Export vs. Sustainability Trade in Saudi Arabia

Introduction

Since the beginning of the twenty-first century, international trade has remained significant in the global business arena. Since the beginning of the 21st century, global trade has expanded to its current $ 20 trillion worth (International Monetary Fund 11). Due to the boom in international trade, nations across the global business arena have benefited. As the world becomes a global village in the international trade circle, nations have exploited trade opportunities (Al-Shumaimari 23). Though it is a fact that trade is critical for economic growth, it has been characterized by negative publicity from the antagonists who blame it for environmental degradation (Al-Qahtany 32). Besides, governments do not restrict development to economic growth policies but also environmental protection, improvements of the social services for the citizens, and offering affordable public goods.

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For instance, trade liberation through strengthening the rules of world trade can be interpreted as geared towards achieving economic growth sustainability. However, the same is often accompanied by the negative impact on developing nations are the small players. This aspect has been the greatest challenge facing developing countries that are active in international trade. Reflectively, the rate of pollution is directly proportional to the level of economic growth until the growth leads to actual development. As a result of the economic development, the rates of pollution will reduce as countries adopt green technology. As a result of these positive changes, the level of pollution will begin to decline.

Thus, the treatise reviews the economic climate of Saudi Arabia to support export trade. This country falls in the category of steadily growing states. Since the beginning of the new millennium, the Kingdom of Saudi Arabia has made steps towards becoming a powerhouse in the global business trade through the creation of numerous jobs, privatization of vital organs of its economy, and investment boosting through incentives to local and international investors. In the last ten years, the private sector has experienced expansionary growth in terms of capital and infrastructure expansion. On the other hand, the consumer goods industry depends on export trade. Reflectively, since exports account for over 40% of the annual GDP for the economy of the Kingdom of Saudi Arabia, it forms an appropriate entry alternative.

Thus, the overall aim of this treatise is to synthesize exports guidelines for the economy of Saudi Arabia. Besides, the discourse explores the strategies that exporters in Saudi Arabia may harness entry into the market of Saudi and how to sustain the same over a long period of time. In the conclusive segment, the paper reviews the export trade considerations to the market of Saudi Arabia.

Sustaining trade with Saudi Arabia: an analysis of exporting as an alternative

Saudi Arabia’s Economic Structure

Being a free market economy, Saudi Arabia has been at the forefront of export trade. The trade policies of the Kingdom of Saudi Arabia are aligned to the Islamic laws that promote ethics in doing business. The larger part of the economy of Saudi Arabia comes from oil and its derivatives trade. At present, the oil industry accounts for over 80% of the total export earnings. This accounts for 40% of the GDP and 80% of the budget revenues. The annual population growth rate of Saudi Arabia stands at 3.5%. This population growth rate is relatively higher than the growth rate of the GDP. At present, the structure of the Saudi population is dominated by persons below thirty years and they form sixty-five percent of the total population. Specifically, in 2003, the per capita GDP grew to $9,450. However, before this, the per capita GDP had peaked at the beginning of the 1980s at $28,000. Since the beginning of the new millennium, the GDP has been on a decreasing trend. The experts have projected a continued stagnation of the GDP of the Kingdom of Saudi Arabia in the coming years unless the growth of the economy increases by a significant margin. Another option suggested is the reduction of the population’s birth rate (Central Department of Statistics 43).

In order to become competitive in the global business arena, the Kingdom of Saudi Arabia passed a series of vital trade laws that were meant to promote the rule of law in trade and open up the economy to other nations. Interestingly, despite the volatility of the oil market at the time, the profits recorded from the Saudi oil export trade contributed to budget surplus and an increase in the GDP by 6.4%. The Saudi Arabian riyal (SR) has remained relatively stable over the years. In line with the Islamic laws, there are no taxes placed in the currency exchange trade against the dollar for both the nonresidents and residents to encourage the open trade economy. However, the only notable restriction in the currency exchange trade is a policy against trade with Israel and companies registered under Israel in addition to regulation of the foreign banks interested in the riyal-dominated businesses (Asafu-Adjaye 67).

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Saudi Arabia’s Trade Policies

Price Controls

Saudi Arabia’s government has adopted the policy of regulating prices for basic commodities. The general effects of the subsidies imposed to ensure that the local commodities are more affordable than those imported. However, the subsidies on agricultural products have been reduced in the recent past as a response strategy for the government plans of deficit reduction (Central Department of Statistics 35).

