The Impact of WTO on Saudi Arabia

Khan H. Zahid
Publication Date: 
Mon, 2005-09-19 03:00

RIYADH, 19 September 2005 — The recent signing of a landmark bilateral trade agreement between the US and Saudi Arabia could not have come at a more opportune moment in view of our recent analysis of Saudi imports. More than ten years after Saudi Arabia applied to join the World Trade Organization (WTO), and after years of protracted and difficult negotiations, Saudi Arabia finally signed a bilateral trade agreement with the US, the last stumbling block to the Kingdom joining the WTO.

For Saudi Arabia, WTO became a symbol of international respect/acceptance as it was the only GCC country and the world’s largest oil producer, not in the WTO. Saudi Arabia initially did not join GATT, the WTO’s predecessor global trade agreement because oil, its sole export at the time, was not part of GATT (still not part of WTO). Later, as the Kingdom developed its downstream oil and petrochemical capacity (SABIC), joining WTO became a key imperative in order to protect its exports from inordinate tariffs by mature, high-cost producer countries.

Unfortunately, the WTO entry rules, as they are written, are not easy for new aspirants. Any applicant would have to sign bilateral agreements with any WTO member country that requests one and those terms would then have to be extended to all other WTO members. Then, a multilateral agreement would have to be signed with all member countries before it is accepted into the WTO.

Around 40 countries asked for bilateral agreements with the Kingdom, the most difficult of which were the US and the EU. Issues included, for example, that any US company with an interest could submit queries or demands that the Saudi side had to address. The first offers by Saudi negotiators were also an issue as was Saudi Basic Industries Corp.’s (SABIC’s) access to feedstock at below world prices.

Over time, new issues arose (foreign investment, agricultural subsidies, copyrights, financial services). Many wonder, “Wouldn’t the WTO swamp Saudi Arabia with cheap foreign imports, destroy local industries and exacerbate the already difficult unemployment situation?” WTO membership will have some negative effects in the short term, but, in the long run, it will benefit producers and consumers alike. The WTO is like medicine. It is painful to swallow but it eventually makes you better. WTO-bred competition will make Saudi companies lean and mean fighting machines that can compete anywhere in the world. And, Saudi consumers will enjoy a wider range and quality of products and services at lower prices.

Long-term, it will open up the Saudi economy to greater transparency, protection of copyrights, rule of law, and more foreign investment. At the same time, it will allow Saudi exporters equal/non-discriminatory access to WTO countries. The full impact of WTO will be a long and unfolding story for the country. We still need to know the details of the final agreement. WTO has given other countries long implementation periods and many exceptions. Also, we have to see what the final Saudi offer is in terms of tariffs, sectors, binding rates, etc. With this report, we start a series on what the WTO means for Saudi Arabia. To our knowledge, there has been little discussion about many aspects of the WTO. Our purpose will be to educate, inform and analyze. We will look at what the WTO is, what are its requirements and what benefits it offers member countries. We will review the future of the WTO and the key issues yet to be resolved (e.g., agriculture, services, labor, subsidies).

(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)

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