Saudi/Bahrain trade dispute intensifies

Tensions between Saudi Arabia and neighbouring Bahrain over the latter's signing, in September 2004, of a Free Trade Agreement (FTA) with the US hit fresh lows earlier this week with Saudi's Finance Minister Dr Ebrahim Al Assaf announcing plans to impose unilateral tariffs on US goods coming through Bahrain. Calling Bahrain's progress towards bilateral FTAs a violation of Gulf Co-operation Council (GCC) economic agreements, the Finance Minister condemned the agreement, which allows duty free access to non-textile bilateral trade between Bahrain and the US, as a direct contravention of the customs union signed by GCC members (Saudi Arabia, Bahrain, Oman, Kuwait, Qatar, UAE) in January 2003. This set a uniform external tariff of 5% on all imported goods and abolished intra-GCC trade duties.

Saudi Arabia's decision to re-impose the 5% levy on duty-free US goods to Bahrain re-exported to the Kingdom would seem to be a natural response, since Saudi itself has not signed any FTA. Nor indeed is it a member of the World Trade Organisation (WTO). However the public nature of the announcement, plus Saudi Crown Prince Abdullah's boycott of the recent GCC summit held in Bahrain, highlights the scale of Saudi annoyance over the issue. The key question for Gulf businesses is whether the re-imposition of the 5% duty is the first step in a series of escalating punitive actions.

Saudi Arabia's frustration over the issue should not be underestimated. Saudi Foreign Minister Prince Saud Al-Faisal noted during a recent speech in Bahrain that "It is alarming to see some members of the GCC enter into separate bilateral agreements with international powers...taking precedence over the need to act collectively...They diminish the collective bargaining power and weaken not only the solidarity of the GCC as a whole but also each of its members."

Bahrain's decision to press ahead with bilateral FTAs (it has also signed a FTA with Singapore) does arguably weaken the GCC's position as a regional trading bloc. Saudi Arabia can point to the stalled GCC negotiations with the European Union over a trade agreement, which have reached a crucial stage as evidence. Saudi will also be aware that it probably has the most to lose if trade agreements are done on a bilateral basis. It is the least liberalised economy within the GCC and is the only GCC country that is not a member of the WTO. Alone Saudi Arabia would also be more vulnerable to trading partners connecting political and social reform to trade issues.

At the same time Bahrain has made the FTA with the US a cornerstone of both its economic policy and plans to attract further foreign investment into its services sector, particularly in the face of increased competition from Dubai. Given the experience of Jordan and Morocco, who have also signed FTAs with the US, Bahrain's economy could benefit substantially from the deal.

However Bahrain also has much to lose if it overly irritates Saudi Arabia. Oil accounts for two thirds of Bahrain's government revenues but its own domestic oil production is small, at around 40,000 barrels per day (bpd). As a result it has traditionally relied on aid from Saudi Arabia. Prior to July 2004, Bahrain received a 50,000 bpd oil grant and the entire 143,000 bpd output from the Saudi Aramco run, but jointly owned, Abu Saafa field. Saudi Arabia's decision to halt the grant and to step back from plans to allow Bahrain to maintain a 100% share of Abu Saafa's output, following a doubling in output to 300,000 bpd this year, cannot have been unconnected to the US FTA.

The UAE and Oman, and to a lesser extent Kuwait, are also in advanced talks with the US about bilateral FTAs. Their response to the latest Saudi action against Bahrain will be crucial in how this issue develops. Certainly greater use of bilateral agreements would be a blow to GCC integration and would raise questions about the commitment of the individual GCC states to monetary union and a single GCC currency: both stated goals of the GCC. However it is more likely that both the UAE and Oman will put their FTA negotiations on hold until Saudi and Bahrain resolve their dispute. How this can be achieved is not clear. One thing is certain however this issue looks set to dominate GCC discussions near-term.