Tax System

The tax system of Saudi Arabia does not affect personal income. The average tax on commercial enterprises is 30% of the profits. Due to some attractive tax incentives such as the ten-year tax holiday for foreign investors in some parts of the economy, foreign investors in these parts of the economy enjoy very long tax breaks.

The Saudi’s Market Structure

Saudi Arabia is one of the critical components of the Gulf Cooperation Council (GCC) that was formed to serve the business interest of its members. The nation has benefited from the free trade agreements negotiated by GCC to trade with Asia and European countries. The GCC has in the recent past established an ambitious policy to merge the Middle East market into a union with a single currency. Among the notable members of the GCC are Kuwait, Qatar, Oman, UAE, Bahrain, and the United Kingdom of Saudi Arabia. The joint per capita income for this group was $16,000 in 2007 (Central Department of Statistics 16).

The overall development levels exhibited by the Saudi market are relatively stable and high thus, encouraging prospective investors in the export trade. Reflectively, this could be seen to include the potentiality of the region for such business ventures as the export trade sector development. The rate at which the economy of Saudi Arabia is growing is incredibly rapid and this has led to the diversification of the economy. Notwithstanding, this diversification of the economy has led to the definition of the interdependence of sectoral components of the economy that translate to the realization of unrestricted business operation. Besides, the finance departments operating in Saudi Arabia’s foreign trade play a great role in the market operations. Further, this interaction has a direct impact on the economic currency value of the country. Consequently, this could be the reason why the Saudi authorities insist on promoting the export trade by being active in the international trade arena.

The annual average population growth rate in Saudi Arabia stands at 3.5%, and this is projected to reach 34 million in 2015. The annual average GDP growth rate is 3.5 and the population’s purchasing power stands at $15,200. Since the majority of the population in Saudi Arabia is youths belong the age of 30 years, the use of the internet, mobile phones, computers, and other digital products have a significant influence on their buying and selling habits as indicated in the table for growth size of the economy of the Kingdom of Saudi Arabia.

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Market 1997 2002 2009
EIU market opportunities rating (10=high) 5.15 6.21 6.6
Normal GDP (US$) 164.99 188.80 200.1
GDP/head (US$) 8,192 8, 027 10,034
Real GDP (US$ bn, 1999 prices) 157.8 172.7 190.8
Real GDP (% change pa) 2.61 0.13 2.1
Growth of real GDP/head (% pa) -0.50 -2.81 0.9
Exports (US$ bn) 60.7 72.6 90.1
Share of world GDP, at market exchange rates (%) 0.56 0.58 0.78
Openness (exports – real GDP) -97.1 -100.1 -101.3

(Source: Central Department of Statistics 45).

The average Saudi’s market size stands at US$190 billion which translates into 0.58 percent of the GDP of the world. The economy of Saudi Arabia cannot function without the input of import trade, especially in the heavy machinery and electronics as the manufacturing industry gears towards sustainable production. The economy of Saudi Arabia has a big deficit in terms of the market requirement for electronics, health products, and types of equipment for communication. However, due to the current demands for leisure, entertainment, training, and education, the service industry has potential in the export trade (NovaStars Information Services 9).

The penetration of the Saudi market is not very easy since the general consumers are persons with stable income and demand quality services. The market is characterized by the demand for the latest and the best in the market. Interestingly, foreign companies have benefitted from this unique feature of the Saudi market. They are in the front line in the import business of goods and services worth billions of dollars annually. However, there has been an open disappointment on the part of these businesses since the fierce competition and narrow choices they offer to the Saudi market are often rejected.

Saudi Arabia’s Market Structure Components

World Trade Organization Accession

After enrolling as a member of the World Trade Organization, the nation of Saudi Arabia has improved it trade laws in line with international practices. The Saudi government has actively removed some of its protectionist trade barriers and has opened its doors to international competitions and trade partners. In addition, the government has improved on intellectual property protection laws. As a result of these positive changes, the Saudi export trade platform has been set for exporters since the above measures have created a transparent trade regime regulated by international trade laws.

Since Saudi Arabia is a member of the WTO, export trade has been made easier. In the recent past, the government of Saudi Arabia lifted the last trade barrier by allowing competition for its oil products from other international companies. However, the bilateral agreements have not been extended to the United States of America.

