Saudi Arabia - Trade Barriers Saudi Arabia - Trade Barriers
As a member of the World Trade Organization (WTO), the Saudi Arabian government (SAG) has taken positive steps to become a more open, transparent, and predictable market; however, it has regressed in several key areas as well.
In January 2018, the SAG implemented a VAT at a rate of five percent, in addition to the excise taxes implemented in June 2017 on cigarettes (at a rate of 100 percent), carbonated drinks (at a rate of 50 percent), and energy drinks (at a rate of 100 percent). Over the past year, certain U.S. pharmaceutical companies have alleged that the SAG violated their intellectual property rights and the confidentiality of their trade data in licensing local firms to produce competing pharmaceuticals. The use of unlicensed U.S. software, including on SAG computer systems, has continued unabated.
U.S. firms report experiencing market barriers in the following areas: Technical Standards and Regulations, Performance and Localization Requirements, Intellectual Property Rights Protection, Delayed Payments, Dispute Resolution, and the Arab League Boycott.
Technical Standards and Regulations
Saudi Arabia uses technical regulations developed both by the Saudi Arabian Standards Organization (SASO) and by the Gulf Standards Organization (GSO). Saudi Arabia notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade.
Saudi Arabia continues to move toward adherence to a single standard, which is often based on International Organization for Standardization (ISO) or International Electrotechnical Commission (IEC) standards, in technical regulations to the exclusion of other international standards, such as those developed by U.S.-domiciled standards development organizations (SDOs). Saudi Arabia’s exclusion of these other international standards, which are often used by U.S. manufacturers, can create significant market access restrictions for industrial and consumer products exported from the United States.
The United States government has engaged Saudi authorities on the principles for international standards per the WTO Technical Barriers to Trade Committee Decision and encouraged Saudi Arabia to adopt standards developed according to such principles in their technical regulations, allowing all products that meet those standards to enter the Saudi market. Several U.S.-based standards organizations, including SDOs, and individual companies have also engaged SASO, with mixed success, on these issues to preserve market access for U.S. products, ranging from electrical equipment to footwear.
Performance and Localization Requirements
Government-controlled enterprises in Saudi Arabia are increasingly introducing local content requirements for foreign firms. Aramco’s “In-Kingdom Total Value Added” program, for example, strongly encourages the purchase of goods and services from a local supplier base and aims to double Aramco’s percentage of locally-manufactured energy-related goods and services to 70 percent by 2021. Saudi Arabia’s military is reforming its procurement processes and policies to incorporate new goals for Saudi employment and localized production. The SAG’s Vision 2030 program calls for 50 percent of defense materials to be produced and procured locally by 2030 and simultaneously seeks comparable increases in the number of Saudis employed in this sector.
Intellectual Property Rights Protection
In 2019, Saudi Arabia was downgraded to the Priority Watch List in the annual Special 301 Report in light of intellectual property (IP) issues that represent barriers to U.S. exports and investment. While the Saudi Authority for Intellectual Property (SAIP) continues to work closely with the U.S. government and industry on a range of issues, serious concerns remain. As noted in the 2019 Special 301 Report, the Saudi Arabia Food and Drug Authority (SFDA) has repeatedly granted marketing approvals to domestic companies to produce generic versions of innovative pharmaceutical products. The approvals reportedly relied on regulatory data created by the innovative product that is subject to Saudi Arabia’s system for protecting against the unfair commercial use, as well as the unauthorized disclosure of, undisclosed test or other data that innovators generated to obtain marketing approval. The SFDA’s actions have created significant concern among U.S. industry stakeholders. Additionally, in 2017, the SFDA granted a license to a local generic manufacturer for a pharmaceutical product that was under patent protection in Saudi Arabia. The 2019 Special 301 Report also highlighted rampant satellite and online piracy in Saudi Arabia by the illicit service “beoutQ.” Although beoutQ’s activities in the Kingdom appear to have ceased starting in August 2019, the widespread availability of beoutQ’s services in Saudi Arabia during 2018-2019 has created serious concern among U.S. owners of sports and entertainment content. IPTV boxes that provide access to pirated content are also rampant throughout the kingdom. Positive momentum continues to develop in Saudi Arabia’s IP enforcement efforts, especially at Saudi Customs, but effective long-term solutions are needed to create a more transparent and responsive system that issues deterrent level sentencing for IP crime.
