Wheels turning over for Saudi industry

The big picture

More countries in the world are members of the World Trade Organisation than are not. It's partly testimony to the insistent properties of market forces that the ancient principles and practice of free trade have become so entrenched. Partly, it's collective political will. The modernistic, brave-new-world experiments in state domination and economic self-sufficiency of the last century seem to have mostly fallen by the wayside.

Of course, it's not quite as simple as that. China's storming entrance onto the world stage may be capitalist in appearance, but it certainly has significant elements of 'command and control' about it. The EU is still obsessed with matters of supranational architecture, regulating everything it can think of, with protectionist and some Utopian instincts.

Yet both China and the countries of Europe belong to the WTO, an entity dedicated to liberating trade and investment, on the understanding that benefits should accrue to all. This body, now heading for 150 members upon the completion of talks with Tonga, institutionalises the concept of 'comparative advantage', the idea that everyone wins if countries concentrate on their best abilities.

It doesn't mean that the market determines everything, like the law of the jungle. Any market needs protecting from itself, since the stronger are tempted to dominate the weaker.

Government still has to be around to determine the rules of the game, so that the benefits of freedom and competition are not twisted and destroyed by the selfish instincts that can pollute any system.

Thus, the WTO provides a framework for the gradual, consensus-based implementation of a supervised market. Because it is an instrument of globalisation, there are those who mistrust or simply dislike its motivations. Some will never like the capitalist ethos, full stop. Those countries which get on board, however, have their own reasons for doing so.

Saudi Arabia, the 149th member, was the last of the Gulf states to make that step, joining in December 2005 following twelve years of negotiations. (China, incidentally, took 14 years.) It did so in the knowledge that its priorities could remain its own affair, and that the potential gains it can make from taking a more engaged position towards the rest of the world are very substantial.

Certain facts remain. While, in common with GCC partners, diversification and privatisation are being pursued to broaden the productive base, Saudi Arabia's economy continues to be dominated by its monumental energy resources, strategically therefore retained by the state.

That said, the government is now ready to take matters forward to the next development stage. With 25 per cent of the world's oil at its disposal, and producing around 10 million barrels per day (earning $180 billion per year at $50 per barrel), obviously a stronger financial foundation is being created for growth in any case, irrespective of joining international clubs.

However, accession to the WTO provides the means whereby the Kingdom's special asset can be employed to best economic effect, namely in providing the cheapest feedstock on the planet for derivative industries, whether for domestic provision (e.g. electricity and water) or for export (particularly petrochemicals), without upsetting its trading partners.

How it works

The rationale for Saudi Arabia's WTO membership was discussed last month in a paper presented to a regional conference in Cairo.* The authors made clear their precept that a rules-based, multilateral mechanism, with a dispute settlement function, makes for mutually cooperative policy behaviour. Orderly conduct of the system was "self-evidently important" for international civil society.

On the issue of sovereignty wherein infringement of basic Saudi Arabian concepts had been cited as a delaying factor, for instance in terms of unacceptable products it was explained that absolute uniformity of national regulations, such as unhindered access for all imports, was not a requirement.

Instead, what is required is no discrimination between domestic and foreign operators. In this regard, members in fact exhibit a "striking diversity" of policies, including tax rates, public spending, labour bargaining systems, and cultural protection schemes. The maintenance of national preferences and standards is therefore not refused.

Furthermore, the WTO does not prohibit all industrial protection, but allows government funds to be used for adjustment assistance, provided it does not also subsidise production. In fact, liberalisation itself is "expected to be incremental in nature and scope", by agreement, not a sudden, unilateral, blanket imposition.

We get the message. For those in doubt, the authors provide guidance on what entering the WTO does and does not imply (see box for an abbreviated version).

Clearly, though, the basic notion behind membership is that trade and investment barriers and distorting market interventions have to be steadily dismantled, with fair and transparent administration. In the case of Saudi Arabia, it is felt that (owing to low tariffs already prevailing) the costs of restructuring should be limited, both for business and government finances.

Moreover, the reduction of subsidies on consumption items (particularly electricity) and water for uneconomic agricultural output can be offset by higher social spending in other ways. The paper indicates that Saudi Arabia's accession may boost GDP growth by an average 0.6 per cent per year during 2006-15 against a hypothetical baseline case. In this sense, it "does not erode but, rather, enhances the capacity of governments to promote public interests".

Certainly, both international observers and the Saudi authorities appear delighted with the decision to join, and the possibilities it introduces.

What it may mean

An example of how perspectives have changed abroad came in a gathering recently in Washington DC. The US had been last to sign a bilateral understanding with Saudi Arabia, stuck on issues such as the 'negative list', the 2001 proclamation of sectors in which foreigners could not participate, and procedural verifications.

A panel was assembled by the Saudi-US Relations Information Service (SUSRIS) under the auspices of the Middle East Policy Council, an American think-tank. In what was effectively a private discussion, it gave some interesting insights to the accession process and decision, and its meaning.

Without accrediting individual remarks by the assembled former diplomats, trade and legal representatives, and other officials, we can gauge the general view. It was said that Saudi Arabia "took the steps they wanted because they're going to win", and that by "embracing international norms" a "real commitment" had been made to reform which would generate "countless opportunities" for locals and foreigners alike to pursue business.

