Nations trade with each other because they bene?t from it. The gain from international trade, like the gain from all trade, arises because specialization enables resources to be allocated to their most productive uses in each trading nation. International trade begets a lot of difficulties and problems that shall be addressed. For example, which goods or services should be imported and exported, in which amount and where, and so on. If local manufacturers export most of the produced goods, this may cause a deficit and prices hike. If importers do not care about quality control, this may cause health or environmental problems, or cause local manufacturers to go out of business. So countries apply trade policies in order to maximize their benefits and minimize risks and negative effects of uncontrolled foreign trade. Today, we have the trade policy of Saudi Arabia in focus with its insistent liberal foreign trade policy; we will analyze and discuss its factors and implications and compare it to different trade policies.
It is worthy of notice, that Saudi Arabia, one of the largest oil manufacturers and exporters in the world, leads the Arab world in exports and imports. The country adopted a liberal trade policy, allowing almost unrestricted imports, but for goods and services forbidden by Islam, such as pork and alcohol. There are no foreign exchange controls, quantitative restrictions or tariff barriers. Any increase in imports from any country depends on competitive prices, good quality, and punctual delivery. By the way, the largest importers to Saudi Arabia are United States, Japan, and China, and experts believe the United States and Western Europe, in particular, need to be more proactive in the Saudi market if they are not to lose market share to China, South Korea, and India.
The government of the country implements a strategy of import substitution, which means that instead of importing goods and services, Saudi Arabia wants to produce those goods and services locally. In order to do this, the country encourages local and foreign investors to plow into manufacturing. Moreover, the government encourages companies to invest in advanced industrial processes and optimization of business processes, into mining and quarrying. Foreign investors are offered tax exemption, long-term extraction concessions and other incentives to invest or establish joint ventures in this growing Saudi industry.
Oil has the leading position in the composition of Saudi Arabian export and makes up about 70-80% of it. The country benefits from rising prices for oil from one side but depends on price fluctuations from the other. The lion’s share of economic prosperity of Saudi Arabia depends on the daily oil price fluctuations. Therefore, the country has to control oil production volumes and agree these with other oil manufacturers in order to influence world prices and prevent them from sudden falls. In addition, country’s government has a strategic goal to achieve significant export diversification and encourages a private sector to enter the international market.
In this area, Saudi Arabia adopted a liberal policy as well. There are almost no limits for inflow and outflow of capital, and the Saudian economy is open for foreign investments. However, the country protects national interests and sets certain requirements, rules, and regulations concerning foreign investments. For example, Saudi Arabia requires that foreign capital invested in economic development projects (excluding petroleum and mineral projects) and that it be accompanied by technical knowledge. In case foreign investor creates a joint venture and allows a significant share of national capital, he or she is eligible for many incentives such as tax holiday, exemption from customs duties for specific goods, provision by the government of plots of land at a nominal rate for factories and residential quarters for workers and some others. Key foreign investors are United States, Japan, and European countries. Good investment and economic climate of the country, developed infrastructure, political stability, transparency of legislation, availability of resources, reasonable taxation – all these make Saudi Arabia a very good place to invest. As an indicator of investment attractiveness, we can take a look at the ratio of foreign investors in the total amount of licensed joint ventures in Saudi Arabia, which exceeds 80%. It is also worthy of notice that local banks readily finance viable projects at reduced rates applicable for joint ventures.
Membership in international trade-related organizations
Saudi Arabia is a member of the World Trading Organization and the Great Arab Free Trade Area. This allows it to access most world markets and import/export goods and services from/to them.
In general, Saudi Arabian trade policy is rather good. It allows the country to prosper and achieve its strategic goals through protecting national interests of population, manufacturers, and investors; through import substitution. It creates good conditions for import of technologies and knowledge, for foreign investments, for optimization of business and manufacturing process towards more efficient ones; and encourages competitive trade. This trade policy is rather liberal, comparing trade policies of other developed countries, which excessively protect national manufacturers and create entrance barriers for international traders through high taxation, quotas, and other means. Liberal trade policy of Saudi Arabia is supported by rational and transparent taxation and legislation systems, stable economic and political environment and other factors.
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