US embassy cable - 03ABUDHABI1756

C O N F I D E N T I A L ABU DHABI 001756 
 
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: 04/13/08 
TAGS: PREL, KIPR, ETRD, ECIN, ETTC, ECON, TC 
SUBJECT: UAE MAY IMPOSE RETALIATORY TARIFFS ON SAUDI 
EXPORTERS 
 
 
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