In an interview to Armenian News – NEWS.am, Willem van der Geest, Long-term Trade Policy Advisor to Armenia with the EU Advisory Group, speaks on the landmark policy measures necessary for Armenia to qualify for Deep and Comprehensive Free Trade Agreement.

Armenia is a beneficiary of GSP+ trade regime with the EU. However, do you think that export opportunities for Armenian businesses, particularly in food and agriculture, could have increased with timely harmonization of Armenian regulations to the EU quality standards?

Armenia is already a beneficiary of the GSP+, but I believe there are export opportunities that are not yet realized. If there were further harmonization of standards and improved quality certification, there would be some potential of expanding Armenia’s export quite considerably, particularly in fruit and vegetables, but also in aquaculture. These are the two sectors that have been identified in the Food Safety Strategy for Armenia as sectors, where it would be relatively easy to scale up quite considerably – maybe doubling or tripling in several years. Again, the current barrier is not so much the price, and not even the quality, which is quite good. The problem is the certification: there is no chain of testing procedures and no internationally recognized certification system. Those are the concerns that we also try to address in talks about the DCFTA. 

You mentioned crayfish, while fish farms are advancing steadily – but they only ship their production to Russia...

Essentially what the EU system demands first is traceability. In that sense you need to keep a full record of fish breeding, residue of particles of metals or chemicals. But this is not presently the case for Armenia. It is needed to put a system in place to trace the manufacturing chain from the farm to the fork. But it is very demanding and will take about five years from now. 

Do you agree that Armenia should not expect much welfare gains from DCFTA since 1) Armenia does not apply tariff-based trade policy, and 2) most of the exports from Armenia to the EU are raw materials (and this is seemingly going to last), which are duty exempt in the EU?

I do not agree with the premise of the question: there’s a very common misunderstanding on the concept of free trade. When we talk about DCFTA, we do not talk simply about decreasing tariffs. Our analytical studies show that only that would have very little impact, because these tariffs are already quite low both on the European side and on the Armenian side. Putting the tariff from 4% to zero – or even from 10% to zero – is not going to matter very much. That’s why we talk about the DCFTA and all these other measures which deal with the issues within the economy, behind the borders – competition, public procurement, etc.

 

As for the export mix, it's true that the greater share of Armenia’s exports is raw materials – like metal concentrates or blister copper. So I think it’s imperative for the economy to try to upgrade these products inside the country: it creates employment and profits. To some extent it’s a matter of investment more than anything else, not a matter of standards per se, because making copper wires, tubes or aluminum foil is relatively easy, the technology is there. But it does not happen because the investors aren't coming. And they are not coming because they don't feel secure about the future of Armenia and because they are not sure they will get the same treatment as the local companies. So it's not the technology, but investment which is the constraint, and for foreign investment you need to lay a level playing field, in terms of taxation and access to market. This includes «deep and comprehensive» reforms across the whole economy.

In DCFTA feasibility study for Armenia of May 2008, it is observed that Russian investments are a strong pillar for Armenian cartelized economy. Still, do you think this may apply to imports of staple commodities (sugar, grains, fuels), where participation is purely domestic?  

Elimination of the shadow economy is obviously very difficult and challenging. Do I observe a policy change? Somewhat. The government agency in charge, the SCPEC, has launched a few more actions – proposals to amend the law to give them more power. The EU practice is very interesting. In the EU, we have a strong competition network, and some of the companies were very heavily fined for price fixing and running cartels, like in glass industry. The famous case is Microsoft, which was fined 497 mln Еurо for tying its software to Windows. The competition policy framework in Armenia should be strengthened, and it will be a chapter of DCFTA, as we have seen in other EU free trade agreements, like in Korea. The case of Korea is very sensitive, as there are big domestic businesses which do not want that. But we understand that the European companies must be at a level playing field with local ones – and the opposite also applies – that's why we include that. 

As for the Russian investment, I don't link it directly with import business. Those are domestic companies. It's true that a large part of their supply comes from Russia, but they can source from anywhere. So it is too limited to link this with Russia.

Might this refer to natural monopolies, where Russian business has a marked prevalence?

European and WTO rules provide that a natural monopoly has to lease its network to other valid applicants at market prices. Sometimes, the tariffs can be set by the government. Virtually all European countries underwent these scenarios at different times. The idea is that you allow other operators to use, say, existing telecom networks. Similar arrangements will have to be found for gas and electricity. It's more complicated, because there's a limited number of electricity suppliers and a single supplier of gas. But to get competitive pricing, you will need to tackle this issue.

Do you think that public procurement tenders have been transparent enough, and equal in bidding opportunities for European vs. local and Russian companies?

Of course, the situation has improved because you joined the Government Procurement agreement of the WTO in 2011, and you've been one of the first CIS countries – and one of the few transition countries in general – that have joined it at this stage. I think it's fair to say today that European companies are at disadvantage vis-a-vis local and Russian companies. And that's why we also want public procurement regulation to be part of DCFTA.

What are possible policy measures for Armenia and Georgia to increase south-south trade cooperation? How this can increase trade cohesion of these countries with the EU?

As you know, the EU is simultaneously negotiating on DCFTA with Georgia. In 2-3 years down the line there may be simultaneous agreements with Armenia in Georgia. And this will indeed also facilitate the trade between Armenia and Georgia, because the Agreement will extend not only on the goods coming from Georgia or Armenia separately, but also on goods of shared manufacturing. And this could increase the scope for intra-regional trade. The same is true for another couple of neighboring countries - Moldova and Ukraine. So I think south-south, although not as the primary intention, will have a good side effect.

Do you think it will be able to smooth transit tariff controversies between Armenia and Georgia? 

This has been already regulated under WTO rules: transfer fees need to be reasonable and not be a source of monopoly. It's difficult in practice to determine whether or not transit prices are reasonable or not. Every side has its own vision: if you forward the goods through Georgia, then you say the price is too high, but if you operate in Georgia, then you say: it's perfectly okay, I dont charge for Armenia more than for others. So we would have to go into a very detailed examination on whether or not some of those charges are articficially high. The World Bank has some calculations of transit prices through Georgia, with which DB ranking forArmenia is assembled. Of course they are high, but no doubt opening the border with Turkey would reduce those charges.

Can one imply that the chances for Armenia to comply with DCFTA with closed borders are very limited, even if other requirements are fulfilled? 

There's little DCFTA can do about it: it's dependant on the two countries concenred, like Turkey –Armenia and of course Azerbaijan – Armenia. This is a very complex security issue. But in the meantime you can surely comply with the DFCTA, even if the closed borders continue to exist. From the ecomist's point of view, closed border is a pity. Still it's not a contradiction to the Agreement – just a missed opportunity.

Thank you

By Aram Gareginyan