UAE-Saudi Arabia Trade: A Powerhouse Driven by Stability and Investment

Table of content

Introduction

Political and legal issues

Social-cultural issues

Market for products from Sharjah

Trade Agreements

Ports and airports

Conclusion

 

Introduction

Foreign trade is normally the exchange of goods, capital and services across the international territories. In both the UAE and the Kingdom of Saudi Arabia, it represents a significant part of the national gross domestic product (GDP). The biggest trading partner of the UAE in the gulf region is Saudi Arabia with bilateral trade between the two countries accounting for over 80 billion Dirham (Hallwood, 2012).

The trade between the two countries account for almost half of the Gulf Cooperation Council trade. The Kingdom of Saudi Arabia offers a wide market for goods and services emanating from the business hub of the UAE. The relationship between the two countries is cross facilitated by the deep rooted friendship which exist between the rulers of those two countries. Some of the factors that make the Kingdom of Saudi Arabia a perfect destination for goods from the UAE include

Political and legal issues

Politically the government of the Kingdom of Saudi Arabia is ruled by a monarch who acts as the traditional leader as well as the political leader. With a monarchical government in place the country is highly stable with little or no opposition to the ruling class. With a stable government this ensures a stable working environment from whereby people can conduct their business with no political interferences.

A monarch government with no political class opposing ensures stability of the nation which in turns translates to a stable business environment. Until the death of the King in 2005, the country had enjoyed stability for continuos long periods of time. Only during the transition period did the country experience uncertainity which was short lived (Arouri, Lahiani & Nguyen, 2011)

Some of the legal issues affecting the conduct of business include the requirement stipulated by the Saudi government that you must have a legitimate presence within the country for you to conduct business. You must obtain a licence from Saudi Arabian General investment Authority (SAGIA) for you to conduct business in that country (Seoudi&Mahmoud, 2016).

With the country being governed strictly by sharia law there is an exception when it comes to foreign companies which want to do business in that country. They are regulated by the foreign investment law, which gives guidelines  on how foreign companies should conduct business in that country. Currently the country is ranked 12^th in the world when it comes into ease of doing business.

The country offers some of the best  investment guidelines for foreign companies whereby foreign companies can establish branches in that country and maintain 100% ownership with the exception of wholesale or trading companies which had been limited up to the year 2010 when the requirements were lifted (Hoekman & Zarrouk, 2009)

With the wholesale and trading companies you could not own more that 75% of the shares and a minimum capital of 20million riyals was required. Also, with the  companies in case of trading with products not directly manufactured in that country you are expected to appoint independent distributors to market your products who are usually Saudi nationals.

Social-cultural issues

Social issues to consider while doing trade include the high level of corruption which is present in the government. With a ranking of 63 out of the 180 countries ranked by Transparency international Saudi Arabia stands out as one of the emerging economies with high corruption levels. Corruption is prevalent due to the unquestionable nature of the government on matters relating to its accounts and decision making process (Shoult, 2011).

As a country heavily influenced by the Islamic religion, trade is also limited to products and services which are shariah complaint.You cannot trade in products which are against the Islamic faith or which go against the teachings of the Quran. Products such as pork are banned in that country. Also, women are banned from  participating in many public activities, hence dealing in products targeting women is not highly advisable (Qureshi, 2014).

The Saudi society does not grant women the same status as men rather they are not even allowed to conduct business which will make the women come into contact with other men who are not their husbands. There is absolute segregation of sexes in that country making it difficult for companies which support women rights to conduct business  in that country (Hoekman & Zarrouk, 2009).

 

Market for products from Sharjah

The economy in Saudi Arabia is heavily dependent on oil. With the new diversification measures currently being put in place, the government invested over 300 billion dollars into the construction of  infrastructure and other networks providing a ready market for aluminium and building products which are manufactured in the business districts of Sharjah. The construction boom that took place engineered by both local and foreign companies ensured there is a ready market for products emanating from UAE. Also, the purchase and ready market for gold in that country for smelting purposes makes Saudi Arabia a key strategic trading partner of the UAE.

Trade Agreements

Direct trade agreements exist between the two countries, but more so  between the GCC countries where both countries are members. The Gulf cooperation council was established in the 1980’s to bolster trade amongst the gulf countries. With the agreements in place since 2003 there are no chargeable tariffs amongst the six member states. Imports from UAE are chargeable at 5%, which is a common tariff for all member states. Investors as citizens of the state have freedom of movement across the borders. The non tariff barriers have, however hampered trade within the region(Al Nahian & Islam, 2009)

Ports and airports

With 8 major seaports spread throughout the country and a similar number of airports, the country boast of some of the best infrastructural projects built through petrodollars. The king Fahd airport is the largest in the world in terms of area, making the country a major business hub in the gulf region (Shoult, 2011).

With the latest in modern technology the ports and airports have the capacity to clear cargo in a record time, making the country ideal for export due to lower delays at the entry points. No bonded warehouses are allowed, hence cargo is usually cleared in a record time. With a capacity to handle over  150 million tones of cargo the seaports of Saudi Arabia are some of the busiest in the world.

The ministry of commerce in Saudi Arabia is in charge of all foreign trade coming into the country through the Saudi Arabian General Investment Authority (SAGIA). The authority is also in charge of issuing licences to foreign investors as well as credit for investment. The implementation and charging of taxes responsibility is vested in the Saudi revenue authority in charge of collecting government revenue.

