Saudi Arabia’s accession to WTO- the impact on petrochem industry

The accession of Saudi Arabia to the World Trade Organization (WTO) is the result of 12 years of extensive negotiations that led to the adoption of 42 bylaws in the last four years. The Saudi accession to the WTO will enhance the competitive advantages enjoyed by the Saudi petrochemical industry and strengthen its position globally. The full impact of the WTO on the industry will not be observed immediately. Being export-oriented, the Saudi petrochemical industry, along with services like finance, insurance and transportation, stands to gain from the WTO provisions These services are purchased in fairly large quantities by the Saudi petrochemical industry and the resulting cost reductions may further add to the competitive advantages of the industry. WTO membership calls for a lowering of tariffs and subsidies on a wide range of goods and services; a strengthening of the protection accorded to intellectual property rights; and measures for a speedier resolution of all trade grievances and disputes, which would provide extra assurance to foreign investors in Saudi Arabia and lead to greater prospects for inward investment. In addition, the WTO will provide a good platform for settling the cases of dumping petrochemicals in the Kingdom by producers in tariff-protected economies. On the benefits side, the removal of trade barriers called for by WTO bylaws will allow Saudi petrochemical producers to offer lower prices to tariff-protected markets of the EU, US and Japanese markets, sizably increasing exports. Tariffs on polymers (Polyethylene, Polystyrene, PVC, Polypropylene) in the EU are to halved, from 12.5% to 6.5%, making it difficult for high-cost producers in these economies to meet the lower market prices caused by the tariff reductions. Will this lead to the exit of the high-cost producers from the industry, reducing the number of producers? Will the increase in demand caused by the lower prices benefit Saudi petrochemical exports? In return, Saudi Arabia will have to lower its own tariffs and open its market to imported petrochemical products. The tariffs on polymers such as polyethylene, polypropylene and polystyrene, currently stand at 12%, with a provision that it be reduced to 8% within an interim period ending in year 2008, followed by a second interim period ending in year 2010, by which time the tariff will drop to 6.5%. Though the volume of imported polymers is small, the tariff reduction may induce a strong competition among petrochemicals producers as they seek to secure a share in the domestic market. Thus the petrochemical producers may need to focus attention on regularly reducing their production costs and ensuring that their product qualities match or exceed the world standards. Given the strong competitive advantage enjoyed by the Saudi producers, will they meet the competitive challenges globally and retain their market share in the domestic market?