Saudi Arabia has announced an amendment to rules governing imports from Gulf Cooperation Council (GCC) countries, in what is being seen as a bid to challenge the UAE’s status as the region’s trade and business hub. The rule change will mean that goods made in free zones within the UAE or with Israeli involvement will be affected adversely.
A Saudi ministerial decree said that all goods made in free zones in the region will not be considered as “locally made” and thus will not qualify for low tariffs. This has the potential to have a drastic impact on trade between Riyadh and Abu Dhabi, which is the Kingdom’s second-biggest trade partner after China in terms of import value.
Free zones are a major driver of the UAE economy. Located in areas in which foreign companies can operate under light regulation, and where foreign investors are allowed to take 100 per cent ownership in companies, free zones have contributed to powering robust non-oil external trade growth within the Emirates.
According to Reuters, goods made by companies with a workforce made up of less than 25 per cent of local people and industrial products with less than 40 per cent of added value after their transformation process will be excluded from the GCC tariff agreement. The Saudi decree will also mean that goods which contain a component made or produced in the occupation state or manufactured by companies owned fully or partially by Israeli investors or by companies listed in the Arab boycott agreement regarding Israel, will be disqualified from low tariffs.
Such a move may present a hurdle for Israeli firms that may have had hopes of taking advantage of normalisation with the UAE to benefit from the lower tariffs enjoyed by foreign firms within the GCC. In May, the UAE and Israel signed a tax treaty to encourage mutual business development.
This is another indication of the growing rift between Saudi Arabia and its smaller neighbour, which some analysts have said has ambitions to punch above its weight and replace Saudi Arabia as the dominant regional power. Under Crown Prince Mohammed Bin Salman, Riyadh is competing to attract investors and businesses to the Kingdom — the biggest importer in the region — at the expense of the UAE.
Bin Salman has been spearheading a campaign to lure multinationals to relocate from Dubai to Riyadh in an ambitious plan that has put a strain on relations with the UAE. The prince has threatened to cut off multinationals from lucrative government contracts if they do not relocate their headquarters to the Saudi capital. The friction between Riyadh and Abu Dhabi, however, is much more serious as their interests have increasingly diverged.
Cracks began to appear in 2019 when the UAE withdrew most of its military forces from Yemen, leaving Saudi Arabia alone in its war against Iran-backed Houthis. Other major sources of tension are said to be the speed of Saudi-led efforts to end the trade and travel embargo on Qatar, about which Abu Dhabi is not pleased, while Riyadh is equally frustrated over the pace of UAE normalisation with Israel.