2021 February-March Analysis Featured

Georgia’s burgeoning clothing industry and the hurdles it faces in exports

Georgian clothing companies have made serious gains in recent years, with 2019 marking an all-time high in exports when, according to Geostat, $56.9 million worth of clothing was exported from the country – a figure 53.2% higher than the previous year.

The gains have been steadily impressive: in 2009, exports of clothing from Georgia amounted to just $37,190 – a side note in the country’s list of exports. Now, Georgian clothing makes for 1.5% of Georgian exports, and the industry employs thousands of people.

However, despite the ongoing growth, Georgian clothing companies oriented toward foreign markets are coming up against significant challenges.

The first and foremost challenge is for producers seeking entry into the EU market, for which they need a EUR.1 movement certificate. This certificate is used to certify the origin of a product and affords exported products the benefits of favorable trade terms under the Deep and Comprehensive Free Trade Agreement with the EU and the accompanying preferential trade policy.

Holding a EUR.1 movement certificate exempts a company from customs duties, without which competing on the European market becomes significantly more difficult. Receiving a EUR.1 certificate is not difficult if a clothing company uses fabric originating in EU countries. Per diagonal cumulation, companies can also use fabric from Ukraine and/or the EFTA countries (Switzerland, Iceland, Norway and Liechtenstein), whose inputs do not add up to the allowed maximum quantity of non-domestic materials used in the production process.

The difficulty in receiving the certificate, the Revenue Service of Georgia told Investor.ge, is that many Georgian clothing producers receive their main inputs from Turkey. Goods produced from originating materials in one FTA country, in this case Turkey, and further processed in another, in this case Georgia, could thus theoretically then be exported back to the EU under preferential treatment.

However, the Revenue Service notes:

“As Turkey-Georgia-EU diagonal cumulation is not yet valid, the raw material must undergo sufficient processing, under the provisions of Article 5 of Annex I to the Regional Convention on Pan-Euro-Mediterranean Preferential Rules of Origin [to be valid for the Eur.1 certificate.”

While a diagonal cumulation provision exists in the FTAs between Georgia, Turkey and the EU, Turkey on its end has yet to ratify the clause, perhaps weary of losing a fraction of its market share to enterprises which may find production in Georgia cheaper and the investment environment more welcoming.

Taken together, these provisions strip exports to the EU of preferred trade status if their foreign inputs are worth more than 40% of the final product value. This is especially a problem for ‘cut-make-trim’ (CMT) producers, for whom inputs are usually around 50%.

Talk about Turkey ratifying the diagonal cumulation clause in its FTAs with Georgia and the EU has sounded on multiple occasions in the last five years, but so far without result.

One company that has faced this problem is children’s clothing brand Spilow. Founder Sopho Chkhaidze told Investor.ge that since the company mainly imports raw materials for clothing from Turkey, it is difficult to obtain a EUR.1 movement certificate.

“Our customers know about the DCFTA between Georgia and the EU, but they do not expect to pay VAT when they import our product and are unpleasantly surprised when they have to do so at customs,” says Chkhaidze, noting that entering the European market is very important for local producers seeking to diversify.

“The state should aim to remove any unnecessary complications. Despite the difficulties with the certificate, we do have foreign partners, but we constantly feel that due to these unplanned costs, clients will not want to make a second order. Therefore, we wish the state would help us to solve this problem promptly,” Chkhaidze said.

Georgian clothing producers also talk about difficulties faced by medium- and small-sized businesses in sourcing capital, and say more state support would help them break through significant barriers by investing in brands with export potential. This problem is familiar to the clothing brand Person, which offers customers women’s and men’s clothing and has been operating on the market since 2016.

“Many Georgian startups have emerged, but we are not just competing with Georgian brands. We are competing with any foreign brand present on the market. However, the behavior of Georgian consumers has changed and they want to buy Georgian products, which is very good. In my opinion, it would be good if there were state organs that would further encourage brands with export potential,” Levan Berdzenishvili, the director of Persona, said in an interview with Investor.ge.

Berdzenishvili says funding has become especially more difficult to secure during the pandemic.

“The problems that the business faced due to the coronavirus pandemic are still relevant. In our case, we had to delay the release of a baby clothing line. It was planned in March, but the coronavirus got in the way. Nevertheless, we managed to release this line later, because we understand its importance for the sustainability of the business. Also, due to the situation in the world, we try to stay up-to-date and have added face masks to our collections,” said Berdzenishvili.

Government agencies have responded to the call in 2020 through Enterprise Georgia, offering renewed co-financing and leasing programs and a credit guarantee mechanism strengthened and expanded as a measure to counter the economic effects of the pandemic.

Spilow’s Chkhaidze commented:

“Access to finance is what we need most. We have a startup business loan from Enterprise Georgia’s Produce in Georgia program, which has helped us take a leap forward. A year ago, they helped us attend an international exhibition and meet many people.

We had small exports to Beirut, our products were sold in London, on farfit.com. When you enter this field, you want more and more. Children’s clothing is perceived with skepticism; trust plays a big role because it is for children. To export our clothes, we are looking for finances to make a big step forward and broaden our possibilities. Otherwise, it is difficult for small companies,” Chkhaidze said.

Despite these barriers, one reason for optimism about the medium term is the fact the country has the appropriate design skills to move up the apparel value chain. This could be done by leveraging Georgia’s vibrant fashion exports, as Georgia has put itself on the sector’s map in the past decade. This has been helped by growth in local ‘fashion weeks’ as well as the success of several prominent Georgian designers on the international scene.

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