Foreign Trade

Interestingly, Saudi Arabia is the only member of the GCC that falls in the world’s top thirty nations in the global business arena. Specifically, the Kingdom of Saudi Arabia occupies the eighth position in the global trade arena with export merchandise of $93 billion besides being in position 32 in the category of import trade.

Saudi Arabia’s Exports

The oil exports in Saudi Arabia account for 80% of total exports. However, the crude oil export declined from the 1980s due to the development of local processing industries. Besides, the competition from SABIC companies exporting the same product contributed to the decline in export trade in the late 1980s. Since then, the export trade has recovered steadily due to the improvement of Saudi Arabia’s world oil market share. However, the global market share that Saudi Arabia controls depends on the demand for its crude oil and its by-products (Al-Qahtany 32).

Saudi’s Imports

Machinery and electronics form the main category of imports in the Saudi market. However, the market share of these items has declined steadily due to the introduction of domestic investments into industries manufacturing the same. At present, this category controls 55% of the imports market share. Import trade for food products has remained the second largest sector of the import trade to Saudi Arabia. In the early 1990s, this category constituted 14% of the total imports. Since the beginning of the new millennium, the market share has increased steadily to 18% by 2009 (World Bank 27). This category constitutes about thirteen percent of the total imports into the Saudi Arabian market. The table below summarized the market share of imports into Saudi Arabia.

Commodity 1999 2000 2001 2002 2003
Foodstuffs 4.70 4.81 5.42 4.78 5.22
Textiles and clothes 1.89 1.73 1.78 1.75 1.85
Medicines 0.89 0.88 0.95 0.99 1
Chemical products 2.59 2.56 2.77 2.81 2.88
Wood and wood products 0.38 0.34 0.39 0.37 0.40
Jewells 1.67 1.37 1.22 0.95 0.45
Base metals and metal articles 2.87 2.35 2.38 2.54 2.66
Electrical machines, equipments and tools 6.00 6.73 6.67 6.42 7.09
Transportation equipment 5.53 4.06 5.35 6.76 7.13
Others 3.39 3.17 3.41 3.85 3.61
Total 29.91 28.01 30.27 31.18 32.28

(Source: Central Department of Statistics 45).

Trade Partners

The majority of all imports into Saudi Arabia originated from West Europe which controls over 44% share of the Saudi’s imports market. On average, the USA supplies 18% of imports into Saudi Arabia. Japan controls 15% of Saudi Arabia’s import market. The Middle East neighboring countries only control between three to five percent of Saudi’s imports market share (NovaStars Information Services 9). This is summarized in the table below.

Saudi Exportation Destinations Ratio of total percentage Nations that import to Saudi Arabia Ratio of the total percentage
USA 18.6 USA 11.3
Japan 15.6 Japan 8.9
South Korea 10.1 Germany 7.4
Singapore 5.1 UK 4.9
China 4.5 France 4.9

(Source: Central Department of Statistics 45).

Exports to Saudi Arabia

Though the importation of consumer goods into the market of Saudi Arabia is often duty-free, the Saudi government has imposed a 20% imports duties fee in some industries as a protectionist policy for its infant industries. Further, purchases by the local markets are made from the local Saudi importer and not from the foreign traders. Whenever the market demands the importation of products, there are tariffs imposed on such imports. For instance, there is a 20% import tariff on wooden frames and aluminum that are imported while there is no tariff for the local aluminum of similar quality and quantity.

The clearance processes in the Saudi seaports are often very quick and can be done within 24 hours. In order to reduce cases of illegal activities, the Saudi customs authorities have been at the forefront in ensuring that export documents are authentic from the country of origin.

Standardization of Trade in Saudi Arabia

Standardization of Imports

The Standards Organization (SASO) which is an independent body within Saudi Arabia is mandated with the task of setting the prerequisite customary for partners interested in import trade (NovaStars Information Services 9). SASO ensures that all business standards are met before permitting a go-ahead for importation. In addition, the standardized quality assurance guidelines set by this organization are communicated to the interested importers and penalties for business misconduct. The standards addressed include authenticity of the markings, calibration, testing, inspection, and identification through sampling the goods imported before being released into the market.

Processes for Importation into Saudi Arabia Market

The SASO authority in Saudi Arabia has designed a customary regulation module that determines the qualification of both the local and international products entering the Saudi market. The conformity to these standards is aimed at ensuring that the local consumers are protected from the harms that might be caused by low standard goods. All the government departments dealing with the import trade are expected to strictly implement the codes (Saudi Arabian Standards Organization 32).

