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Gulf economies: give us room to trade.

The private sector in Saudi Arabia claims that it is eager to broaden its horizons overseas. The obstacles in its path are protectionist barriers in Europe and the slow pace of Gulf economic integration. At the same time, argues Mushtak Parker, all Gulf countries are anxious to increase overseas investment in their own economies.

WHILE GULF COOPERATION Council states will continue to boost bilateral relations with individual European Community states, prospects for the signing of a free trade agreement between the GCC and the EC by the end of 1992 are bleak. This was the view expressed to The Middle East by both Mohammed al Musallam, Saudi Arabia's assistant deputy minister for industrial affairs at the Ministry of Industry and Electricity, and the influential private sector businessman, Abdullah Dabbagh, the secretary-general of the Council of Saudi Chambers of Commerce and Industry.

EC tariffs on Gulf petrochemical exports and the absence of a GCC customs union are the major stumbling blocs. With little sign of agreement on the petrochemical tariff issue (partly because of powerful lobbying by European chemical unions) the issue of a free trade accord, says Al Mussallam "will drag on as long as the petrochemical issue is not resolved."

However, he differs with Dabbagh on the question of a customs union. The GCC governments do not see this as a problem and expect to have "a customs union in place within the next two to three years."

The private sector, on the other hand, wants greater urgency. "The GCC is supposed to be one market soon," comment Dabbagh. "It has taken steps towards that goal, although the customs union is not in place yet. Hopefully in the next summit meeting this will be agreed and then implemented as soon as possible. According to my sources, the Europeans are stipulating that there is no possibility of signing a free trade agreement without the customs union in place. I can see the validity of the point. If you want to deal with one market and unless you have a customs union, there won't be one."

Both reacted strongly to the "infamous" carbon tax proposals of the former EC environment commissioner, Carlo Ripa de Meana, stressing that the Gulf states believe in a clean environment. "But why should a sector - whether it is oil or coal - pay the price for a problem caused not chiefly by it but mostly by other sectors. How come they are not taking their part of the burden in taxation. Why put all the burden on petroleum and coal?" Dabbagh asked.

Both warned that while the GCC cannot do anything to stop the tax from being introduced, the real victim will be the European consumer. According to Dabbagh, the Japanese are on the right track on this issue - instead of restricting the use of oil or coal, they are investing in the development of technology for cleaner emissions. With only two months away from the European Single Market in January 1993, Arab states have an added fear of a "Fortress Europe" and also the way the GSP (General System of Preferences) for developing countries operates.

On support for Saudi exporters, Al Musallam reiterated that they have plenty of options as far as export finance is concerned. "There are the Islamic Development Bank's longer term trade finance facility and other IDB funds, the Arab trade finance programme, the Inter-Arab Investment Guarantee Corporation and other intra-Arab funds. There is plenty of cash around and, of course, the commercial banks also offer trade finance. Our export incentives are already there and are very generous."

The Saudi private sector would not necessarily agree. At the annual export promotion seminar in Jeddah at the beginning of the year, Saudi exporters were complaining about the lack of government incentives and support, especially in risky markets. Dabbagh admits that there has not been much change so far. "We hope that we will get more government involvement in export promotion as exists in most other countries. The export promotion unit in our Council is lobbying, doing market research, providing information and advising our exporters. On the implementation side, the joint-stock company - Saudi Industrial Exports Corporation - is doing very well in marketing Saudi products abroad. There are

other marketing companies also coming on stream."

As regards the setting up of a Saudi export credit guarantee agency, Al Musallam is keen to emphasise that the need for export credits is not great enough at present to justify a national agency. However, a feasibility by the Indian Eximbank on a Gulf export credit agency is under way. Riyadh would strongly support such an agency if it was recommended and agreed by the GCC.

The private sector, on the other hand, rues the fact that such an agency will take time to materialise, given the bureaucracy and the decision-making process within the GCC. "It would be more effective to have a GCC export credit agency. It might be ambitious at this stage of development of the GCC mandate, but I think it is a great idea - if they can do it."

There does seem to be a certain naivety in the perceptions of GCC officials about export finance and credit guarantee risks. They have a notion that bilateral agreements will somehow preempt payment and other risks for their exports, particularly to new markets in China, Asia, Russia and the CIS, and of course in Africa. The Russian Foreign Trade Bank, for instance, recently halted all trade-related payments owed to Japanese, German and Western firms, who are all too familiar about payment delays and legal loopholes when exporting, including to some Middle East states.

At least Dabbagh is more realistic. He acknowledges that not all Gulf states are rolling in surplus liquidity and therefore all kinds of investment mechanisms in the GCC must be encouraged, including off-balance sheet projects such as build-operate-transfer (BOT).

Dabbagh also believes that the Saudi private sector institutional framework is still lagging. "There are many regulations which need updating, especially the taxation structure - and that particularly where it relates to foreign companies. If we want to attract foreign investment then we have to have an emenable investment and regulatory climate."

Many businessmen also ask why the kingdom is not a member of GATT. Al Musallam points out the disadvantage to Saudi Arabia, notably in the case of petrochemicals. The real reason is that it suits Riyadh not to be a member. Saudi tariffs on the whole are small averaging around 12%. If it were a GATT member, it would have little room for manouevre with countries that have high (70% plus) tariffs.

The GCC states, especially Saudi Arabia, will continue to focus their trade and investment in the West and Japan. GCC officials have neither the patience nor the stomach for boosting intra-Islamic trade, which according to Al Musallam, "needs to be seen in a realistic and pragmatic way. The world is in recession and most of the Muslim economies are under severe strain. We have to move slowly because our economies are too diverse."
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Title Annotation:Business & Finance; international trade
Author:Parker, Mushtak
Publication:The Middle East
Date:Dec 1, 1992
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