FRANK KANE: As the two most dynamic economies in the GCC, both Saudi Arabia and the UAE want to optimize their competitiveness in order to attract foreign direct investment and encourage trade with the rest of the world.

The issue that has arisen recently is that there appears to be a lack of level playing fields in the search for greater competitiveness.

The GCC Customs Union was set up in 2003 as a way of encouraging greater intra-GCC trade and harmonizing terms of trade between members and their foreign counterparts. Since then, there has been a big increase in trade between GCC members and foreigners, but hardly any improvement in intra-GCC commerce.

Some of the reasons for this are legacy issues. GCC members were, in the main, energy exporters to the outside world, with little need to trade with their immediate neighbors in goods and products that were standard across the region.

But other factors have also ensured that intra-GCC trade remains a low priority for members. The rise of China and other big Asian economies to become top import partners has further reduced the imperative for trade between GCC members.

At the same time, the growth of free zones, especially in the UAE, has undoubtedly added to the allure of some members, but has also increased imbalances within the GCC. Free zones in the UAE, for example, are government-sponsored organizations, with favorable terms of business, leading to low labor and logistical costs.

The recent announcement by Saudi Arabia on new terms for trade with other GCC countries is a belated, but much needed recognition of the need to equalize trading conditions within the GCC and to streamline rules that are almost two decades old.

All member states want to reduce their dependence on foreign labor as part of their plans to accelerate the role of the private sector in their economies. Saudi Arabia, with a large and youthful demographic in need of employment, sees the need to provide more jobs for citizens outside the public sector.

In particular, the Kingdom does not want to remain in a position where it is in effect helping subsidize free zones in other countries that already enjoy special status and artificially low costs.

The new rules were a long time in preparation by the Kingdom’s financial and commercial policymakers and were not directed at any other GCC member in particular. Certainly, they were not linked to any other issues between member states of the GCC.

The new tariffs range from 3 to 15 percent on imported goods, but average out at about 5.5 percent.

They also specifically allow flexibility for industries and producers that cannot meet the requirements on foreign labor components. Those who are having trouble meeting the 25 percent local labor rule can compensate with other local added value or content in their products.

One other big discrepancy is the variation in rates of value-added tax (VAT) across the region. Saudi Arabia increased VAT last summer in response to the strains of the pandemic recession — in a move welcomed by the International Monetary Fund at the time — while the UAE held its rate at 5 percent. This too puts an unnecessary strain on intra-GCC trade.

Saudi Arabia’s Crown Prince Mohammed bin Salman said recently that the 15 percent VAT rate was a temporary measure that would go down in the future. It is time for other GCC members to look again at their VAT rates with a view to greater harmonization across the region.

All countries in the GCC are looking to move beyond the era when they were simple oil pumpers for the rest of the world. They were consumers and importers of globally manufactured goods, now they want to become producers and exporters of products other than crude oil.

Perhaps the best way forward is for a new GCC-wide conference to harmonize customs tariffs and VAT rates in a bid to ensure that the playing fields of global commerce are level and even.

Author: Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai