The Impact of the WTO on the Petrochemical Industry in Saudi Arabia - Essay Example

Chapter 4: WTO Membership and Petrochemical Industry 4 Harmonize System and WTO Schedule In their Lawton & McGuire (2005) say that the chemical industry in the World Trade Organization is “nationally based, reliant on intellectual property for competitive advantage and structurally limited in its ability to adopt a wide range of adjustment strategies.” Despite the economic benefits of accessing to the World Trade Organization, as there is an absence of alternative strategy options, this will lead Saudi’s oil companies to operate under the influence of the European Union chemical companies that are lobbying the organization to establish the rules to harmonize the rule associate with the chemical industry in Saudi Arabia (Al-Alamy, 2003; Zuhd, 2005l; Al Zuhd, 2005; Al-Sadoun, 2008). According to the GATT says Yu, this “Harmonize System would ensure greater ability for countries to monitor and protect the values of tariff concession” (Yu, 2008, p. 8). It ensures that there is only One General Rules to be applied to all Members but these rules also cover the specific commitments made by all members. For example, in the part one of the agreement concession called the Most Favored Nation Tariffs, there is a clause known as “bonded tariff” or the maximum tariff the members should levy. If the tariff levied is higher than the maximum tariff stated, the country has to compensate other parties for the excess amount, but it is based on line-by-line according to national nomenclatures of the time when concession took place. How the tariff is calculated? It is based on the description of the product base rate duty before any tariff, rate of bonded tariff, implementation period, initial negotiation, and other duties and charges (Robinson, 2004; Al-Sadoun, 2008). In his paper to the World Bank, Saudi Arabia and WTO in the light of Mena Experience, (http://worldbank.org/idf/ndf3/papers/global/Al-Sahlawi.pdf.) Professor Al-Sahlawi, indicates that compare to the growth of manufacturing industry in the global market, the growth of petrochemical industry in the Middle East and Arab Regions is considered slow. He suggests that it is important to follow Egypt and Morocco to improve petrochemical industry and make it to be more competitive than the manufacturing industry in the global market or to create petrochemical products as export merchandise. In terms of joint ventures in the petrochemical industry, Al-Salawi (ibid) claims that furthering the process of privatization eases the process of foreign direct investment such as in Egypt where the rate of foreign direct investment has increased to 28% (ibid). As stated in the Overview, WTO is driven by its member nations and decisions are made by consensus; Yu (2008) confirms that World Trade Organization also calls for the member countries, whose representatives are appointed politically, to provide greater access of foreign investors to the country’s resources that involves the state’s basic resources. The state basic resources include housing, industry, tourism, land reclamation, agricultural projects, oil services and transportation services. He continues, these resources also include “infrastructure for drinking water, waste water, electricity, roads and communications, financial leasing” (2008, p.4), projects financed by public fund, venture capital, transportations (air, land and sea), hospital and medical treatment centers, computer software and systems, and other areas. The Harmonize System of the World Trade Organization, in general, is meant to liberalize merchandise trade, improve capital glows, increase privatization and foreign direct investment flows, freeing all tariffs and prices, and easy access to local market that will enhance foreign ownership (Yu, 2008; Loeffler Tuggey Pauerstein Rosenthal LLP, 2005). Though Al-mady, in Sabic’s (2005) Petrochemicals industry trends and challenges, describes the positive impact of the opportunity of the Kingdom to join the World Trade Organization, in the end, the Kingdom would experience what has been experienced by other developing countries. This process of liberalization would indeed lead the country to be colonized by the other countries through “Treaty.” During the sign of the trade treaty between Indonesia and Australia concerning the island of West Papua, the Australia foreign minister stated, “It is easy to take the control when it is small.” 4.2. Petrochemicals industry trends and challenges In his presentation during the European Petrochemical Association Annual Meeting in Vienna, Austria, Saudi Basic Industries Corporation (SABIC) Vice Chairman and CEO Mohamed Al-Mady stated that under the World Trade Organization trade scheme, the industry is experiencing major structural changes particularly in the area of feedstock, geographic and demographics. There has been an increasing demand for petrochemical products in Southeast Asia. By joining the World Trade Organization, the Kingdom, together with Russia and Middle Eastern countries and other international petroleum companies would play a greater role in the development of global energy market. He also claims that this development is driven by growing demand from each country and the desire of government, on behalf of its representatives, to monetize the country’s economic resources (Sabic, 2005). Al-Mady is optimistic that this accession will likely improve the demographics of petrochemical products. But he subtly admits that this accession would ease the transfer of the crude oil from the Kingdom to the European Union countries, which will in turn, sell the oil products to the Kingdom and other Middle East and Arab countries, Africa and Asia at a price determined according to the agreement stated in the World Trade Organization (ibid). Countries including Kuwait, Bahrain, Qatar, Oman, the Arab Emirates, and Russia are increasing their production of petrochemical products even though most are still behind Russia in the production of ethylene. Nevertheless, it is estimated that by 2010, ethylene production in Iran and the GCC countries would reach about 20% of the global capacity (Gulf Oil Gas, 2005). 