USTR - 1996 National Trade Estimate-Gulf Cooperation Council
Office of the United States Trade Representative

 

1996 National Trade Estimate-Gulf Cooperation Council

This section of the report analyses trade policies of the six member states (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates (U.A.E.)) of the Gulf Cooperation Council (GCC).

In 1995, the United States trade deficit with the GCC was $350 million, $322 million less than that in 1994. U.S. merchandise exports to the GCC were $10.2 billion, a $588 million increase from 1994. U.S. imports from the GCC totaled $10.5 billion in 1995, up 2.6 percent from 1994.

The stock of U.S. foreign direct investment in Saudi Arabia was $2.7 billion in 1994, 3.8 percent greater than that in 1993. U.S. direct investment in the U.A.E was $589 million in 1994, up 12.4 percent from that in 1993. U.S. direct investment in the GCC is largely concentrated in manufacturing and petroleum.

The GCC is a policy-coordinating forum for its members. Since it cannot impose trade policies upon its member states, each is free to pass and enforce its own trade laws. However, there has been growing cooperation among GCC members on certain issues, such as standards-setting, establishing tariff ranges, and cooperating on intellectual property protection. There is also consideration being given to forming a customs union and continuing work on a free trade area between the GCC and the EU.

The United States seeks to strengthen common action among GCC members, as well as provide new impetus to the United States and the GCC countries to expand and strengthen our economic and commercial ties. The most recent U.S.-GCC Economic Dialogue took place in March 1996 in Bahrain.

IMPORT POLICIES

Tariffs

The GCC leadership failed to agree on a unified tariff at its annual summit in December 1995. Many GCC countries maintain high (15-20 percent) tariffs on products produced locally. As the GCC moves to harmonize its tariff schedule, there is concern that a "highest common denominator" approach could significantly increase the number of products across the GCC that face high tariffs.

Of the GCC countries, Kuwait, Bahrain, Qatar and U.A.E. are members of the WTO. All four of these countries entered the GATT and WTO under simplified procedures and with minimal negotiations, based on the United Kingdom's previous application of the GATT 1947 on their behalf. Saudi Arabia applied for WTO membership in July 1993, and converted this application to WTO accession early in 1996. Negotiations for the terms of Saudi Arabia's accession are now underway, and will be conducted under the standard procedures of Article XII of the WTO. An observer to the WTO since April 1995, Oman has decided in principle to join the organization, but has not yet applied for accession.

STANDARDS, TESTING, LABELING, AND CERTIFICATION

As U.S. export interest in the region grows, the United States has become concerned with certain restrictive standards in various GCC member states. In particular, shelf-life requirements throughout the GCC for food products are in many cases far shorter than necessary to ensure safety, posing problems for U.S. exporters who often face lengthy shipping times. These requirements were in some cases shortened, and began to be more vigorously enforced in 1993, creating considerable hardship for U.S. exporters. Labeling and expiration date requirements are overly stringent and an export impediment for U.S. fresh eggs and canned baby food products. For example, the U.S. standard for fresh eggs is 6 months, based on immediate refrigeration and chemical treatment of shells, while the Saudi Arabian Standards Organization (SASO) standard has been reduced to 90 days. Canned baby foods are allowed a 1 to 2 year shelf life in the U.S., while the SASO standard has been reduced to 6 months.

In 1990, the United States entered into a highly successful arrangement with SASO to encourage cooperation in the development of standards. SASO's work frequently leads to the creation of regional GCC standards. The United States - SASO partnership, which includes a U.S. technical advisor in Riyadh funded by the United States Government, has led to greater transparency in the Saudi system and has increased opportunities for American exporters to comment on draft Saudi standards. SASO has already adopted ISO 9000 as approved standards for Saudi Arabia, and acts as an accreditation body through the quality assurance department. The U.S. and the GCC concluded a Memorandum of Understanding on Standards at the March 1996 Economic Dialogue meeting in Bahrain.

In October 1995, a new certification program went into effect to monitor and control the quality of certain products imported into Saudi Arabia. The International Conformity Certification Program (ICCP) will apply to 76 regulated products during its first phase. The program, managed by Inchcape Testing Services, will inspect and test, on behalf of SASO, any shipment bound for Saudi Arabia to verify the quality of the goods.

