US embassy cable - 03ABUDHABI2218

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 
------------------- 
 
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 
------------------------------------------- 
 
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... 
------------------------- 
 
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. 
------------------------------------ 
...And Is Likely To Have GCC Support 
------------------------------------ 
 
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 
------------------------------ 
 
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