How might new Saudi tariff rules affect Gulf trade?

Legislation | | MIC Customs Solutions |

New customs rules in Saudi Arabia will seek to clamp down on imports from GCC free zones that benefit from preferential tariff rates.


The Saudi Arabian government has this month introduced new trade rules for imports that will amend rules of origin and see additional tariffs applied to certain products.

Finance minister Mohamed Al-Jadaan said the changes will seek to boost local producers, but some commentators have suggested they are also designed to separate the Kingdom from other Gulf states, which could lead to friction with key trading partners in the region.

So what is changing, and how have experts in Saudi Arabia and the wider region reacted to the new rules?

What's included in the new rules?

Central to the changes, which were published in the Saudi official gazette as a ministerial decree, will be that goods produced in free zones in the Gulf Cooperation Council (GCC) will no longer be considered to be locally made. This means they will be taxed as foreign goods and ineligible for customs concessions.

In order to benefit from preferential tariffs, products should have a valid certificate of origin and be shipped directly from the producing country to the Kingdom, the decree stated. This will target importers that route goods through other Gulf states, for instance to get around import bans.

Furthermore, alterations to rule of origin requirements mean the Gulf customs agreement will no longer apply to goods that include components produced in Israel, or products manufactured by companies wholly or partly owned by Israeli investors or companies, as identified in the Arab boycott against the country.

Finally, Saudi Arabia will also exclude goods that originate from manufacturers where local citizens make up less than 25 percent of the workforce, as well as industrial products with an added value of less than 40 percent after the manufacturing process, according to the GCC customs agreement.

How will the changes impact regional trade?

The new rules are set to have a particularly large impact on the United Arab Emirates (UAE), which has 55 free zones, compared with just four in Oman, three in Bahrain and one each in Qatar and Kuwait.

It was noted by The Media Line that free zones, where foreign companies can operate under light regulations and where overseas investors are allowed to fully own companies, are among the main drivers of the UAE's economy. 

For example, the largest of these areas, the Jebel Ali zone, currently exports more than 40 percent of its products to Saudi Arabia. Therefore, economic observers said the decision to raise customs duties on its products will lead to great harm in this region.

The UAE is also a major hub for re-exporting foreign products to Saudi Arabia, such as Turkish goods that are subject to an unofficial embargo by Riyadh. The exclusion of Israeli-made products may also undermine efforts by the UAE to normalize political relations, coming shortly after the two nations agreed to open up to more economic cooperation.

Meanwhile, the rules on workforces could also prove challenging for many companies in the region to adhere to, as manufacturers often rely heavily on expatriate workers from countries such as Bangladesh, India, Pakistan and Nepal. Figures from the Gulf Statistical Center for the General Secretariat of the GCC States suggest these workers make up more than 90 percent of the workforce in many companies.

What have commentators said about the changes?

Emirati economic analyst Saeed Rais told The Media Line the new rules will be very harmful to the UAE and go against efforts to build unity in the Gulf.

He said: "We strive for economic unity and the promotion of intra-Gulf trade, but such requirements may complicate matters. Certainly, investors [in the Jebel Ali free zone] will find alternative markets for their products, but perhaps the Saudi citizen will also be affected by the rise in prices after raising customs duties on them."

Mr Rais added: "All Gulf countries depend on expatriate workers, and the conditions for having a quarter of the employment of citizens cannot be matched. Even in Saudi Arabia itself, the number of foreign workers inside factories exceeds 90 percent of the workers that are there." 

However, Saudi economic analyst Dr Ali Al-Qurashi told The Media Line the new regulations will end a long period of "unjustified courtesy" in opening the Kingdom's markets without reciprocity, and suggested it signals Riyadh is no longer prepared to tolerate the use of "deviations and open tricks" to avoid customs duties.

"These rules come after years of problems with regard to the Gulf customs union and the insistence of some GCC countries to keep customs tariffs floating so that they can localize foreign industries and export them to the rest of the GCC countries as national industries on preferential terms," he stated.

Other nations have indicated they will be less affected by the changes. Bahraini economic analyst Akbar Hussain, for example, suggested only a few exports from his country may be affected, as it is less reliant on overseas workers than many of its neighbors.

"Every country has the right to arrange its internal affairs and impose its laws, and merchants always adapt to it," he continued. "There is nothing bad, and they always have a large profit margin that can cover the difference in customs tariffs."