Made in USA: A hard sell?

Is the massive recent slump in US-Saudi trade merely a case of the natural business cycle, or are other forces to blame for the decline?

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By  Massoud Derhally Published  July 30, 2002

|~||~||~|Saudis and expatriates still talk of campaigners standing outside American fast food chains and supermarkets, handing out flyers, and encouraging Arabs to boycott American products. Consumers in the kingdom have reacted to the escalation of violence in Palestine and perceptions of western collusion with Israel—reflecting an upsurge of political consciousness. American goods are being replaced with Japanese and European products, resulting in a sharp decline of US exports to Saudi Arabia, according to analysts and economists.

People are not just boycotting Starbucks, Coca-Cola, Pepsi, McDonald’s, Johnson & Johnson, and American movies, but also opting for homegrown alternatives like the Iranian soda called ZamZam. “The public is intentionally trying to avoid buying American products,” a member of the ruling Al Saud family told Arabian Business. “There are a lot of scenes where you get people protesting saying, ‘Starbucks we don’t need your coffee’ or vandals who come and write things in paint. There is definitely an anti-US sentiment. We have people openly calling for a boycott of US products and this has been on the street, on television and in newspapers.”

The most recent US department of commerce figures show US exports to the kingdom for the first quarter of 2002 dropping to US $985.9 million, marking a 43 percent decline from US $1.739 billion in the same period a year earlier. Saudi exports to the US for the first quarter of 2002 were US $2.44 billion, down 35 percent on the previous year. If the current trend continues, the problem could be immense for the kingdom’s economy, already suffering from anaemic growth, a staggering US $170 billion in debt—equivalent to nearly 100 percent of gross domestic product (GDP)—and unemployment of an estimated 20 percent.

Some analysts say there is no direct correlation between the current decline in US-Saudi trade and the grassroots boycott that has gathered momentum since the Palestinian intifada started in September 2000. Brad Bourland, chief economist at Saudi American Bank, believes the current figures do not paint an accurate picture of the flow of trade between the US and Saudi Arabia.

“My first inclination is to say that there was a lumpiness in the first four months of last year [2001], that we need to take out of the picture, so we get a true year over year picture,” Bourland told Arabian Business. “If it includes services then the decline makes sense to me, because a service can include a Saudi buying airline tickets to go to the US, or spending money on tourism. Saudi travel to the US is way down. Any kind of purchases associated with that typical travel would be way down.”

Others maintain the decline in first quarter US export figures to the kingdom does not imply that politics have influenced economic relations. They explain the decline in technical terms like a declining value of a currency or a reduction in oil production. “US-Saudi trade may fluctuate from year to year due to the price of oil, which influences the Kingdom’s expenditures and other economic factors in both countries,” Judith Kipper, co-director of the Middle East Program at the Centre for Strategic and International Studies in Washington D.C, told Arabian Business.
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Nor does grassroots action in the Arab world influence US policy, she says. “Boycotting American consumer products is not going to change either US or Saudi policy. While Saudis and other Arabs may have genuine differences with the United States on policy issues, the misinformation and conspiracy theories circulating in the region and in some media outlets are provocative and tend to obscure the real issues. Saudis and other Arabs, as well as the United States, need to pay more attention to understanding each other. Different systems, culture and even values require tolerance and understanding, not boycotts,” added Kipper.

A lower price of oil and a reduction in OPEC output could certainly explain why Saudi export figures to the US show a 35 percent decline for the first quarter of 2002 compared to the first quarter of 2001. It is noteworthy that as of May 2002, Mexico replaced Saudi Arabia to become the principal supplier of crude oil to the United States, according to the U.S. Energy Information Administration.

But according to Bisher Bakheet, managing director of Saudi based Bakheet Financial Advisors, Saudi Arabia has nothing to worry about. “It does not make a difference if the US relies less on Saudi oil. The minute the US begins to rely less on Saudi oil, you have other countries who will rely more and if Saudi oil output is reduced it will reduce the overall supply and the price will go up.”