4.3. Future Outlook for Global Petrochemical Industry According to Al-Mady (Sabic, 2005), with expansions in ethylene, propylene, ethylene glycol, polyethylene, polypropylene, styrene monomer, steel, methanol and urea, SABIC will play an important role in the future of the Middle East petrochemical industry. Sabic’s current and planned investment to expand its capacity is estimated to be around $20 billion in the next three years (ibid). It is expected that the investment and expansion in petrochemical industry will increase its annual production of oil products from 43 million tons to 64 million tons as of 2008 (ibid), which will eventually encourage other private sector or Saudi investors and foreign partners to build ethylene crackers and derivatives plants for similar investments (ibid). While the Kingdom represents the world’s main oil supplier, Sabic considers the Middle East region itself as the world’s most attractive location for the production of petrochemical assets because of its geographic location and its wealth of resources. By partnering with the European petrochemical industries, the petrochemical companies of these countries would have better access to the global market (ibid). Many European companies are not attractive to form joint ventures with the Saudi’s oil companies; however, they act as intermediaries between these companies and those of the United States to negotiate joint ventures initiatives (Samirad, 2004). Sabic, on the other hand, is taking the lead to expand globally by acquiring petrochemical assets of DSM, which is an active worldwide in life science products (Sabic, 2002). Similarly, it improves its strategies, expands its capacity nationally, and this accession would bring Saudi Arabia closer to the member countries and can negotiate trade more effectively without going to each country. For Sabic, this accession will help the World Trade Organization to prevent illegal importation and exportation of petrochemical products (Sabic, 2005). Yu (2008) argues that World Trade Organization has done much to liberalize the market without indicating the damage it has done to the member countries, particularly the developing countries, but others are calling for protection. However, protection would likely be difficult for a country after joining the World Trade Organization. Once a country becomes the member of the World Trade Organization, any protection it imposes on foreign investors would be retaliated by severe domestic economic penalty. Taking into account the analysts’ prediction, Sabic believes that within the next three decades, the global economic outlook will be promising because poverty rate among the world’s population will likely decline (Sabic, 2003). This, eventually, will increase the people’s standard of living and hence, the demand for the chemical growing products. Despite this prediction, Sabic finds the short-term is more of a threat to the industry than the promise of outlook (Sabic, 2003). 4.4. Saudi’s Economy, Petrochemical Industry and WTO Zuhd (2005) highlights the impact of this accession on the Kingdom several economic factors, for example on imports. World Trade Organization requires that the country has to participate in the information technology agreement and eliminate the tariffs on technology products. It requires the Kingdom to eliminate tariffs on all pharmaceutical products; easy access to local commercial market that commercial free trade. With this policy, firms are able to trade computer and technology products without tariffs; bind all duties and charges on industrial goods; charges fees for customs and port services on imports based on the cost of services rendered and terminate import certificates on importers; remove export restrictions on all scrap metals; and introduce import licensing. This accession would cause the Kingdom to reduce or eliminate its economic power to enhance the state economic and national security. Tariffs also represent an economic mechanism to protect domestic producers from being undercut by foreign producers who would dump their products into the country at prices below or lower than the price of domestic goods. Zuhd (2005), on the other hand, indicates that import tariffs reflect: (1) Protection of domestic products and hence the livelihood of the people inherited from the central economic planning. (2) Industries that play important role in economic are subject to greater protection. Countries that eliminate import tariffs is working against the country. (3) Countries that have eliminated import tariffs tend to be overpowered by foreign exporters that are aggressively dump their products at prices lower than domestic prices. In cases such as this, the host country will retaliate by pursuing aggressive export to other countries to make up for the income lost from imports they have forgone, because it has to abide by its agreement with the World Trade Organization. Despite the eagerness of the country to make up for the loss in earning from import tariffs, the country is being restricted from exporting through quota, licensing, patent, and contract registration that requires it to minimise its export price (Al-Alamy, 2003). This will eventually exhaust domestic production because they have to export goods at prices lower than the cost of production (Covell, 2004). Dr. Al-Sadoun believes that the impact of the Kingdom accession to the WTO will cause Saudi petrochemical producers to lower its prices as to tariff in the protected markets such as in the EU, US and Japanese markets. By reducing the tariff, it will induce and increase Saudi’s petrochemical exports; however, it depends on the supply and demand of lower price of petrochemical products. (http://www.arabnews.com/?page=6§ion=0&article=74580&d=12&m=12&y=2005). He gives an example that “tariffs on polymers (polyethylene, polystyrene, PVC, polypropylene) in the EU are to be reduced by approximately half, from 12.5 percent to 6.5 percent” (ibid). Consequently, it constraints the ability of domestic producers to produce at lower market prices due to the reduction on tariffs. In the short-run, continuous reduction will push them to produce at a lower profit margin but in the long-run, with the increasing demand and even though producers will have to operate at prices below the profit margin, they will achieve greater benefit. With price liberalization, like in Russia, the Saudi government would have to balance between import substitution and export restriction that comes at the expense of the people and the poor regions (Covell, 2004). As import substitution is exhausted, it is replaced by subsidy while export substitution is adopted and once export substitution is exhausted, it is replaced by export subsidy due to competition laws. Ironically, this economic playground comes at the price of the people because it “depends on the ability of public finance” (Robinson, 2004, p. 99). Export subsidy, will, on the contrary, create monetary vacuum and distorts the fiscal budget. On one hand, local market is in favor of domestic production but government imposes fiscal pressure on them because it has to meet its political commitment to the World Trade Organizations (ibid). Under chemical tariff harmonization agreement, the voluntary agreement in Uruguay requires tariffs elimination or non-tariffs to all pharmaceutical products. Saudi Arabia, indeed, is one of the 25 destinations for America’s chemical industry that will be channeled through direct investment. This does not occur if the government is still in control of the state as paternal governance (Smith, 1993). The chemicals and the Doha Round indicate that the Middle East represents country with the least world employment in the chemical industry, while countries around the world produce chemical production of $3 billion or more per year (WTO, 2005). The following table describes the world employment in the chemical industry (ibid). Table 1. World Employment in the Chemical Industry thousands of people, 2001  Continents People Percentage Middle East  210 2% Africa  365 4% Latin America  610 6% Central/Eastern Europe  981 10% North America  1,183 12% Western Europe  1,743 17% Asia Pacific 4,975 49% Total World Employment  10,067 100% Sources: WTO: 2005, p. 11 According to Doha Round (ibid), chemical products are highly competitive globally and its production requires capital intensive. This competitiveness will be an attractive factor for firms to invest in chemical production, particularly when the tariffs have been liberalized (ibid). The Doha also argues that the elimination of tariffs would likely reducing the costs of inputs and outputs as they are considered as agriculture products and the market for these chemical products would also increase (ibid). Another Doha argument of eliminating tariffs on chemical products that it can increase agricultural crop production as it also controls the yield of the crop, animal and plant diseases (Al-Sahlawi, http://worldbank.org/idf/ndf3/papers/global/Al-Sahlawi.pdf). However, the impact of chemical in the United States and other countries has proven that easy access to chemical products have negative impact on the environment. Interestingly, concerning chemical harmonization, “Doha” points out that it indicates its extensive responsible care, creativity and innovation of new products, which in the end, as the privatization takes control of the state, government loses it capacity. Doha argues that this will improve the Saudi Arabian’s affordability and access to consumer goods and services world wide but in the process, the people would be marginalized in their own country as the crude oil products will be shifted to the European countries to be processed and the country will, in turn, purchase the end products from the European oil producers. Under the World Trade Organizations requirements, the Kingdom will have to eliminate its restriction on “importing beef and other meat products from animals treated with growth promoting-hormones” (Zudh, 2005) – an indication that this policy triggers the incidence of cancer as animals such as cows are treated with bovine has cause serious health problem in both humans and animals. From animal health point view, Forge of Health Canada (1998) indicates that the growth hormone bovine, known also as rbST cause mastitis, congenital defects, reproductive problems, and increase the possibility of lameness on animals. Besides cancer, rbST causes Brucellosis on human and Brucella abortus on women (Duclos, Benteja, Serre & Bascoul, 1984). 4.5. Concluding Perspective on Saudi’s Petrochemical Industry and WTO Al-Sahlawi (http://worldbank.org/idf/ndf3/papers/global/Al-Sahlawi.pdf) argues, the accession of the Kingdom of Saudi Arabia to the WTO indicates a red light. It beacons a healthy political and economic relationship between oil sector, non-oil sector, and government. In fact, he says, this accession is politically negotiated among the politicians who are in favor of privatization. Such as in the case of United Arab Emirate or Oman, the process has resulted in the government to subsidies and protect specific industries such as manufacturing industries, infant industries, and intellectual property rights, if they should become part of the bargaining package with WTO, says Al-Sahlawi. Generally, petrochemical industries, petroleum and minerals, and manufacturing sectors are natural oligopolies. Thereby, their interests to the Kingdom through the WTO are predominated. He argues, seeing the experience of many countries, the Kingdom approach to the globalization should be treated with caution. In fact, he emphasizes, “many of the WTO sponsored programs will have to be phased out in support of economic, social and political realities facing each member country” (p. 8). These include the approach toward privatization where, like in Morocco, government has no roles in the development and management of the country’s economy while Egypt takes the government as a participant in the process of privatization. In the process of liberalization, the promotion of foreign direct investment either through joint ventures or foreign ownership will override the national interests or reduce the country’s ability to perform a balance, equitable social and economic policy (Shafritz & Russell, 2000). References Al-Alamy, F. 18 October 2003. The New World Order. A presentation to KFUOM. 29 April 2008. Read More

 

Read More