Car export was 20.5% of the total exports in 2011 and it had the highest share in total exports, among all export goods. What a striking fact! So, what does this mean for Georgia and how can we become regionally more competitive in car-trade? How can we meet the demand on European, Japanese and US cars in Caucasian and Central Asian markets by becoming a regional trade and transit center for those cars?
Since 2005, car exports have been steadily increasing, in value and as a share of total exports. The correlation between car exports and imports is 0,67 and their dynamics follow a similar pattern which is the case basically because Georgia is not a car producer; rather - it re-exports imported cars from Japan, USA and Europe.
What does it mean to be a re-exporter?
Being an exporter means that it is exposed to demand shocks, which are out of the control of its policy treatments. Being a re-exporter, in addition, means that country is exposed to supply shocks which are out of control of its macroeconomic policy treatments. Besides, being a re-exporter means that there is a high correlation between imports and exports and thus if there is an import shock then exports also suffer and vice versa.
And again a striking fact!
Car exports increased by 98% in 2011 compared to the previous year. This was partly caused by the changes in the customs legislature of Kazakhstan, lowering tariffs on imported cars, which took place in the first quarter of 2011. However, this was not the deterministic cause for such a high increase in 2011. During the third quarter Kazakhstan annulled changes in its legislature and increased tariffs again but Georgia still maintained its high levels of car-exports.
What was the main reason behind the trend?
The main reason for the increasing trend in car export/import since 2005 has been the favorable institutional and legislative reforms, which have lowered tariffs and simplified custom procedures for importers/exporters of cars. Those reforms lowered export/import costs and consequently increased mark-up for car re-exporting companies and/or decreased prices for foreign consumers.
Georgia has a potential to become a regional (Caucasus, central Asia) hub for trade in automobiles. This could be one of the untapped potentials for the country. By now, Georgia has favorable institutional settings and has proven the ability to develop in this direction i.e. increasing exports means that there is demand and increasing imports means that companies also have incentives to re-export cars because they see the business being profitable.
So, where should we go further?
By now Georgia has a negative trade balance in cars (it has had a negative balance since 2000) which means that Georgia is paying more than it receives from re-exports. To become a regional hub and to proceed further in this direction Georgia should start targeting positive trade balance in cars.
Here are two main reasons why negative trade balance is being caused:
- A share of imported cars is meant for domestic consumption;
- If there is a negative demand shock on cars in the foreign market then some imported cars might stay for a long time in Georgia, and because they depreciate their value is lower once they are re-exported
Here are some suggestions on how to deal with negative trade balance on cars:
- Investments in special car repair centers which will repair imported second-hand cars for re-export;
- Implementation of some coordination mechanism among individual car traders which would provide:
- information on custom procedures and tariffs of the countries in the regional market,
- detailed info on demand on the cars (which cars are popular, what is the average price paid for cars by consumers etc)
Comments
Let's become founders a re-exporter firm together with other ISETers, we'll have enough information, coordination and I'll repair the cars. what do you say?
For sake of our national hub for Automobile trade!
Okay, sorry for not being serious... Seriously, very interesting post Mr. Mekerishvili
* founders OF a re-exporter firm
I have a lot of remarks regarding your post and I will structure them properly and come back with a comment.
Dear Giorgi,
first of all, I would like to ask you a question and please answer honestly: Do you really think car export will become a strategically important part of Georgia's Economic condition? Are we really going to become a hub for Automobile trade? I would like to know your personal opinion...
Second of all, could you maybe name other country who started similarly like Georgia? Can we estimate our future outcomes based on other countries' experience?
Also, I would like to know if the repair centers you're talking about are also a known method in some other countries?
And what exactly do you mean by the coordination between the individual car traders? You mean they should form some entities? Do such entities exist in Europe or USA or Japan for example? Or some re-exporter countries?
And as for the research about demand on cars, could maybe someone come up with the serious research for this sector? Because I really doubt care traders have sufficient human resources, awareness and motivation for such research.
In General, very appealing subject, we should continue the research on this subject
Interesting topic! Car re-exporting feeds large number of families in Georgia. My cousin just entered this business and I know some details from him. I don't think there is need for some scientific research on demand. I could not imagine how well resellers are informed about the demand, they are aware about the legislation of destination countries, they are also paying attention to every details like taste, which differs between nations and regions. For example every car trader know that Georgians prefer black cars while Azeris like white cars. I'm not talking about the maker, model, engine size and other details of cars. They know and learn by doing.
To add to your list, one other main reason contributing to negative trade balance is the fact that majority of cars are re-exported before the customs clearance and government gets almost nothing out of it. Taxation system is not functioning properly, while it is hard to capture the true value sellers get for their cars, they can easily cheat. I think this is not a huge problem at this stage while there is no loss for increasing social welfare.
I also think that success in this direction partly was due to the high competition (not coordination). Coordination will probably drive prices up for local and foreign consumers that would stop blooming of this sector.
Car re-exporting feeds large number of families in Georgia. My cousin just entered this business and I know some details from him. I don't think there is need for some scientific research on demand. I could not imagine how well resellers are informed about the demand, they are aware about the legislation of destination countries, they are also paying attention to every details like taste, which differs between nations and regions. For example every car trader know that Georgians prefer black cars while Azeris like white cars. I'm not talking about the maker, model, engine size and other details of cars. They know and learn by doing.
To add minor detail, the fact is that majority of cars are re-exported before the customs clearance. Government gets insignificant amount out of it. also because taxation system is not functioning properly, while it is hard to capture the true value seller gets for the car and they can easily cheat. I think this is not a huge problem at this stage while there is no loss for increasing social welfare.
I also think that success in this direction partly was due to the high competition (not coordination). Coordination will probably drive prices up for local and foreign consumers that would stop blooming of this sector.
Useful points Lasha. I agree with all of them to a great extent. However, I do not think that it is straightforward that coordination drives up prices when we face market failures, cost of information and scale effects.
Also, I just had an idea about establishing such firms which would import cars from EU/Japan/US and export them to Central Asia/Caucasus. As far as I'm informed, re-exporting currently takes place on individual level i.e. there are individual traders who do that on their own without having any firm or legal entity employing people, having infrastructure etc. I think firms would have better potential to target foreign markets than individual traders do. There are of course firms that import cars but those firms work for Georgian market. I do not know any Georgian car importer firm which seriously targets foreign markets, as well.
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