UAE MAY IMPOSE RETALIATORY TARIFFS ON SAUDI

1. (U) Classified by DCM Richard A. Albright for reasons
1.5 (b) and (d).



2. (C) Summary and comment: General Director of the UAE
Federal Customs Authority Mohamed Al-Mehairi told Econoff on
April 13 that the UAE is seriously considering retaliatory
tariffs on Saudi exporters, in response to harassment by
Saudi customs officials of local traders exporting their
goods into KSA. In violation of the GCC Customs Union
(which came into effect on January 1, 2003) Saudi customs
officials search each container passing through the UAE-
Saudi border and charge UAE exporters up to a 12 percent
tariff on the goods -- even though goods manufactured in the
UAE (outside the free zones) are technically exempt from
tax. The UAEG has called for a meeting this week in Dubai
to resolve the issue, but is prepared to slap a reciprocal
tariff on Saudi goods exported to the UAE. This provides
further evidence that the GCC Customs Union appears for now
to be little more than window dressing, and that even the
mild-mannered Emiratis are willing to talk (and maybe even
play) tough when politics affect the bottom line. End
summary and comment.



3. (U) Al-Mehairi confirmed recent press reports that Saudi
customs authorities are demanding up to a 12 percent tariff
from certain UAE-based manufacturers, who also must undergo
unreasonably lengthy inspections at the border and
significant shipping delays. Instead of usual random
checks, Saudi authorities open every container of goods
exported and fail to repackage the shipment correctly. UAE
traders complain of loss through breakage, loss of
perishable items due to lengthy delays at the border, and
demurrage charges in addition to the 12 percent tariff. The
UAE Customs Authority heretofore has instructed local
traders to pay the tariffs, assuming that refunds would be
forthcoming once Riyadh provided clear instruction to its
customs officials.



4. (C) According to Al-Mehairi, Riyadh argues that all
products manufactured in the UAE use intermediate goods from
the UAE's many free zones, and therefore are subject to the
12 percent tax. Al-Mehairi said the Customs Law clearly
exempts items that are manufactured in the UAE (outside the
free zones), regardless of the origin of the intermediate
goods. The Saudi policy disadvantages UAE traders, who must
pay a tax on whatever goods they import from the free zones,
and then pay again when the final product is exported to
KSA. Al-Mehairi confirmed that only Saudi Arabia is a
problem; all other GCC countries are playing by the rules
agreed upon last December.



5. (C) Al-Mehairi said that the UAE will demand that Saudi
Arabia implement the GCC customs agreement immediately, and
provide refunds to the UAE traders at a meeting of UAE and
Saudi customs officials in Dubai on April 15. The customs
officials may establish a joint committee under the aegis of
the GCC Secretariat to manage this issue over the long-term.
If the delegates are unable to reach consensus, Al-Mehairi
says the UAE is prepared to impose retaliatory tariffs of 12
percent on Saudi products entering the UAE. "We don't want
a trade war," he said, "but this practice is unacceptable
and in violation of the GCC Customs Union Agreement." He
noted wryly that this is the sort of behavior that has kept
Saudi Arabia out of the WTO.

Wahba