A source intimately engaged in the negotiations confirmed that in respect of tariffs, quotas, bureaucratic impediments, the agency system, agriculture, services and intellectual property rights, "transformation [has] occurred across the board". At the same time, the application of the agreement's assorted clauses would not occur straight away, but take time (as it has in China), in accordance with custom.

There seemed to be a confidence that the principle of 'national treatment', i.e. a level playing-field for all-comers, would be upheld. At the same time, it was not an open-and-shut deal. On the one hand, elements of business risk might remain; on the other, reaching the WTO landmark itself would bring further bilateral agreements (investment treaties and FTAs) into view.

Particular note was made of the enormous potential in petrochemicals. An academic pointed to the difficulty of accessing the European market, where Germany especially had resisted incursion. Saudi Arabia's exceptionally cheap inputs from oil and gas makes it a commercial threat.

With fast-growing Saudi industry gearing itself for Chinese demand and liable to absorb all local product, the charge that the industrial giants Saudi Aramco and SABIC should not engage in double-pricing (discounted at home, i.e. below world export prices) will simply no longer apply. In that event, WTO rules would become an irrelevant constraint.

The resulting opinion was that the opportunity now existed to develop enormous export capacity. Petrochemicals output is already "increasing by leaps and bounds", and by 2015 Saudi Arabia would rise from seventh to first place, producing over 100 tonnes per annum. Other sectors (e.g. cement, steel, aluminium) would advance too.

Plans in action

From the Saudi Arabian viewpoint, the positive aspects of the WTO deal, and the associated resolution towards openness and progression under King Abdullah, have come firmly to the fore. Amid the Gulf region's oil-driven buoyancy, and (it may be said) Dubai's overt example of commercial acumen, a mood of optimism and intent has taken a firm grip.

Prior to accession, the prospect of a competitive environment seemed to provoke consternation about Saudi business, whether in banking, insurance, telecoms or distribution services. While some concern persists, particularly for smaller enterprises, attention has switched to the prospect of massive inward investment and economic expansion.

Leading officials have certainly made plain their intention to capitalise on the leverage which accession can bring. Chairman of the Saudi Arabian General Investment Authority (SAGIA) Amr Al-Dabbagh was not only indicating expectation but putting out the welcome mat in the remark: "Accession will significantly enhance FDI. [It] is crucially important for the Kingdom."

Indeed, the plans have been in place for some time. SAGIA was created in 2000 precisely for the investment push getting under way. The numbers involved are truly gargantuan. Funds are now actively being sought for projects worth over $600 billion in petrochemicals, gas, electricity, water desalination and railways. In fact a total $1 trillion has been mooted over a 20-year timeframe.

Despite the surging liquidity already present in the Gulf, foreign investment is still desirable, since it brings technical expertise and knowledge transfer. In fact, it is an explicit objective to make Saudi Arabia a top-ten global FDI destination within five years. It could happen, just as it has in China. The latest figures in 2005 (H1) showed a phenomenal 1670 per cent increase on the previous year at 65 billion Saudi riyals ($17.3 billion). And this against a background of FDI soaring worldwide, estimated by UNCTAD at $897 billion (up 29 per cent year-on-year) in 2005.

Just as impressive as the data, however, is the ambient mood, the government commitment and the dialogue it is generating. Al-Dabbagh's marketing seems rooted solidly in a core belief in the merits of the market and international interaction. "Economies today are driven not by import-substitution [but] by export-oriented strategies. Economic reforms are a process [where] to remain ahead of others in terms of ... competitiveness .. you have to constantly improve."

The evidence is stacking up. Last year Jubail Industrial City, already the world's largest civil engineering project, attracting $46 billion of investment so far, was identified by a specialist Financial Times magazine as having the best potential for FDI in the region. Boosted by investor-friendly legislation, a $3.8 billion expansion phase (JIC2) has been initiated.

Most recently, the proposed King Abdullah Economic City launched last month promises a stunning, multi-purpose, $27 billion private-sector development beside the Red Sea. Notably, its announcement was timed to coincide with WTO entry, and the banner thereby unfurled for the rest of the world to see.

There's no doubt about it. It's not just a pipedream. Wheels have been set in motion. Saudi Arabia means business.

* Saudi Arabia's long road to WTO membership: the potential payoffs, by Mohamad Abdelbasset Chemingui and Raed Safadi, Economic Research Forum, December 2005

WTO GUIDELINES

What is concerned....

• goods and services trade, and national systems for protection of trade-related intellectual property rights
• regarding goods -- (i) external: tariffs, non-tariff measures like customs fees and valuation procedures, rules of origin, subsidies, anti-dumping, import quotas and bans; (ii) internal (imported products): taxes, charges and regulations affecting competitiveness
• regarding services -- provision across borders, regulation thereof, presence of foreign suppliers, access to connection facilities
  

What WTO does....

• require publication and transparent administration of measures, with schedules showing binding ceilings for tariffs, subsidies, and limits to market access
• require non-discriminatory application externally and internally
• allow qualified exceptions in case of most-favoured-nation (MFN) deals, i.e. FTAs and customs unions
  

What it does not....

• define or seek to curtail trade or non-trade national objectives
• require all import barriers to be eliminated
• stipulate exact procedures or uniform set of regulations
• define reduction of tariffs or other barriers
• prohibit public spending on all preferred activities
• require acceptance of other countries? product or service standards

Source: see asterisk