The GCC plans to implement a system for registering companies that comply with international standard ISO 9000. The central accreditation organization will be the Gulf Standards Organization (GSO). There will be an agency in each of the six countries to inspect factories, make recommendations, and issue registrations. The GSO is negotiating with the European Union to put the program in place. The EU is sending experts to help the GCC in technical and training aspects of the program, and to set up mutual recognition systems for certification and quality control mechanisms.

In January 1995, a GCC standardization official reported that the GSO has set some 580 unified standards for the GCC countries to date, and plans to increase that number to 1000 soon.

GOVERNMENT PROCUREMENT

All GCC countries maintain preferential buy-national policies and all except Bahrain maintain offset requirements requiring that a portion of any major (and usually military) government tender be subcontracted to local firms. For example, Kuwait government procurement policies specify local products when available and prescribe a 10 percent price advantage for local firms in government tenders. Offset regulations introduced in Kuwait since the liberation specify that foreign firms awarded government contracts worth over $17 million must invest 30 percent of the contract value in a project in Kuwait, the GCC or the rest of the Arab world. Offset regulations are changing and complex.

Saudi Arabian government contracts on project implementation and procurement are regulated by several royal decrees which strongly favor GCC nationals. Most defense contracts, however, are negotiated outside these regulations. Under a 1983 decree, for example, contractors must sub-contract 30 percent of the value of the contract, including support service, to majority-owned Saudi firms. An exemption is granted where no Saudi company can provide sufficient goods and services to fulfill the obligation. In addition, Article 1 (D) of the tender regulations decrees that Saudi individuals and establishments have preference over all other entities in government dealings. The same regulations also accord preference to "mixed" entities as long as Saudi nationals hold at least 51 percent of the mixed entities capital. Article 1 (E) follows suit by giving preference to products of Saudi origin which satisfy the requirements of the procurement, even when the specifications are inferior to those of a foreign counterpart.

In 1987, Saudi Arabia put new regulations in force giving priority in government purchasing programs to GCC products. These items now receive up to a 10 percent price preference over non-GCC products in all government contracts awarded by foreign contractors. Saudi Arabia requires offsets in military contracts and recently in commercial government contracts as well.

Oman provides a 10 percent price preference to Omani nationals for Omani goods and services. Additionally, the government considers quality of product or service and support as well as cost in evaluating bids. For most major tenders, Oman typically notifies firms either already registered in Oman or preselected by project consultants. Oman is known to have an offset program only with the United Kingdom, although the investment can originate from any country. Offsets are not standard adjuncts to government contracts and have not been associated with any U.S. defense transaction, whether commercial or FMS.

The U.A.E. has no requirement that a portion of any government tender be subcontracted to local firms. There is a 10 percent price preference for local firms on procurement and tenders. The U.A.E. requires a company to be registered in order to be invited to receive government tender documents. To be registered, a company must have 51 percent U.A.E. ownership. However, these rules do not apply on major project awards or defense contracts, where there is no local company able to provide the goods or services required. The U.A.E. requires offset investments by winners of defense contracts. The requirements state that an investment must generate returns within seven years equal to 60 percent of the value of the contract.

Bahrain, in its decree number 11 of 1985, provides for preference in government tenders to Bahraini and GCC products up to a price differential of 10 percent, provided the products meet standard specifications as to kind and quality. Bahrain does not have an offset program.

Qatar requires foreign firms wishing to participate in government procurement tenders to bid through local agents. Qatar gives a ten percent price preference to local firms and a five percent price preference to GCC firms in all government procurement.

EXPORT SUBSIDIES

Saudi Arabia has recently reduced wheat production subsidies. The Grain Silos and Flour Mills Organization

(GSFMO) controls wheat production by assigning production quotas to each of the country's grain farmers. Farmers can only receive government support prices within preassigned quotas. GSFMO production quotas for the current year were reduced to 1.3 million metric tons, compared to two million metric tons in 1995. The reduction in quotas coincides with a June 1995 decision by the Saudi Government to reduce production support prices for wheat from $533/Mt to $400/Mt, still double world prices.

The Oman Development Bank offers interest subsidies for the relatively few non-petroleum sector exporters obtaining commercial bank letters of credit and offers some lower than market "insurance" against delay in payment of receivables.