The SASO standardization process requires an authentic conformity certificate for each import shipment for goods and services it regulates that are meant for the Saudi market. The frequency of importation and the type of products being imported determine the ease of obtaining the conformity certificate. The offices of SASO allocated in all the import routes ensure that shipments lacking the conformity certificate are turned back. The documentation must be authentic for trade to be possible. The most common documents that are verified by Saudi Arabia’s SASO include insuarence, billing, and safety certificates.

Main Success Strategies for Exportation to Saudi Arabia

As suggested in the studies, a smooth exportation business is possible when companies assess the potential of their import products in terms of legal requirements and market demands of the intended markets. Through the informed selection of the target markets, and exporting company may draw clear and effective strategies for selling (Park 23). Effectiveness policy determines the penetration strategies designed to increase market share for a particular product and ensure the sustainability of the captured market. Competitiveness ensures that the company survives competition through unique business services such as strategic location, free delivery, and reliability as perceived by customers. Efficiency ensures maximum gain from the trade within minimal expenditure in the target market (Travis 21).

Therefore, realistic market assessment and creation of a unique market niche are the main prerequisite for successful trade in the Saudi market characterized by customers with specific demands and culture. The most appropriate market entry strategies into the market of Saudi Arabia include franchising, direct marketing, and joint franchising. These strategies may only succeed when the importing company has a comprehensive understanding of the dynamics of the local market, technological competition, quality assurance, cultural compliance, effective marketing skills, and competitive pricing.

Market Dynamics and Size

Market dynamics determine effective sales and public awareness to develop product knowledge to Saudi Arabia clients. If well merged with the appropriate market mix, the strategy will secure a continuous quantitative increase of market share by constantly maintaining an up to per competition levels. Correspondingly, a company may seek to offer different packages and sizes for its products and other associated services so that those customers, who buy in relatively smaller quantities but in bulk, are integrated into the marketing plan. Besides, the plan may offer a variety of different distributions channels that will be vital in the attraction of new customers. As a result, the new geographical regions will facilitate the expansion of the export market in Saudi Arabia. Different business policies will influence different types of clients and at the same time create new markets segments as a result of amassed economies of scale. The Saudi market is strategically located and can offer exporters a series of services such as administrative services, marketing services, delivery services, and product-handling services.

The physical distribution patterns are with no doubt a critical area of focus. This will make use of the company’s brand logos that are highly recognized by most of the consumers to build other distribution channels in the Saudi market. Different distribution channels of an importing company will expand the sales thus increasing the eventual profitability. In addition, the use of local sales of agents will enhance the distribution of the imported products in the macro and micro-regions of the culturally integrated Saudi market.

Technological Advantage

Comprehensively, it would be necessary to establish how conversant the people of Saudi Arabia are to technological advancements constantly changing across the global arena. The answers to this question could be relative as it depends on the country’s technological advancement. Research has it that Saudi Arabia though very populous, has a high percentage of the literate in its population (Park 43). Saudi Arabia has a high number of literate young are the main clients for import products, especially computers and electronics. An importing company could take this as a business opportunity. The language used in the intended market is critical. The fact that the participants of the trade activity from either country share a common language will facilitate an easier entry.

Access to the market (exchange negotiations or otherwise) could be a factor that would influence the pattern of trade in the export industry. Saudi Arabia has improved its infrastructure systems in transportation and communication. This has played a major role in the improvement of the delivery of social utilities.

Moreover, the documentation of import regulations has made it clear that they are binding and any ambiguities are excluded from the equation. The provision of patent and trademark rights in Saudi Arabia has helped eliminate the chances of fraudulent attempts on a company’s product to ensure that the company is not disadvantaged. An export company can take this as an assurance of the protection to be offered to their products against illegal dealers.

Superior Quality

The inflation rates in Saudi Arabia are at a minimum and the currency management authorities are confident that the rates are not only minute but also manageable. Thus, it will not have a substantial macro effect on the market demand pillars. Through the importation of quality services, the revenues are projected to increase for an export company interested in the Saudi market. The availability of the import goods market in the populous Saudi market is a positive factor that can be integrated into the marketing plan of such a company. A rational importation investor would seize this as an investment opportunity. Moreover, the currency’s stability and its minimal fluctuations would auger well with the business profit-making objective. In addition, recent research on economic projection confirms that Saudi has a stable exchange rate on the balance of payments echelon. Consequently, an export company stands to gain in the Saudi market.