Although Bakheet believes technical factors like the exchange rate or the price of oil could explain the drop in US-Saudi trade, he also believes a widespread grassroots boycott has played a stronger role in defining the current flow of trade. “It is definitely a political issue at stake and not a technical one. I think the figures are starting to show now and will get much worse as time goes on, unless US foreign policy towards the Palestinian issue is more balanced,” explained Bakheet.

Fraught ties hit travel, business relationships

Tighter US domestic security measures have had their effect too. In the aftermath of the September 11 attacks, Arabs certainly felt they were under intense scrutiny when travelling to the US, and many still feel the same way today. With visa applications at US embassies taking up to 4 weeks and the chance of being fingerprinted on arrival at US airports, Arabs today are increasingly looking to travel in the Middle East, Far East and Australia.

“While the destinations keep changing in the instance of Saudi Arabia, the recent political scenario has triggered off various changes in the travel patterns,” says Amin Ahmed, regional marketing manager of Kanoo Travel, the region’s largest travel agency. “A lot of people are not going to the west because they don’t feel very comfortable and those who used to travel for education purposes, are now heading for places like Australia. Even tourism is heading towards the Far East and Australia,” Ahmed added. Travel to the US from the region is down 50 percent and travel from the US to the region is down 10 percent, according to Ahmed.
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While many would like to discount what some see as a direct link between economics and politics, statistics tell another story. According to US official figures, American exports to the Kingdom between September 2001 and March 2002 plummeted by percent. For the month of April 2002, which coincided with an escalation of violence in the Palestinian occupied territories, US data shows a 39 percent decline in US exports to the kingdom from the same month a year ago of US $594 million. The latest figures come on the heel of waning sales at US branded fast food chains that reported sales declines of 20 to 45 percent in the first half of 2002. This is in addition to Saudi citizens seeking out Japanese and European products when they go shopping at supermarkets.

“The US government is not helping today. Your Gulf businessman is not willing to travel to the US any more, especially when, each time you open the television, you see how they [Arabs] have been treated in the airports and how Arab American citizens are being treated by their own government,” explains Bakheet. Trade between the two countries, according to Bakheet, will be affected with time, as family businesses in the Gulf lose their business contacts in the US and eventually decide not to do business there any more. “The US is concerned with its security, but at the end of the day they are also paying for it with people avoiding going to the US,” says Bakheet.

One salient example is that of Saudi Prince Amr Al Faisal, who cancelled his partnership with an American company to protest American support for Israel. There are calls from various quarters in the Kingdom to reinstate the boycott against all companies doing business with Israel. Saudi Trade Minister, Osama Faqih, warned Saudi companies against importing goods from 12 Egyptian agricultural and tourism companies accused of dealing with Israel, in comments published in the daily Al-Jazira on July 13.

Is there a resounding indication as to what one might make out of current US-Saudi trade relations? According to a senior source at the US-Saudi Business Council in Washington D.C. there is nothing to worry about. “When it comes to trade in Saudi Arabia we don’t look at quarters because it varies from year to year. We have to look at the entire year,” said the source. When asked if the decline in exports from the US was a result of a boycott, the source said, “There is no organised boycott campaign—this is just sentiment.”

But sentiment carries weight. “Our franchises are not doing well and sales figures are down an estimated 40-45 percent in Saudi,” said a senior executive at Americana, the Kuwaiti-based food conglomerate, which has exclusive rights to operate KFC, Pizza Hut, Hardee’s, T.G.I. Friday’s and Baskin Robbins outlets across the Middle East. The executive went on to say that out of the entire Gulf market in which Americana operates, Saudi Arabia has suffered the most. Americana has been at pains in emphasizing it is an Arab company. Throughout the duration of the World Cup, the company invested heavily in a media marketing campaign that said Americana is an Arab company 100 percent.
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Consumer products have also been affected. “The Saudi-American relationship is money for oil,” says the Saudi prince, “and the private sector is being hit by the current boycott. There is no need to stack up on goods because inventory is not selling,” he explained. Ahmed Linjawi, external relations manager for Procter & Gamble’s joint ventures in Saudi Arabia told the Wall Street Journal two months ago that he expected the boycott to have an impact on his sales and his biggest concern was the company’s image in the Saudi market. Procter & Gamble products at the time, such as Pampers diapers, were reported to be down 30-40 percent in a large Saudi supermarket chain.

