Saudi Arabia Joins WTO

After twelve long years, Saudi Arabia became a member of the World Trade Organization on November 11, 2005.  Formal accession to the world body occurred on December 11^th after the 148 WTO members unanimously voted in favor of Saudi membership.  This is a momentous achievement for the Kingdom which has always based its national economy upon trade and private enterprise.

Second only to China which took 14 years to attain WTO membership, Saudi Arabia was the only Gulf Cooperation Council member outside the WTO.  As the world’s 13^th largest exporter, the 23^rd largest importer of goods, and the 36^th largest importer and exporter of services, the Kingdom concluded bilateral agreements with WTO member nations on a variety of trade issues. 

During the past few years, the Kingdom has undertaken an ambitious program to reform and restructure the rules governing its economy.  Within the past five years, nine regulatory agencies have been established and over 42 trade-related laws have been enacted to meet the challenges of an increasingly global economic system.  The  Saudi government has worked very hard to diversify the country’s economy in order to reduce its dependence on oil exports.  With WTO membership, it is anticipated that many non-oil-related sectors of the Saudi economy will flourish.

During the accession process, Saudi negotiators answered more than 3,400 questions and produced over 7,000 pages of documents dealing with every aspect of the country’s economy.  As the world’s most influential trade organization, the WTO accounts for over 97% of global trade.  It was a matter of necessity, not choice, that made the Kingdom work so hard to attain WTO membership.

Had the Kingdom remained outside the WTO, its strategy for diversifying its oil-dependent economy would have been endangered.  Without WTO membership, any nation could impose restrictions on Saudi exports or on Saudi investments.  The Kingdom would have remained subject to the whims of other countries’ arbitrary customs rules and restrictions.  Instead, as a WTO member, Saudi Arabia will be subject to the same rules as the other 148 member nations.  Predictability and transparency of foreign trade and investment will encourage all parties to deal fairly with one another.  Every major change in trade regulations must be announced in advance, and any aggrieved country can seek redress through the WTO appeal process.

Each WTO member must treat all other member countries in an unconditionally non-discriminatory manner under the Most Favored Nation rule.  If one member reduces tariffs or trade barriers for another member, it must do the same for all other WTO nations.  Additionally, WTO membership demands National Treatment, meaning that foreign goods are to be treated no less favorably than domestic goods.  Finally, a WTO member can only use tariffs to restrict imports and must maintain a schedule of limited tariff rates which are clear to all other member nations.

Saudi Arabia committed itself to lower trade barriers and increase market access for foreign goods over the next ten years.  The Kingdom also agreed not to maintain any export subsidies on agricultural products.  Foreign companies may now own up to 60% in joint-venture insurance companies or banking institutions.  Within three years, the Kingdom must open the country’s telecommunication sector to as much as 70% foreign equity ownership.  However, despite WTO membership, certain sectors – such as Haj and Umrah and land transportation – will remain closed to foreign investment.

A good example of the benefits of WTO membership is in the area of intellectual property rights.  The Kingdom agreed to a number of technical standards and rules that are designed to protect technological investments.  As a result, Intel Corporation, the world’s largest manufacturer of computer chips, will establish a $100 million venture capital fund to invest in technology companies that are connected with the Gulf and Saudi markets.

Saudi negotiators made certain that certain religiously forbidden goods would not be allowed to enter the Kingdom after WTO accession.  Specifically, alcohol, pork products, pornography, and other goods contrary to Islam are prohibited, notwithstanding the free trade objectives of the World Trade Organization.

Not all Saudi businesses welcome WTO membership, primarily due to fear of increased foreign competition.  This is especially true in the services sector.  However, the reduction or elimination of trade barriers is expected to provide more opportunities for local companies to offer their goods and services outside the Kingdom.  Saudi corporations that fear these challenges will have to change their way of doing business if they are to remain competitive.  However, most commentators believe that Saudi businesses generally will benefit as a result of more open markets among WTO member nations and will adapt their operations to become more efficient and cost-effective.  As this occurs, Saudi citizens also will benefit in purchasing goods and services at lower prices. Local Saudi chambers of commerce are now gearing up to educate local companies on the opportunities inherent in WTO membership and to assist them in streamlining their operations to compete with foreign concerns.

WTO membership is expected to have a positive effect upon banking, insurance, and telecommunications in driving additional growth in each of these sectors.  In the short term, local petrochemical producers and service companies may experience lower profits, and it remains to be seen how adept these companies will be in adjusting to these new market conditions.  Overall, however, Saudi companies should thrive as a result of WTO membership and as local companies enter into joint ventures with foreign businesses.