attributed to the reduction of barriers hindering the cross-border provision of services, the reduction of non-tariff barriers on goods, and the easing of restrictions against FDIs in Georgia. There is no estimated change in the balance of trade.
The import duty revenues decrease by 15.8% as a result of three FTAs, with the FTA with the USA being particularly impactful.
Sector impacts suggest positive outcomes for most sectors’ output, with petroleum processing, textile and clothing, and metal manufacturing expected to benefit the most. The hospitality sector may face a slight reduction in output due to an increase in wages and returns on capital more in profitable sectors inducing movement of the factors of production. Favorable outcomes are anticipated for most production factors.
The findings provide valuable insights for policymakers considering trade reforms, emphasizing the importance of deep preferential integration with the trading partners, as the decrease in non-tariff barriers for goods and the alleviation of barriers against FDI in Georgia are identified as major factors contributing significantly to the improvements in welfare gains. Along with these elements of deep integration, the reduction of barriers against cross-border services contributes to improvements in real GDP, whereas the elimination of tariffs exhibits minimal effects in both cases.