The Diagonal Cumulation Offers New Opportunities to Georgian and Turkish Businesses

It has been 5 years since Georgia joined the Pan-Euro-Mediterranean (PEM) convention on preferential rules of origin in May 2022. The Convention allows countries with a free trade agreement with the EU as well as with each other to use the diagonal cumulation method (scheme) in a multifaceted format. In particular, goods produced from originating materials in one FTA country and further processed in another, can then be exported back to any of the member countries under preferential treatment.

Because of the above, the Georgian side began negotiations with Turkey to conclude the diagonal cumulation agreement between Georgia, Turkey and the European Union, which was implemented in April 2021. The diagonal cumulation between Georgia, the EU, and Turkey allows products based on industrial raw materials imported from Turkey to enter the European market under a free trade agreement. Prior to the introduction of diagonal cumulation, products produced in Georgia using Turkish raw materials were ineligible for a free trade regime and had to be returned to Turkey.

Textile production is at the leading edge of this field, since it is the first sector producing the final product in Georgia with raw material supplied by Turkey and exporting it to Europe. Statistics indicate that the sector is growing quite rapidly, and the volume of exports is growing each year, so there is a lot of potential. A good example is the new enterprise project in Rustavi, which was built during a time of global crisis and pandemic.

“As other sectors, diagonal cumulation is especially important to the further development of the textile industry in the country as well as the attraction of new foreign investments into it,” said Genadi Arveladze, the Deputy Minister of Economy in an interview with Diplomat.

This diagonal cumulation between Georgia, the EU and Turkey is supported by the USAID Economic Security Program, which strives to generate high-paying jobs, attract investment, and increase Georgian small and medium-sized business income. “Exporting products made with Turkish raw materials to EU countries within the framework of a free trade agreement may spur Turkish entrepreneurs to open enterprises in Georgia, as happened in the case of textiles. We think this opportunity will be extended to other sectors as well,” said Giorgi Darchia, the USAID Economic Security Program Representative. In order to explore potentially profitable sectors in collaboration with the Ministry of Economy and Sustainable Development of Georgia, USAID Economic Security Program involved in the implementation of this initiative.

USAID Economic Security Program provided assistance in examining potential profitable sectors. “With the help of the consulting firm PMCG, we analyzed the production capacity of enterprises, raw materials in Turkey, and the exports of their products to the EU countries - where are the growth trends; as well as the human resources in Georgia and their institutional knowledge necessary for a particular industry to be easily mastered by the private sector in Georgia,” said Giorgi Darchia.

The consulting company PMCG has identified the most promising sectors and value chains that will benefit from diagonal cumulation. A list of raw materials that can be used / added to products made in Georgia for diagonal cumulation purposes. Within the priority sectors / value chains, sixteen products were considered to have the most economic potential for Georgia, producing them with Turkish raw materials and exporting them directly to the EU through the FTA.

Along with identifying products whose manufacturing will benefit Georgia, the project also identified Georgian and Turkish companies. We gave priority to companies with international experience, production potential, and women entrepreneurs and managers. An event will be conducted by the USAID Economic Security Program, with the participation of these companies, during September to facilitate the development of future cooperation between Georgian and Turkish entrepreneurs.

“Diagonal cumulation, along with increasing Georgia’s export potential to the EU, will also facilitate the inflow of foreign direct investment (FDI) from Turkey. At the same time, by promoting cooperation between Georgian and Turkish companies, diagonal cumulation will encourage innovation in the Georgian and Turkish business sectors and create new highly qualified jobs,” said Ketevan Babiashvili, PMCG consultant.

Osman Turan, the Chairman of Georgian and Turkish Businessman Association in Georgia, believes that this opportunity brings positive benefits to both sides, since it will ensure Georgian and Turkish companies’ competitiveness on the European market, more advancement, and larger production, which directly translates into more investment and more jobs. In his view, it is crucial to carefully select the sectors and directions that will benefit from this opportunity. As the chairman of the association points out, there is great interest from manufacturers of furniture and building materials.

In response to a question about how diagonal cumulation can be fully realized to its full potential, the chairman of the association stated that it is a dynamic process. He considers it a positive sign that many large Turkish corporations have engaged in business in Georgia, as they each are a kind of business card for Georgia and a sign that other Turkish organizations would feel comfortable doing business in Georgia. “ Generally, I think it takes more time to realize the potential of Georgia, to make this opportunity available to the larger masses, and to improve Georgia’s competitiveness compared to other countries,” claimed Osman Turan.