New Saudi commercial policy announcements impacting regional trade and investment flows and a willingness by the United Arab Emirates to hold up an OPEC+ agreement over oil production levels have fueled the perception of rising tensions between the two largest economies of the Gulf Arab region. Stiffer commercial competition, in particular instances, however, should not be confused as the primary factor driving regional dynamics. The recent, multifaceted Saudi-Emirati spat is a symptom of the state-led pursuit of economic interests.
National interests have long shaped regional initiatives across the Gulf Cooperation Council; this is especially apparent in economic domains. The piecemeal and incomplete implementation of the value-added tax, which emerged as a unified agreement among GCC member states in 2016, illustrates how domestic concerns often trump regional commitments. Yet the very visible nature of the Saudi-Emirati dispute – exemplified by the Saudi energy minister alluding to the UAE as the “one country” going against the OPEC+ group of OPEC and non-OPEC oil producers – seems to signal a new tenor in bilateral relations.
Context and timing play a major role in the perception of heightened tensions. With the GCC summit in Al Ula in January having effectively ended the boycott of Qatar, regional coverage has moved to the next order of intrigue: potential fault lines in Saudi-Emirati relations. Saudi Arabia did announce in quick succession a series of economic policies that appear designed to divert trade and investment from the UAE to Saudi Arabia. Some of them were announced shortly before the reported resolution of the OPEC+ dispute, others well before any dispute even emerged. These measures have emerged during a fragile period in which regional states are seeking to rebound from coronavirus-induced economic downturns, and the UAE is gearing up for the delayed launch of the World Expo in Dubai.
Get Ready to Rumble?
Saudi Arabia’s push to advance its economic interests centers upon deriving greater value from regional economic activity. For example, in February the Saudi government announced that, to secure government contracts, foreign firms would be required to establish a regional headquarters in the kingdom by January 1, 2024. The extent to which this new policy is meant to disrupt current regional economic arrangements or give the Saudis more leverage in negotiating with foreign firms remains a subject of some debate. The economic policies announced in July are more technical in nature, such as excluding goods coming from regional free zones from preferential tariff concessions and clarifying rules of origin. Saudi officials are walking a tightrope between clarifying existing policies and norms, on the one hand, and tweaking existing rules and regulations to better suit their interests on the other hand.
Free zones have long occupied a complicated position within the GCC’s imperfect customs union. Technically speaking, most goods passing through conventional free zones should be subject to a common external tariff of 5%. However, there are lots of gray areas. Many Gulf free zones are closely integrated into the traditional economies of various countries and emirates. Some regional free zones even offer dual licenses for commercial activities inside and outside of the zone. Tracking the regional provision of services by free zone-registered firms and imposing tariffs pose additional challenges.
There is precedent for the intense focus on regional free zones. Saudi and Kuwaiti customs officials adopted a similar stance against Bahraini business hubs – namely the Bahrain International Investment Park, which was promoted and recognized as a free zone in a 2013 ranking of global free zones by fDi Intelligence. Regional customs officials subsequently enforced the 5% common external tariff as if these goods came from outside the GCC. Officials in Bahrain subsequently withdrew from participating in the magazine ranking and ultimately decided that it was in their interests to recast the zone entities as traditional business parks rather than free zones, given the strong Saudi orientation of their clients’ commercial operations.
Saudi Arabia does levy higher tariffs on certain goods that compete with domestic industries, but the GCC’s customs union is intended to protect the free trade of locally manufactured goods moving within the region. The Saudi levies announced in July apply to industrial products with less than 40% of added value and goods produced by companies with less than 25% of their workforce comprised of GCC citizens. The Saudi desire to clarify rules of origin and strictly enforce the requirements for transforming a foreign good into a local product are entirely justifiable. Yet tying tariffs to the workforce composition of GCC firms places certain member states, such as the UAE and Qatar, which possess small ratios of local citizens to total residents, at a distinct disadvantage simply because of their demographics.
The UAE has demonstrated that it too is willing to defend its economic interests, and the Emiratis can employ various levers to increase economic pressure on Saudi Arabia. The UAE’s move to scuttle an OPEC+ agreement on oil production policy centered upon its desire for a higher production baseline. According to Kate Dourian, the UAE has a “valid argument,” given the billions of dollars invested by the Abu Dhabi National Oil Company to expand its oil production capacity. Utilizing more of Abu Dhabi’s hydrocarbon resources while demand lasts can boost government coffers over the medium term and help maintain momentum on expensive economic diversification initiatives.
On July 14, the UAE reportedly agreed to a deal to end the OPEC+ standoff, suggesting a temporary easing of tensions on the energy front. The compromise would increase the UAE’s oil production limit in 2022, but discussions over the precise figures are still ongoing.
Cooler Heads May Prevail
The state-led pursuit of economic interests in the Gulf does not necessarily have to be a zero-sum game. A flurry of meetings between Omani and Saudi government officials – including an official visit by Sultan Haitham bin Tariq al-Said to Saudi Arabia – reflect marked change from years of lackluster relations between the neighboring Gulf countries. Officials agreed to accelerate the opening of a highway connecting Oman and Saudi Arabia through the vast desert region of the Empty Quarter. Meanwhile, the chairman of the Oman Investment Authority discussed the benefits of Omani free zones and special economic zones with his Saudi counterpart as well as how Oman might help Saudi Arabia better exploit East African and Asian markets.
The harder case, and the one requiring more concerted effort to avoid zero-sum thinking, may be Saudi-Emirati maneuvering in the economic sphere. This competitive engagement was fully evident recently on energy and free zones policies, but it is likely to also emerge and develop in other economic spheres, such as post-pandemic tourism.
Saudi Arabia’s wide-ranging growth ambitions should not be underestimated – the country accounted for 49.8% of the nominal gross domestic product of all six GCC countries in 2020. Crown Prince Mohammed bin Salman has proved to be a staunch proponent of the major Saudi economic and social transformations envisioned by Vision 2030, despite slow progress in certain target areas. If other GCC states like the UAE look for areas of alignment in economic strategies and visions, these neighboring countries might just be able to steer Saudi Arabia’s economic development in a manner that safeguards their core economic interests. An alternative scenario involving the unbridled pursuit of domestic interests would be to the detriment of the entire region.