LACK OF INTELLECTUAL PROPERTY PROTECTION

Although the GCC and its member countries lack comprehensive laws and regulations to ensure effective intellectual property protection, some progress has been made in recent years. Saudi Arabia enacted patent and copyright laws in 1989, the U.A.E. enacted copyright, trademark, and patent laws in 1992, Bahrain enacted a highly deficient copyright law in 1993, and Kuwait and Oman are still in the process of drafting copyright laws. The GCC secretariat has declared the protection of intellectual property rights to be a priority and is working to facilitate this in the six member states, especially in the area of patent protection. Presently, all GCC countries have trademark laws; Bahrain, Kuwait, Saudi Arabia, and the U.A.E. have patent laws; only Saudi Arabia, the U.A.E., and Bahrain have copyright laws in place, but in no case is protection adequate for U.S. or other non-Arab league works. No GCC countries are members of the major intellectual property conventions, such as the Berne Convention for the Protection of Literary and Artistic Works, the Paris Convention for the Protection of Industrial Property, or the Geneva Phonograms Convention, although several of the GCC countries are planning to join these conventions. Saudi Arabia became a member of the Universal Copyright Convention on July 13, 1994.

Despite the progress to date, IPR problems remain in the entire region due to a combination of inadequate or non-existent laws and lax enforcement. Pirated motion pictures, video cassettes, computer software, literary works, and sound recordings are available to varying extents in all GCC countries, and videotapes are produced for export in Bahrain. Counterfeit products such as clothing, auto parts, and household products are also available.

Saudi Arabia

Saudi Arabia enacted copyright and patent laws in 1989. The Saudis assert that the copyright law is fully consistent with international standards. However, the United States has a number of concerns with the law, the most important of which is that U.S. sound recordings are not protected. Saudi Arabia has acceded to the Universal Copyright Convention, which obliges Saudi Arabia to protect U.S. and other non-GCC member works. Saudi Arabia's patent law provides a generally complete and adequate legal basis for protection. In December, 1995, over six years after the office opened, the Saudi Patent Office issued its first patents. Saudi Arabia has made significant progress on copyright enforcement in the video market, though enforcement on sound recordings and software remains a problem.

The United Arab Emirates (U.A.E.)

The Government has cracked down on piracy of audiovisual works and sound recordings. As a result, shops in the U.A.E. are clean of pirated audio/video works and sound recordings. Modern movie theaters have opened since September 1994 and show western movies obtained from licensed distributors. Pirate video products enter the country from neighboring Oman but are not available in shops registered and licensed by government authorities. They are distributed from private apartments. The Government is starting to counter computer software piracy, which is widespread. The U.A.E. patent law protects pharmaceutical processes but not products and a factory in the U.A.E. produces pirate versions of patented drugs.

Bahrain

Recent industry reports indicate that Bahrain has become an export center for pirated video cassettes. Bahrain in 1993 enacted a new copyright law that contains serious deficiencies, including lack of protection for U.S. and other non-Arab League works, and lack of clear protection for sound recordings and computer software. Bahrain does have relatively good patent and trademark laws.

Kuwait

Kuwait has had patent and trademark laws in effect since 1962, but penalties under both are so low as to be ineffective in deterring illegal activities. The patent law, moreover, excludes certain chemical inventions involving foods, pharmaceuticals and medicines, and grants a term of protection of only 15, rather than the standard 20 years. It also contains provisions for compulsory licensing whenever a patent is insufficiently worked in Kuwait or is of "great importance to national industry."

Kuwait currently has no copyright law, but prepared a new draft law on copyrights in early 1993, which, in its current form, is seriously deficient and would not fulfill Kuwait's commitment to provide TRIPs consistent copyright protection. The United States has expressed its strong interest that the draft law clearly protect U.S. works and provide standards of protection consistent with modern international agreements.

Oman and Qatar

In 1995 Oman continued to study and revise draft copyright and patent laws. Imported pirated products are available in retail outlets. Qatar provides no legal protection for pharmaceutical patents.

Gulf Cooperation Council

The GCC Secretariat has prepared a draft patent law that would create one patent system for the member states. The draft law has several significant problems, including a lack of protection for pharmaceuticals (products or processes for production) and biological inventions. In addition, the draft contains a broad compulsory licensing regime.

The GCC also has made efforts to create common trademark and copyright laws, although these are not as far advanced.