Delayed Payments
Companies who hold government contracts here continue to experience payment delays. While the Finance Ministry is honoring its pledge to pay the dues on time, many government departments are taking months to process the paperwork and send it to the Ministry, according to reports. Apparently, the delays are less severe than in the aftermath of the 2014 oil slump; however, it has been widely reported they are impacting sectors from construction to education and they’re particularly acute for companies dealing with the Health Ministry.
To allay contractor concerns, the Finance Ministry launched an electronic platform in January 2018 that allows it to check on the status of payments. In February, a royal order set up a committee headed by the Commerce and Investment Minister to determine government arrears and find a quick solution.
U.S. companies should contact the U.S. Commercial Service at the Embassy in Riyadh or Consulates in Dhahran or Jeddah if payment problems persist.
Dispute Resolution
Traditionally dispute settlement and enforcement of foreign arbitral awards in Saudi Arabia have proven time-consuming and uncertain, carrying the risk that sharia principles can potentially trump any foreign judgments or legal precedents. Even after a decision is reached in a dispute, effective enforcement of the judgment can take a long period of time.
In recent years, the SAG has demonstrated a commitment to improving the quality of commercial legal proceedings and access to alternative dispute resolution mechanisms. Local attorneys indicate that the quality of final judgments in the court system has improved, but that cases still take too long to litigate.
In 2012, the SAG updated certain provisions in Saudi Arabia’s domestic arbitration law, paving the way for the establishment of the Saudi Center for Commercial Arbitration (SCCA) in 2016. Developed in accordance with international arbitration rules and standards, including those set by the American Arbitration Association’s International Centre for Dispute Resolution and the International Chamber of Commerce’s International Court of Arbitration, the SCCA offers comprehensive arbitration services to firms both domestic and international. The SCCA reports that both domestic and foreign law firms have begun to include referrals to the SCCA in the arbitration clauses of their contracts. However, it is currently too early to assess the quality and effectiveness of SCCA proceedings, as the SCCA is still in the early stages of operation. Awards rendered by the SCCA can be enforced in local courts, though judges remain empowered to reject enforcement of provisions they deem non-compliant with sharia law.
In December 2017, the United Nations Commission on International Trade Law (UNCITRAL) recognized Saudi Arabia as a jurisdiction that has adopted an arbitration law based on the 2006 UNCITRAL Model Arbitration Law. While Saudi Arabia adopted this law in 2012, UNCITRAL did not consider it as a model law jurisdiction due to the SAG’s reference to sharia’s supremacy over UNCITRAL-adopted provisions. After discussions between UNCITRAL representatives and Saudi judges, during which the Saudi judges clarified that sharia would not affect the enforcement of foreign arbitral awards, UNCITRAL added Saudi Arabia to the list of model law jurisdictions. The potential impact of the decision is that foreign investors and companies in Saudi Arabia have slightly more certainty that their arbitration agreements and awards will be enforced, as in other UNCITRAL countries. Whether (and how) Saudi courts will apply this latest interpretation of the relationship between foreign arbitral awards and sharia law remains to be seen.
Arab League Boycott
The GCC announced in the fall of 1994 that its members would no longer enforce the secondary and tertiary aspects of the Arab League Boycott. The primary boycott against Israeli companies and products still applies. Advice on boycott and anti-boycott related matters are available from the U.S. Embassy or from the Office of Anti- Boycott Compliance in Washington, D.C. at (202) 482-2381.