Will Saudi Arabia join the WTO?

Despite eight years of negotiations, Saudi Arabia’s accession to the WTO is still pending and the kingdom’s absence from the organisation, because of a reluctance to open up certain sectors to foreign competition, could be costing the Kingdom dear

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By  Massoud Derhally Published  February 4, 2003

|~||~||~|It would be imprudent to claim that there is a clear-cut way of advocating economic development throughout the world. By the same token, it would be absurd to argue that all developing countries need is to liberalise their trade regimes.

Still, more needs to be done on various fronts. For the Middle East to become a net producer, rather than remain a consumer, markets need to develop and manufacturers and industries need to play bigger roles in the economy.

So say economic analysts, who add that the Gulf customs union, which came into effect January 2003, is a step in the right direction that will help create a Gulf common market, allowing the Gulf to hook up with foreign economic blocs, especially the European Union. But they also warn that free trade deals with the EU may remain dependant on Saudi Arabia joining the WTO.

Saudi Arabia, the biggest GCC economy, is also the only member that has not entered the WTO. While the kingdom has made noticeable changes in the last two years, such as improving in the field of trade services and redrafting its foreign investment laws, accession to the WTO doesn’t seem to be any closer.

Neither does a trade pact with the EU. A senior EU official told Reuters in November 2002 that the EU would not revive patchy free trade negotiations with GCC states until Saudi Arabia joined the WTO and that the customs union, on its own, would not suffice for a trade agreement between the two blocs.

“The major conditions are the customs union and Saudi Arabia joining WTO,” European Commission chief economic adviser, Andre Sapir, told Reuters. “Then the normal negotiations will take place on how much to be liberalised on a product by product basis and on what time frame,” added Sapir.

The comments of Andre Sapir did not go down well in the Gulf, where analysts say the EU is dragging its feet. “They [the EU] have a bag full of excuses that they want to use against the GCC. Of course they know that it will be difficult to compete with the Gulf’s petrochemicals and they are dealing with manufactured goods from the Gulf in an unacceptable way,” Ihsan Bu Hulaiqa, a Saudi economist, told Arabian Business.
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Saudi accession to the WTO was never an issue in the negotiations between the EU and the GCC, say analysts. “As soon as we have fulfilled one condition, they come up with another. We don’t see any link between Saudi Arabia being a WTO member and the agreement,” a United Arab Emirates trade official told Reuters. Bu Hulaiqa expands: “After the GCC agreed to a customs union, we believed the Europeans had exhausted their excuses. This is a new excuse and this will backfire.

“We have to remember that people in the GCC and especially Saudi Arabia take the issue of tariffs and fines as strategically important. Whenever a country doesn’t wish to co-operate, reciprocate and help us diversify it will affect economic relations negatively. The Europeans need to remember a simple thing; they are number one when it comes to imports to the GCC...if they insist, we [can] put importing from Europe on the backburner; it doesn’t have to be number one.”
Impartial observers seem to agree. Matteo Legrenzi, of St. Antony’s College, Oxford University says, “I am not sure the EU is really keen on a trade pact. The impact on its petrochemical sector would be significant and the access to GCC markets for EU products is already well developed.”

Either way, most analysts agree that the kingdom is not expected to gain WTO membership in the short to medium term. The question is ‘Why?’ Saudi Arabia, like the rest of the GCC states, brought its tariffs in line with the requirements of the customs union over the course of 2002, decreasing the rate from 12% to 5%, ahead of implementation of the union in January this year. Most imports were taxed at this rate, although other industries did continue to be protected by a higher tariff rate of 20%.

“Saudi Arabia, as part of its structural reforms is rewriting new laws, initiating new institutions, eliminating certain distortions in the market,” says Bu Hulaiqa. “We are serious and we are not doing this because we are dying to get into the WTO but because it is important and essential to the well being of the Saudi economy.”

Negotiations have stalled because of issues relating to agricultural subsidies and intellectual property. Saudi Arabia feels there is a lack of understanding by the WTO of its Islamic background and that it has received harsher treatment than other member states like Kuwait, which also has a protected banking sector. Fawaz Al Alamy, deputy minister for Technical Affairs at the Saudi Ministry of Commerce, declined to comment on the status of the negotiations, but was reported last year as saying pork and alcohol were stumbling blocks.