The documentation required when you want to import goods into the country include

• Certificate of origin, which should be authenticated by the UAE chamber of commerce,
• Saudi Arabia customs invoice which you should have in triplicate(Three copies)
• An authenticated  invoice from UAE showing country of origin, name of carrier, brand and number of goods, a clear description of the goods in terms of weight and value.
• A bill of lading
• Saudi Arabian standards organization(SASO) certificate of conformity issued by a body certified in the UK.

Tariffs, duties and taxes paid by importers vary depending on the types of goods that you want to export to Saudi Arabia. Consumer goods such as foodstuffs and food items are duty free. Goods which are also manufactured in that country attract higher duty due to the government policy of protecting local industries (Shoult, 2011).

With the UAE exporters, they are entitled to lower duty due to the bilateral trade agreements existing between the GCC countries which the country is a member of. Tariffs and taxes are usually dependent on the good and services you are dealing with hence Emirati investors should be aware of the fact that differing items are charged differing rates.

Some of the laws governing investors in Saudi Arabia include provisions which only allow foreigners to conduct business either as a limited liability company or a joint stock company. Sole proprietorship trade is not allowed for foreign nationals in that country. However, it is possible to open a branch of a foreign company and still maintain 100% ownership, but limited to certain industries within that country. (Mohamed & Sidiropoulos,2010)

Also, after commencement of operations the government does not require investors to reduce their equity over time as may be necessary in other countries. Foreign investors as per the  laws in place have unlimited access to foreign exchange currency.

Some of the government activities which favour foreign investment include the government success in being able to control inflation to levels attractive to foreign investors. The government has also been able to ensure the stability of the Saudi Riyal. The exchange rate of the country, currency is quite, stable, enabling predictability in its movement by foreign investors.

The new measures put in place to diversify the economy includes, the country being among the few in the world with a high level of openness for foreign capital especially in the upstream gas sector which Emirati investors can partake in (Hallwood, 2012).

Also the country, privatization programs are a sure way of attracting foreign investors into that country to uptake the government owned state cooperations. The banking sector of the country is amongst the most diverse in the world, providing foreign investors with access to credit facilities which has enabled the growth of non-oil sectors (Omran & Bolbol, 2009).

The high standards of living enabled by the government in that country also attracts foreign investors due to the high spending power of the citizens of that country. Also, the government of Saudi Arabia has in the past offered incentives such as better loan terms to foreign entities which will set up manufacturing units in the provinces of Tabuk,Hail and Jizan which are still underdeveloped.

Conclusion

Trade between the two countries is set to increase threefold due to the expected cooperation between the two countries in key areas of the economy especially after the signing of the non oil trade agreements. The non oil agreements will promote other industries which are cruicial to the economy hence bringing a better understanding between the two nations. The agreements are also important as it has harmonized the customs amongst the two countries creating a favorable business which will allow the export on national products to newer foreign markets in the Kingdom of Saudi Arabia.

 

References

Omran, M., & Bolbol, A. (2009). Foreign direct investment, financial development, and economic growth: evidence from the Arab countries. Review of Middle East Economics and Finance, 1(3), 231-249.

Mohamed, S. E., & Sidiropoulos, M. G. (2010). Another look at the determinants of foreign direct investment in MENA countries: An empirical investigation. Journal of Economic Development, 35(2), 75.

Al Nahian Riyadh, M., Akter, S., & Islam, N. (2009). The adoption of e-banking in developing countries: A theoretical model for SMEs. International review of business research papers, 5(6), 212-230.

Shoult, A. (Ed.). (2011). Doing Business with Saudi Arabia. GMB Publishing Ltd.

Hallwood, C. P. (2012). Transaction Costs and Trade Between Multinational Corporations (Vol. 18). Routledge.

Arouri, M. E. H., Lahiani, A., & Nguyen, D. K. (2011). Return and volatility transmission between world oil prices and stock markets of the GCC countries. Economic Modelling, 28(4), 1815-1825. Elsevier.

Hoekman, B., & Zarrouk, J. (2009). Changes in cross-border trade costs in the Pan-Arab free trade area, 2001-2008. World Bank Policy Research Working Paper Series, Vol.

Seoudi, I., & Mahmoud, S. (2016). Public Policy for Venture Capital: A Comparative Study of Emirates, Saudi Arabia and Egypt. Review of Business & Finance Studies, 7(1), 19-42.

Qureshi, R. (2014). Human resources development and the status of women labor force in Saudi Arabia: a critical analysis. International Journal of Current Research and Academic Review, 2(4), 144-155.

 

A brief overview of the FTA of the gulf countries

Main Aspects of the FTAs Signed by the UAE

Gulf Cooperation Council (GCC) Agreement name:		Gulf Cooperation Council (GCC)
Coverage:	Goods	Type:	Customs Union
Status:	In Force	WTO Legal Cover:	GATT Art. XXIV
Date of signature:		31-Dec-2001
Date of entry into force:		01-Jan-2003
Current signatories:		Bahrain; Kuwait; Oman; Qatar; Saudi Arabia; United Arab Emirates
Original signatories:		Bahrain; Kuwait; Oman; Qatar; Saudi Arabia; United Arab Emirates
All Parties WTO members?		Yes