Saudi Arabia’s announcement in June regarding rules of origin on imports from other Gulf Cooperation Council countries has raised the stakes within the region, as it goes head-to-head with the UAE in competing for the position as the region’s trading and business hub. 

The country introduced further caveats regarding the ability to claim a local national origin — most notably a nationalisation rate of at least 25% — which is vital for imported goods to enjoy a discounted rate (usually 0%). Further, and potentially more importantly for those with businesses in the UAE, goods leaving from a free zone will no longer be considered locally produced, and are therefore ineligible for the tariff reduction.

Given that the UAE is Saudi Arabia’s second-largest trading partner, this is going to have massive reverberations across the business world, not only among the companies trading goods from free zones in the UAE. Companies with their regional manufacturing capabilities located in one of the UAE’s free zones will now have to re-examine both their clients and operations to calculate the potential impact this change will have.

The new rules also target the set of agreements signed between the UAE and Israel in May 2020, which has resulted in increased trade between the two countries. Unfortunately for both, any goods with components produced in Israel — or owned fully or partially by Israeli investors — will also be deemed outside of the scope for preferential tariff rates.

The country also announced in February 2021 that, by 2024, only those companies with a regional head office in Saudi Arabia will be eligible to bid on, and be awarded government contracts.

The full impact of the tariff restrictions is yet to be ascertained — as is the UAE’s response. It could well be expected that there will be additional incentives on offer to both attract and retain companies to the free-zone jurisdictions. Considering the level of capital investment that some multinational manufacturers have invested into areas such as Jebal Ali Free Zone, it is difficult to imagine them providing a knee-jerk reaction and relocating their operations.

While this announcement is still fresh, the potential impact is quite far-reaching for those operating from within the UAE free zone regime. The only certainty here is that more announcements will be expected as both the UAE and Saudi Arabia diversify away from traditional oil and gas revenues, and compete to attract much sought-after foreign investment in other sectors.

This article first appeared in the August/September print edition of fDi Intelligence.