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Saudi Arabia's WTO Membership and the Implications for its Top Firms

Saudi Arabia's acceptance as the 149th member of the World Trade Organization (WTO) has been widely celebrated as a milestone in the Kingdom's private sector reform and the liberalization of its economy.

It took 12 years for Saudi Arabia, the world's largest oil producer, to complete negotiations to join the WTO - the second-longest accession period after China, which negotiated for 14 years before becoming a member.

There were many in Saudi Arabia who resisted joining the WTO. Some feared that WTO free trade rules would limit the Kingdom's right to restrict the import of goods prohibited under Islam, including pork, alcohol and pornography. There were concerns among small Saudi firms that joining the WTO would trigger overwhelming international competition.

Talks also dragged on due to US and European insistence that Saudi Arabia make its industries and regulations more transparent. The US took time to accept that the Kingdom's economy was sufficiently open for membership. Petrochemical producers in Europe were equally worried that maintaining cheap domestic oil and gas would give Saudi firms an unfair advantage. In the end, all parties agreed on the final details, and in mid-December Saudi Arabia will be attending the next WTO meeting in Hong Kong as a full member. Joining the WTO will have important implications for the Saudi economy, its key industries and its local companies. Entry into the WTO poses a great challenge to the Saudi private sector, which must complete preparations to operate in a competitive environment. This applies most of all to the services sector, which stands to be the most affected by the influx of foreign companies.

World Trade Organization Key Facts Location : Geneva, Switzerland Established : 1 January 1995 Created by : Uruguay Round negotiations (1986-94)   Membership : 149 countries (on 11 December 2005) The World Trade Organization (WTO) is an international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world's trading nations and ratified in their parliaments. Through these agreements, WTO members operate a non-discriminatory trading system that spells out their rights and their obligations. Each country receives guarantees that its exports will be treated fairly and consistently in other countries' markets. Each promises to do the same for imports into its own market. The system also gives developing countries some flexibility in implementing their commitments.

Commerce and Industry Minister Dr. Hashem Yamani said that Saudi Arabia made "far-reaching, very substantial and commercially meaningful concessions and commitments on goods and services." However, it is still unclear exactly what kind of changes Saudi Arabia will be obligated to undertake.

It is clear from early conversations with relevant parties that there will be significant changes in the following areas:

. Foreign ownership in services sectors, such as retail and distribution;

. Producers and distributors of liquefied natural gas will have to operate on the basis of normal commercial considerations, based on the full recovery of costs and a reasonable profit;

. Gradual lowering of trade barriers and expanding market access for foreign goods; and

. Opening of the insurance sector to foreign operators.

Many of Saudi Arabia's top companies have grown over the years thanks to protective regulations. However, others have been operating in a competitive environment for many years. In analyzing the implication of Saudi Arabia's entry into the WTO, it is important to look at the individual sectors and recognize how WTO membership will affect each sector differently.

. Oil and Petrochemicals: Saudi Arabia's two largest firms, Saudi Aramco and Saudi Basic Industries Corp. (SABIC), are direct beneficiaries of the lower cost of hydrocarbons in the Kingdom. Historically, it has been the norm for these firms to pass on the savings downstream. However, despite initial statements to the contrary, it is possible that this policy will be significantly limited with the entry into the WTO and Saudi Aramco and SABIC may be forced to sell domestically at world market prices. This would adversely affect the profitability of local petrochemical producers.

. Banking: Recent economic growth driven by high oil prices and increased government expenditure has resulted in greater private sector activity and hence greater domestic liquidity. This is the primary reason for the flourishing of the Saudi banking sector. Entry into the WTO is likely to have a positive effect on the financial services sector as it will continue increasing economic activity and growth. The Saudi banking sector has been very profitable despite the relatively high level of competition. The Kingdom's entry into the WTO is unlikely to result in any lower activity for the sector.

. Insurance: With the WTO entry, Saudi Arabia agreed to allow foreign insurance companies to operate in the Kingdom. This is likely to put pressure on the National Company for Cooperative Insurance (NCCI), the government insurance company. However, the sector will flourish as new companies get licenses and foreign companies introduce international best practices to the field.

. Telecommunications: Prior to entering into the WTO, Saudi Arabia had committed to introduce competition to the telecommunications sector. As the Kingdom offers the third GSM license and allows private operators of land lines, the former government monopoly Saudi Telecom Co. (STC) is likely to lose additional market share. However, the telecom market as a whole is likely to continue displaying robust growth as penetration rates increase and the foreign-owned businesses drive additional growth.

. Services: As mentioned earlier, the local services sector is likely to be most affected by the Kingdom's entry into the WTO. Local companies have historically been sheltered from foreign competition. With the opening up of retail and distribution to foreigners, local services companies are likely to experience lower margins and lower sales. It remains to be seen how quickly they are able to adjust to the changing marketplace.

Overall, it is clear that Saudi Arabia's entry into the WTO is likely to provide yet another boost to the local economy, one that will result in increased economic activity and one that will have direct benefits to the average consumer. However, some local companies, especially in the services and perhaps the petrochemicals sectors, may have to re-adjust to the new operating environment quickly to remain leaders in their fields.

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This article first appeared in Arab News and has been adapted with permission.