“We no longer have a lot of allies in the media or government or academia. They say it’s hard to help. They are staying quiet,” Linjawi told the Journal. While Arabian Business was unsuccessful in reaching Linjawi, we did speak to Turki Bin Moammar at the Modern Industries and Modern Products Company, a joint venture of Procter & Gamble, who said Linjawi, had been misquoted by the Wall Street Journal.

“Both companies are Saudi companies with two manufacturing facilities in Jeddah and Dammam, in which we manufacture 14 brands. There are more than 2000 Saudis and Arabs who stand behind the manufacturing, marketing, and distribution of these brands,” explained Bin Moammar. “P&G is our joint venture partner which brings us the technology and the expertise. While some individuals tried to include some of our brands in the boycott calls, we actually saw our sales to date grow. This is because consumers know these brands for many years and they know that they are proudly made in Saudi,” Bin Moammar added.

US companies hold strong market share in the automobile sector in Saudi Arabia and other Arab countries. “If the sector becomes susceptible to political tensions, then US-Saudi trade could be hit,” a respected Gulf economist, who spoke on condition of anonymity, told Arabian Business.

“They [American companies] have spent a great deal to capture that market share, and if Arabs are serious about the boycott and begin not to buy American cars then surely that will hurt them,” said the economist. Saudi Arabia imports around 200,000 cars yearly, 50,000 of which come from the US. “If a boycott takes shape on American cars without a doubt it will have an effect as the Middle East market as a whole represents a sizeable market. Such a public boycott and the willingness of individuals to boycott as a matter of principle will have an impact,” explained the economist.
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According to official figures from the US department of commerce, US exports of machinery and transport equipment to Saudi Arabia for the first quarter of 2002 were US $544 million, down 53% from the first quarter of 2001. While we could not gauge accurately if sales of US cars in the Kingdom have declined, some analysts believe the scope of items on the boycott list is expanding. “The boycott is not a government based boycott, but a grassroots one. Any product that is American made has been boycotted by the average citizen and that has included American-made cars,” explains Bisher Bakheet of Bakheet Financial Advisors.

Yet senior economist, Muhammad Malick, at National Commercial Bank in Saudi Arabia, says he has not seen a substantive change in year-on-year car export statistics. “After September 11, certain import orders were dropped or delayed, and while investment in machinery, capital goods and cars was low in the first quarter of 2002, car imports are still about SR 1 billion [US $266 million] a month,” Malick said.

Do Malick’s surprising statistics on car imports suggest that US-Saudi trade could recover soon? For that picture, we’ll have to wait for end-year trade figures.

But the evidence suggests that politics are indeed behind the 43% slump in US exports to Saudi Arabia. After all, figures for the first quarter of 2002 compared to the same period a year earlier, show a rise of 20 percent in Japanese exports to Saudi Arabia, increasing from US $731 million to US $877 million, according to Reuters.

The latest reports from the French embassy in Riyadh show French exports have also increased, to 533 million euros for the first four months of 2002, up 12.9 percent from the same period a year ago. British exports rose to 339.6 million pounds during the first four months of 2002, a 12 percent increase from a year earlier, said Tareq Al Sharafa, commercial officer at the British embassy. German exports for the first quarter of 2002 rose to 779 million euros, an increase of 12.65 percent from the previous year, according to Oliver Parche at the German Saudi Arabian Liaison Office for Economic Affairs in Riyadh.

“We have a private sector that buys consumer goods like cars, clothing and food products, and if people are not buying then it makes no sense for merchants to stack up. This is precisely what is happening,” says the prince.

“I don’t think Saudi Arabia as a government is trying to get back at the US by cutting back on exports or imports. If anything, the government is trying to win their trust back. Crown Prince Abdullah has been very outspoken, and Bush may admire a lot of the things he says, but not congress, which has gone so far as to divide the kingdom’s importance in terms of provinces, saying that it only cares about the eastern region,” added the prince.

Is politics affecting US-Saudi trade? For now, it would appear so. —Massoud A. Derhally

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