Following 12 years of negotiation Saudi Arabia was finally admitted into World Trade Organization last November. GMR assesses the immediate business implications.
Membership of the World Trade Organization (WTO) will bring significant changes to the way business is carried out in Saudi Arabia.
The government has already carried out a number of economic and judicial reforms to conform to WTO agreements and regulations.
It ensures easy access of goods and services to the Kingdom from WTO member countries. Customs tariffs will be lowered to the minimum. Procedures to license companies and businesses will be eased. Existing companies will face tougher competition. Some small-scale companies may be merged or shut as they may not be able to withstand the competition. Marketers can now find a different market in Saudi Arabia with lot of opportunities. They should device new strategies to face competition. Saudi Arabia will also benefit as its products will be able to enter new markets, trade barriers of its petrochemical exports will disappear and trade exchange with other countries will increase and facilitate transfer of technologies from industrialised countries.
Saudi Arabia won accession to the WTO in November, 2005 after 12 years of intensive negotiations. The Saudi stock market, the largest bourse in the Middle East in terms of capitalization, reacted positively to the long-awaited good news with its index surging to unprecedented levels (although it fell heavily in March).
Financial analysts believe that more benefits are on the way as soon as trade barriers to Saudi petrochemicals fall. They also expect greater inflow of foreign direct investment (FDI) into the country.
Insurance
WTO accession resulted from economic reforms and trade liberalization efforts in recent years. The Kingdom gave the green light to foreign insurance companies to have full presence in the Saudi market and operate its branches directly. The government will permit foreign insurance companies to establish locally incorporated cooperative insurance joint-venture companies. It has limited the ownership of foreign partners in joint-venture insurance companies to 60%.
Banking
Banking is another field to receive a greater boost as the sector is now open foreign competition.
Foreign banks are permitted to either form local joint-venture companies with an increased foreign equity cap of 60%, or to open direct branches in the Kingdom. The government has allowed asset management and financial advisory by non-commercial banking financial institutions. It has also allowed foreign financial institutions to engage in financial brokerage.
Telecoms
Major changes are expected in the telecom sector with the offer of 70% foreign equity ownership in the sector within three years from accession. The government will apply this commitment to the standard telecom services and to the value-added telecom services. The protection of intellectual property rights (IPR) under WTO rules would encourage big international IT businesses to enter the market.
Technology
As a direct result to Trade-related aspects of Intellectual Property Rights (TRIPS) agreement, Intel Capital, the investment arm of Intel Corporation, the world's largest computer chipmakers, announced that it is teaming up with the Saudi Arabian General Investment Authority (SAGIA) in establishing a $100 million venture capital fund to invest in technology companies that are operating in or connected to the Gulf and Saudi market.
The Saudi minister of Commerce and Industry, Dr Hashim Yamani, who led the Kingdom's WTO negotiation team, says Saudi Arabia would benefit hugely from the WTO accession. "There is no country that has not benefited from joining the trade organisation which grants member countries a number of privileges including the entry to most international markets.
"WTO provides its members the right to block any commodity from outside that poses a threat to the moral values, security or health of the people in that country."
Yamani also says that the Kingdom would have tremendous influence on the WTO over the next five or six years.
"Saudi industrialists should reinvent themselves to work efficiently in the light of the stiff competition from outside. This is all the more important as most of the countries are keen to gain entry to Saudi market with the aim of investing in various projects," he says.
According to Dr Yamani, the WTO has no power to control soaring oil prices.
Dr Fawaz Al-Alamy, deputy minister of commerce and industry, who led the technical team during WTO talks, believes that the Kingdom can leverage its membership by gradually opening up its economy and creating better atmosphere for FDI.
"The Saudi economy is ready for the globalisation challenges because the Kingdom fully supports free trade principles," he says.
Tariff levels are very low in the Kingdom compared to other countries in the region. Moreover, there are no technical trade barriers in the Kingdom since it does not implement quota restrictions. Saudi's trade position is robust as: "the percentage of the country's trade to its gross domestic product (GDP) is at 70%," says Al-Alamy. "WTO is an advantage to the Saudi economy because most of the world economic activities in all aspects take place within the economies of member countries," says Al-Alamy.
According to WTO statistics, 90% of international trade along with 96% of international financial transactions occur within the economies of its member countries.
"FDI is a key source for increasing the Kingdom's GDP growth rate, and the WTO agreements will help to increase the flow of FDI into the Kingdom," adds Al-Alamy.
Saudi Arabia aims to attract $624 billion of FDI into the country in the coming years.
Harsha Singh, deputy director-general of WTO, has emphasized the significance of the WTO membership of Saudi Arabia being the world's largest oil exporter and the world's 33rd largest merchandise exporter.
"There are fears among many that large economies in the organization are capable of hijacking the WTO's dispute-settlement mechanism to their advantage, but this is not true," Singh told the Jeddah Economic Forum.
Developing countries can use the dispute-settlement mechanism to file cases against developed countries thus protecting their rights while seeking fairer trade, he adds.
But many small-scale businesses and industries are worried about the WTO accession, fearing that they would not be able to stand up to tough competition from international giants. Small and medium-size family businesses that form the lion's share of the Kingdom's business sector are likely to suffer the most as a result of foreign competition. Dr Anwar Eshgi, chairman of Middle East Strategic and Legal Studies Center, has stressed the need for restructuring businesses to face the WTO challenge.
In order to survive and compete in the new environment after WTO accession, Dr Ali Lutfi, former Egyptian prime minister, advised family businesses to develop their abilities and production quality; to merge with other similar companies; to go in partnership with foreign companies; to balance the business financial needs and the family financial needs; to arrange for a smooth power transition within the family; to allow for more than one owner; and to involve women in the business to guarantee a continuation of ownership. Lutfi made this proposal while addressing a family business forum in Jeddah.
© Gulf Marketing Review 2006