But Matteo Legrenzi, of St. Antony’s College, Oxford University says while, “There is still an understandable tendency in Saudi Arabia to protect their putative industries that were developed at a huge cost in past decades, other more flashy items, like the liberalisation of pork imports and such, that are often in the news, appear to me of negligible importance. The real issue is subsidy to local industries,” says Legrenzi.
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Changes in the insurance sector and legal system that do not conform to Sharia are also sticking points. “The WTO has been demanding from the Saudi side to modernise their legal system and bring it to par with international standards and also demanding the development of the regulatory framework,” explained Said Al Shaikh, chief economist at Saudi Arabia’s largest bank, National Commercial Bank. “They have insisted on the opening of more sectors of the economy and are not happy about the exclusion list that put 19 sectors in the negative list.”

The WTO also wants the kingdom to end the sole agency rules for the wholesale and retail sectors. “One of the more prevalent issues in the region is the idea of commercial agencies, whereby in order to be a commercial agent, for example in the UAE, the law stipulates that you must be a 100% owned company or a UAE national,” says Mona Ashour, attorney at Al Tamimi and Co. “There is a lot of debate over this as the law is in contradiction to the WTO. It puts a barrier on trade. But for the UAE and other Gulf countries, they do not have the obligation to delete those barriers because in their schedule of commitments they did not make the commitment at the time they joined the WTO. That is why they can get away with having this law still,” Ashour added. How this will be resolved and how the negotiations will play out, in the case of Saudi Arabia, remains to be seen.

The kingdom stands to benefit overall when it joins the WTO. In the short term, there are certain industries and companies that are not equipped to compete with international companies once subsidies and tariffs are removed. It will be very difficult for certain industries to compete with international players. “To resolve that, maybe there have to be some safety nets to help those industries to go through that process,” says Said Al Shaikh.

In the medium to long term, however, WTO membership will encourage Saudi companies to be more efficient, to diversify their products and services and in order to exist, they will have to make some gains in efficiency and explore regional and international markets, says Al Shaikh. “The consumer will benefit because they will have access to goods and services at cheaper prices, and the Saudi producer will be more attentive to consumers because of the international players,” explains Al Shaikh.

Saudi producers would have fewer obstacles in international markets once the kingdom joins the WTO. “If we look at the petrochemicals and aluminium that Saudi Arabia exports, once the kingdom is a member of the WTO, it will be able to demand the removal of barriers to their products in those markets of countries that are members of the WTO, but they cannot demand that now because they are not a member of the club,” says Al Shaikh.

Currently there is a 6% European Union duty on aluminium exports, but this should be eliminated once the negotiations go through, say analysts. For certain industries, there will be benefits, especially industries that have a high requirement for energy, where Saudi Arabia has a comparative advantage and the kingdom can utilise this advantage to its benefit much more in the future.

If the banking sector were to be open to foreign competition, and international players were able to come and provide services to Saudis, Al Shaikh believes this would increase the level of efficiency in the sector and make local players more attentive to their clients.
“Besides efficiency and the gains to consumers, joining the WTO will eliminate those that are subsidised and will allow the economy to grow faster, provide for a technology transfer and access to expertise and know-how,” Al Shaikh said.

According to Bu Hulaiqa, joining the WTO will boost Saudi exports by 10% per annum. “When it comes to trade, Saudi Arabia is an active party in international trade and the exchange both ways is close to US $ 100 billion,” he says. “The kingdom is investing heavily, not only in oil manufacturing. The total investment in non-oil manufacturing alone is SR50 billion and we believe joining the WTO will give Saudi products a chance to compete in the open market.”

For the GCC, the main benefits of Saudi WTO membership will derive from the negotiating power of the GCC rather than any direct trade gains, says Johnny Abedrabbo, a senior economist at the National Commercial Bank. “WTO accession will provide GCC countries, including Saudi Arabia, expanded market access for their petrochemical industries. Accession will also contribute to an improved regulatory environment and the structure of GCC economies.

One insider in the kingdom, told Arabian Business, “As soon as Saudi joins the WTO, I would expect to see a surge of investment in petrochemical facilities on the part of the big German chemical companies and European oil companies interested in integrating into petrochemicals, which would then be exported to Europe.” For the time being though, the Arab world has little clout in the WTO and the lack of co-operation continues to weaken its collective bargaining power.
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