UAE AND SAUDI CUSTOMS OFFICIALS AT AN IMPASSE

C O N F I D E N T I A L SECTION 01 OF 02 ABU DHABI 002218

SIPDIS

STATE FOR NEA/ARP, NEA/RA
STATE PASS USTR - JBUNTIN
USDOC FOR USPTO
USDOC FOR 4250/DOC/MAC/ONE/CLOUSTAUNAU
GENEVA PASS USTR

E.O. 12958: DECL: 05/06/08
TAGS: PREL KIPR ETRD ECIN ETTC ECON TC
SUBJECT: UAE AND SAUDI CUSTOMS OFFICIALS AT AN IMPASSE

REF: ABU DHABI 1756


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

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Summary And Comment
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2. (C) Summary and comment: General Director of the
UAE Federal Customs Authority Mohamed Al-Mehairi
updated Econoff May 6 on negotiations between the UAE
and Saudi Arabia regarding the alleged harassment by
Saudi customs officials of local traders exporting
their goods into KSA (see reftel). Saudi customs
officials continue to charge UAE exporters up to a 20
percent tariff on goods crossing the UAE-Saudi border,
even though goods manufactured in the UAE (outside the
free zones) are technically exempt from tax. The
latest meetings May 3-4 to resolve the row ended
abruptly with both sides walking out, and Al-Mehairi
vowing not to return to the negotiating table until
his Saudi counterparts exhibit some flexibility.


3. (C) Summary and comment continued: The UAE
Finance Minister intends to raise the issue at the
informal meeting of GCC trade ministers this summer,
but a resolution is likely to occur only if top UAE
leaders intervene at the formal GCC summit in
December. We will seek a meeting with UAE Finance
Minister Khirbash in the coming weeks to determine
whether the anti-Saudi vehemence felt at the Federal
Customs Authority is echoed at the higher levels of
the UAEG. End summary and comment.

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UAE Officials Frustrated By Saudi Obstinacy
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4. (C) During the May 3 meeting, Riyadh reportedly
refused to distinguish between goods manufactured in
the UAE's many free zones (subject to the 12 percent
tax) and goods that are manufactured in the UAE
proper. According to Al-Mehairi, the GCC Secretariat
conducted a study of the free zones in 2000 that is
the basis of the UAEG's definition of free zone and
non-free zone manufacturing establishments, but Saudi
officials would not accept this document.


5. (C) Saudi officials also demanded that Riyadh send
its own inspection team to the UAE to determine for
themselves the location of certain UAE companies, and
the types of businesses in which they engage. An
infuriated Al-Mehairi contended that the UAEG inspects
and certifies businesses to operate in the UAE, and
Saudi Arabia has no extraterritorial jurisdiction in
this matter.


6. (C) Informal meetings of the negotiators are
scheduled throughout the next several weeks, but Al-
Mehairi -- the UAE's chief negotiator on customs
issues -- said he would not attend. Unlike the SAG,
the UAEG is seized with the issue; the UAE exports an
approximate USD $3 billion to Saudi Arabia each year,
while importing less than USD $700 million in Saudi
goods. Al-Mehairi confirmed that the Finance Minister
would confront Saudi officials at the GCC trade
ministers round this summer, but "this goes much
higher than the Finance Minister; all of the shaykhs
know about this."

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UAE Customs Retaliates...
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7. (C) In order to make a statement against the Saudi
position, the Federal Customs Authority undertook on
May 5 to block all Saudi imports into the UAE for 48
hours, according to Al-Mehairi. After only six hours
of the embargo, however, unspecified "higher
authorities" ordered the Federal Customs Authority to
reopen the border to Saudi traders at the behest of
and as a display of goodwill to the Saudi royal
family.


8. (C) Al-Mehairi recounted numerous recent examples
of Saudi customs officials unnecessarily delaying UAE
perishable shipments at the border for three days, and
allowing the goods to pass only after the expiration
date printed on the product's label had passed. The
UAE Finance Ministry has determined that UAE companies
have needlessly paid USD $3 million in tariffs to
Saudi officials since the supposed implementation of
the GCC Customs Union in January.
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...And Is Likely To Have GCC Support
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9. (C) The other GCC countries agree that Saudi
Arabia is not abiding by the terms of the GCC Customs
Agreement, and have discussed informally if they
should take collective action against Riyadh,
according to Al-Mehairi. The other GCC countries
already joined forces within the last month to block
Saudi milk imports, which Al-Mehairi alleges have been
"dumped" into other GCC markets at less than fair
market prices. Al-Mehairi asserted that this Saudi
milk is not pasteurized and poses a health risk to
consumers.

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Iraq Could Change GCC Dynamics
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10. (C) Al-Mehairi queried Econoff about plans for
rebuilding Iraq's economy, and noted that a stable,
secular Iraq probably would be invited to join the GCC
trading block. Admitting that such a decision would
not sit well with Riyadh, Al-Mehairi added that access
to the mammoth Iraqi market would be the welcomed
answer to the GCC's problems with Saudi Arabia. "If we
have Iraq, forget Saudi Arabia."

Wahba