This research paper by Tony Venables has some interesting implications for the South Caucasus:

 Better integration with a resource-rich economy is extremely valuable for the resource-poor. Remote and land-locked developing countries have very limited export potential with the external world … Regional integration enables them to earn foreign exchange via their exports to the resource-rich partner. The benefits arise as the prices of these regionally traded goods are bid up, raising wages and creating a terms of trade gain for the resource poor economy.

However, resource-rich economies lose (or at best have very modest gains) from regional integration. The terms of trade gain for the resource-poor country is, of necessity, a terms of trade loss for the resource-rich economy. Added to terms of trade effects are trade creation and diversion. The resource-rich economy runs into diminishing returns as it seeks to spend its resource revenues, and trade is a way to relax this constraint. But these gains come from non-preferential opening, and regional integration leads preponderantly to trade diversion.

With a preferential trade agreement between Azerbaijan and Georgia, Azerbaijan imports from Georgia not because Georgia is the most efficient producer of tradable goods but because of Georgia’s preferential access to the Azeri market. This is great for Georgia, but Azerbaijan would be better off by shunning preferential trade agreements in favor of non-preferential ones.

In light of this the strategy to position Georgia as a transit hub makes sense. Improving transportation infrastructure and simplifying customs procedures reduces intra-regional trade costs and does not introduce distortions, in contrast to preferential trade agreements. Immediate benefits accrue to Georgia as her transport and logistics sector expands, and to Azerbaijan in the form of lower trade costs. In the long-run, Georgia and Azerbaijan can gain even more if being a transit hub facilitates the entry of Georgia into global production chains. In this case Georgia would be able to serve the Azeri market even without the help of distorting preferential trade agreement.