Saudi Arabia’s New Tariff Rules Put It at Odds With UAE
The new import rules exclude free zones and products with Israeli components, as well as factories with less than 25% local workers
The Kingdom of Saudi Arabia has issued a new decree amending import duties from Gulf countries, in a move that observers say is aimed at separating the Saudi market from other Gulf states and putting pressure on the Gulf Cooperation Council countries.
According to the ministerial decree published in the Saudi official gazette, goods produced in free zones, many of which are located in the UAE, will be treated as foreign goods, and will be ineligible for customs tariff concessions. In addition, the Gulf customs agreement will not apply to goods that include a component produced in Israel or manufactured by companies wholly or partly owned by Israeli investors or companies, as identified in the Arab boycott against Israel.
Another part of the new regulation says that Saudi Arabia will exclude goods produced by companies with a workforce made up of less than 25% of local people, and industrial products with an added value of less than 40% after the manufacturing process from the GCC customs agreement.
This exclusion has come as a shock in Gulf circles, since factories in Gulf countries rely heavily on expatriate workers who work more cheaply, specifically from countries such as Bangladesh, India, Pakistan and Nepal, and who constitute more than 90% of factory workers due to their low salaries, according to statistics issued by the Gulf Statistical Center for the General Secretariat of the Gulf Cooperation Council States.
According to data issued by the Gulf Statistical Center, trade between the Gulf Cooperation Council countries – excluding oil – before the coronavirus pandemic in 2019, amounted to more than $73 billion, with an annual growth rate of 3.9%. Gulf countries also export among themselves 24% of goods of national origin, which is equivalent to a quarter of the total products exported by these countries, not including oil.
The decision to treat the goods produced in free zones as non-Gulf goods mainly targets the United Arab Emirates, as the UAE Jebel Ali zone is the largest free zone in the Gulf, and it exports more than 40% of its products to Saudi Arabia. The decision to raise customs duties on its products will lead to great harm in this region, according to economic observers.
Free zones, which are among the main drivers of the UAE’s economy, are areas where foreign companies can operate under light regulations and where foreign investors are allowed to fully own companies.
The kingdom announced the recent rule changes despite the UAE being Saudi Arabia’s second-largest trading partner after China in terms of the value of imports, based on Saudi trade data.
The UAE is also a major hub for re-exporting foreign products to Saudi Arabia, including Turkish goods that are subject to an unofficial embargo by Riyadh, according to official statistics.
In addition, the exclusion of products that contain Israeli-made components comes after the UAE and Israel normalized relations and have opened up to economic cooperation between the two countries.
The announcement of changes to Saudi tariffs comes amid sharp disagreements in economic relations between Saudi Arabia and the UAE, such as Saudi Arabia preventing its citizens from traveling to the Emirates in an attempt to stop the spread of the coronavirus, despite the fact that unofficial Emirati sources have responded that Abu Dhabi will be less harmed than Riyadh. Relations between the two countries also were tested this week over questions about extending oil production cuts in OPEC+.
Saudi strategic and economic analyst, Dr. Ali Al-Qurashi, told The Media Line that the new regulations “end a long period of unjustified courtesy and indulgence in opening our markets to far and wide without reciprocity, deviations and open tricks that are no longer acceptable.”
He added that “(t)hese rules come after years of problems with regard to the Gulf customs union and the insistence of some Gulf Cooperation Council countries to keep customs tariffs floating so that they can localize foreign industries and export them to the rest of the GCC countries as national industries on preferential terms.”
Al-Qurashi also said that: “The new fees fired a bullet of mercy at the attempts to disrupt the customs union by floating customs tariffs and benefiting from Saudi preferential treatment without bearing any consequences, and whoever wants a customs union after today must first abide by this regulation.”
The decision also gave the Saudi private sector “excellent competitive and protective conditions” in areas such as emerging industries, and will benefit both Saudi labor and Gulf labor in general, he added.
Article 18 of the resolution, which deals with free zones, “will kill the free zones that destroyed our local industries and flooded our markets by providing protection for national producers and importers from countries of origin from dumping on the Saudi market, which is pursued by the countries that surround us with free zones and covet preferential treatment for entry to our markets,” Al-Qurashi said.
Neither the United Arab Emirates, nor any other Gulf country, has issued official statements or amendments in their tariff laws in reaction to the recent Saudi decisions.
Saudi and Emirati social media influencers clashed over the new regulations as Saudi influencers tweeted attacks on the UAE and the goods exported from the massive Jebel Ali free zone in Dubai, including references to the export of 10 million fake cigarette packs from the Jebel Ali port to Saudi Arabia, while the Emiratis accused Saudi Arabia of starting to think “selfishly.”
Every country has the right to arrange its internal affairs and impose its laws, and merchants always adapt to it
Emirati economic analyst Saeed Rais told The Media Line that “the new import rules imposed by Saudi Arabia go in the opposite direction of the unity of the Gulf economy.”
“We strive for economic unity and the promotion of intra-Gulf trade, but such requirements may complicate matters. All Gulf countries depend on expatriate workers, and the conditions for having a quarter of the employment of citizens cannot be matched. Even in Saudi Arabia itself, the number of foreign workers inside factories exceeds 90% of the workers that are there,” he said.
“The Jebel Ali free zone will be affected, but partially. Certainly, investors there will find alternative markets for their products, but perhaps the Saudi citizen will also be affected by the rise in prices after raising customs duties on them,” Rais added.
“Maybe this will be a summer cloud and it will end soon,” he said. “It is true that the entire economy is affected by the repercussions of the coronavirus, but certainly the Gulf countries remain an economic force to be reckoned with in the world, and therefore, such things will certainly improve later.”
Meanwhile, Bahraini economic analyst Akbar Hussain told The Media Line that “Bahrain’s situation is different with Saudi Arabia, as the Saudis are Bahrain’s largest trading partner; but we in Bahrain have national workers everywhere, perhaps only some simple exports will be affected, but it certainly will not have a big impact.”
He added that: “Every country has the right to arrange its internal affairs and impose its laws, and merchants always adapt to it. There is nothing bad, and they always have a large profit margin that can cover the difference in customs tariffs.”