SERVICES BARRIERS

Visa Issuance Policy

Saudi Arabia took steps to liberalize its business visa policy in 1993. Formerly, all persons coming for business had to be sponsored by a local citizen, and the Saudi embassy or consulate required approval from the Foreign Ministry in Riyadh to issue a visa, resulting in substantial delays. The new policy was aimed at improving upon the old system by eliminating the need for businessmen representing well-known U.S. firms to have a Saudi sponsor. The new policy allows businessmen whose firms are involved in joint ventures in the Kingdom to obtain multiple-entry visas valid for six months. Finally, in the above cases the Saudi embassy or consulate have the discretion to issue a visa without obtaining approval from the Foreign Ministry. The new policies have not yet been fully implemented, and few American executives have multiple entry visas.

Kuwait in 1995 significantly liberalized its visa policy for U.S. citizens. U.S. citizens no longer need a Kuwaiti sponsor for travel to Kuwait for business or personal reasons. Americans traveling to Kuwait receive 10 year multiple entry visas. Only in the case of extended visits (beyond 30 days) are residency visas and Kuwaiti sponsors required.

Oman continues to take steps to liberalize visa issuance. Oman reciprocally offers U.S. citizens two year multiple entry business or tourist visas; processing time can be up to two weeks. "No objection certificates" can be obtained on shorter notice with the assistance of any of the major hotels where visitors may be staying. In addition, businesses in Oman can request "NOC's" for their business contacts. Visa requirements are expected to be dropped entirely for U.S. citizens resident in the GCC countries beginning in the spring of 1996.

In addition to the multiple entry visit visas valid up to 10 years that the U.A.E. issues to American citizens through U.A.E. embassies and for which no sponsor is needed, the U.A.E. permits Americans with at least six months residence in other GCC countries to visit the U.A.E. without obtaining visas prior to initiation of travel. Such visitors receive U.A.E. visas in the airport upon arrival, upon payment of a 100 Dirham ($27.49)

The United States now has a reciprocity agreement with Qatar for 10–year visas of which many U.S. citizens are taking advantage in their commercial dealings with Qatar.

The United States now has a reciprocity agreement with Bahrain for five-year, multiple-entry visas, of which many U.S. citizens are taking advantage in their commercial dealings with Bahrain.

Insurance

With the exception of the U.A.E., all GCC countries discriminate against foreign insurance companies, generally by restricting foreign participation (Kuwait), discouraging new applications (Bahrain), or requiring operation through a local sponsor (Saudi Arabia, Oman and Qatar).

Banking

Banks are variously restricted from entering GCC markets. Saudi nationals must own 60 percent of any bank. In Kuwait, foreigners are permitted to own up to 40 percent of Kuwaiti banks. Bahrain has not issued licenses for new commercial banks since 1983, though the majority of commercial banks in Bahrain are foreign bank branches; Bahrain does encourage the establishment of offshore or representative offices of foreign banks. Oman, Qatar, and the U.A.E. technically allow foreign banks to operate, but have refused new foreign banks from establishing operations on the grounds that their countries are "over-banked". There are more foreign bank branches in the U.A.E. than domestic banks. The U.A.E. has banned the opening of any more foreign bank branches, although there are indications that the ban is not permanent. Foreign banks may open representative offices in the U.A.E.. Offshore banking is not permitted in the U.A.E. Oman is considering permitting the opening of representative offices, possibly in 1996.

Shipping

In the past, Kuwait prevented access to government project cargo by U.S. shipping lines by giving the United Arab Shipping Company the right of first refusal on all government project cargoes. Bahrain also favors the United Arab Shipping Company on cargo contracts for government projects. Kuwait no longer applies this requirement to shipments from U.S. ports. Saudi Arabia follows GATT guidelines which allow a nation to give preferences to national carriers for up to 40 percent of government cargoes. Under these rules, the Saudi National Shipping Company and United Arab Shipping Company receive preferences.

INVESTMENT BARRIERS

Foreign equity is limited to 49 percent in Kuwait, Qatar, and U.A.E. (The U.A.E. has exempted the Jebel Ali Free Zone from this barrier, but products entering the U.A.E. from the Free Zone are treated as foreign products.)

Oman, too, generally has a 49 percent limit on foreign equity participation. However, joint venture industrial projects may be up to 65 percent foreign owned, and, in projects of high national priority, up to 100 percent. The imposition of progressively higher taxation the higher the foreign ownership can be offset by the authorization of a five year tax holiday, which can be renewed.

Saudi Arabia has no legal restrictions on the percentage of foreign ownership; however, under current policy, wholly foreign-owned investment proposals are unlikely to receive government approval. Moreover, Saudi government incentives such as tax holidays normally are not available unless there is at least 25 percent Saudi ownership. Wholly foreign-owned branch offices are generally approved, however. The Foreign Capital Investment Code requires that foreign investment be made in line with the nation's development priorities and that investments include some technology transfer. Foreigners may not invest in joint ventures engaged solely in advertising, trading, distribution, or marketing. Real estate ownership is restricted to wholly-owned Saudi entities or citizens of the GCC.

Only in Bahrain is 100 percent foreign equity sometimes allowed.

In some areas, such as real-estate, as well as in most shares of publicly traded companies, non-GCC investment is banned in all GCC countries.

OTHER BARRIERS

Agent and Distributor Rules

In GCC countries, U.S. firms may find that compliance with U.S. law presents special challenges when selecting a local agent. Many GCC business leaders are also prominent government officials. Local agents are required in all sales transactions in Kuwait and Oman. Saudi law requires that in-country distributors be licensed by the Ministry of Commerce. Only Saudi citizens can obtain licenses, although a recent GCC decision may broaden this to include GCC citizens. Direct sales are possible except in the case of sales to government agencies, where a "service agent" is required. The U.A.E. permits two types of commercial entities to import and distribute products. One is a 100 percent U.A.E.-owned business and the other is a limited liability company in which foreign ownership up to 49 percent of equity is permitted. In 1993, Oman liberalized its agency laws slightly. The change enables any importer to bring in goods without paying a commission to the relevant agent, provided that the goods are brought in through Omani ports or airports.

Termination of agency agreements can be difficult in all the GCC countries and may involve unreasonable financial losses to the foreign supplier. A commercial agency law adopted by Bahrain in November 1992 makes it easier to terminate agency agreements in cases where the agent has not carried out his responsibilities satisfactorily.

Import Licensing

Varying degrees of licensing procedures are enforced to protect domestic industries or restrict importing to nationals of GCC countries except in Bahrain. In Saudi Arabia, the importation of certain articles is either prohibited or requires special approval from competent authorities. The following products require special approval: agriculture seeds, live animals and fresh and frozen meat, books, periodicals, movies, tapes, religious books and tapes, chemicals and harmful materials, pharmaceutical products, wireless equipment, horses, products containing alcohol, and natural asphalt.

Documentation Requirements

All GCC countries impose unusually complicated export documentation requirements for goods imported by the GCC. The documents must be both certified by an approved Arab-U.S. Chamber of Commerce and certified by the consulate of the country for which the goods are destined. In Oman, this documentation is not required if the importing company has an existing agency agreement with the United States exporter. At the end of 1995, Oman declared that it would be simplifying all customs clearance documentation requirements over the next few years to expedite the flow of goods and promote use of Omani ports and airport.

Corporate Tax Policies

Saudi Arabia, Oman, and Kuwait tax foreign companies at a higher rate than they tax domestic companies. Additionally, several GCC countries tax royalties as if they were 100 percent profit, and maintain a variety of other tax policies considered unfair to foreign companies. The U.A.E. imposes a 20 percent income tax on foreign banks. No tax is levied on domestic banks. Oman, in late 1995, was reviewing proposals that could provide national treatment to joint Omani-foreign joint ventures. Foreign investors receive incentives, including a ten year tax holiday, for approved agricultural and manufacturing projects with a minimum 25 percent Saudi participation.

Procedural and Financial Irregularities

Procedural and financial irregularities can be significant barriers to trade in GCC countries. Such irregularities have resulted in lost opportunities for U.S. suppliers of goods and services, and forced some U.S. businesses out of some markets. Disregard of irregularities may subject Americans or U.S. companies to prosecution under the Foreign Corrupt Practices Act.

The Arab League Boycott of Israel

On September 30, 1994, the GCC announced that it would end adherence to the secondary and tertiary aspects of the Arab League Boycott of Israel, which eliminated a significant trade barrier to U.S. firms. In January 1996, Oman and Israel signed an agreement to implement a 1995 announcement to open trade missions in early 1998. In March 1996, the GCC reiterated its commitment to end the secondary and tertiary boycott, and recognized the "total dismantling of the Arab Boycott of Israel as a necessary step in advancing the peace process and promoting regional cooperation in the Middle East and North Africa." (See the Arab League chapter for further information.)

 
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