Cultural Friendliness

For the social dimension of the evaluation of the Saudi market for the import trade. It is necessary for the company to tailor its products to suit the acceptable cultural norms. This way, it is necessary for the marketer who is carrying out the research to evaluate the literacy levels of the Saudi people. This will include the evaluation of the Saudi education system and levels. Most importantly is to link the findings to the target market of import products. By doing this, the marketer will establish the level of awareness of the people of Saudi. The majority of customers for imported goods are Muslims with very strong moral standing. Therefore, an importing company has to tailor its products to minimize conflicts that may arise due to social, cultural, and religious prejudice.

Tactful Pricing

Due to a fair pricing mechanism, competition factors may positively skew to the advantage of an importing company that adopts it. With competitive prices for its products and uncompromised quality of services, this strategy has the capability of making the operations of such a company in Saudi Arabia economically feasible and sustainable, while at the same time winning a greater percentage of the market share. Ultimately, such a company has to put several considerations into critical thinking before settling on this decision. To enhance the achievement of the same, the company needs to introduce different price policies which in return will attract various types of clients thus, creating new market segments.

Consequently, marketers will be required to maintain the sale and success of the entry procedures and endeavors of the company. In line with the marketing principles, this recommends the proper scrutiny of various factors creating a direct or indirect impact on the economic trends and changes of the economy of Saudi Arabia. The prices of a commodity influence the determination of the buyer’s buying decisions. The products of an importing company into the market of Saudi Arabia need to be integrated with a competitive pricing mechanism to outsmart the competition.

Effective Selling Approach

As the Saudi government seeks to re-invent the economy and restore investors’ confidence, the Saudi market currently enjoys a relatively peaceful and economically stable business environment. Factually, the Saudi nation seems to be embracing the spirit of globalization and economic liberalization with an upbeat positive mood of better focused economic growth accompanied by development. Thus, it is recommended that an export company should maximize the available import trade opportunity to re-establish a structurally feasible marketing program, as it will have the advantage of knowledge on the Saudi market segmentation and demand trends. The other aspect of the selling mix is that of promotion. The export company should carry out public awareness programs through frequently diversifying some of the products from its new customers that have worn out.

Conclusion

Conclusively, it is apparent that the Saudi market is characterized by the existence of numerous trade opportunities in addition to a series of challenges. Therefore, exporters should review these challenges and opportunities before venturing into this market. This treatise has comprehensively analyzed the salient features and market profile of the Kingdom of Saudi Arabia. Moreover, exporters are given the procedural guideline for doing business in Saudi Arabia. A detailed appraisal of the cultural, economical, and demographic inclination of Saudi clearly indicates that its market is fast growing with a substantial population who actively use import products. This forms the basis for a feasible investment position. With an already existing marketing structure, though currently dysfunctional, an importing company should apply cauterization of marketing distribution channels within a wide established network alongside a strong financial arm. The challenges that an importing company may face in the entry bid include limited political, cultural, social freedoms encircled in a religious parameter. However, the opportunities available outweigh the challenges in the export trade to Saudi Arabia. The main challenge to export trade is the unique Saudi market characterized by demand for customized services.

Works Cited

Al-Qahtany, Mohammed. “Obstacles facing exporters of non-oil products.” Proceedings of theEconomies of the gulf council countries: The Opportunities of the 21st Century, 5.1 (2002): 15-22. Print.

Al-Shumaimari, Ahmed. “Direct marketing in the gulf council for cooperation countries: opportunities and challenges.” Proceedings of the Economies of the Gulf Council Countries:The Opportunities of the 21st Century, 5.1 (2002): 45-56. Print.

Asafu-Adjaye, Jordan. “International trade and sustainable development in Sub-Sahara Africa.”International Journal of Social Economics, 31.4 (2004): 417–429. Print.

Central Department of Statistics. Statistical Year Book, Ministry of Planning: Riyadh, 2009. Print.

International Monetary Fund. World Economic Outlook: Advanced StructuralReforms, IMF: Washington, DC, 2008. Print.

NovaStars Information Services 2006, The Saudi Network: Marketing US Products. Web.

Park, Gerald. Monetary Management in GCC Countries, IMF Staff Papers: Washington DC, 2009. Print.

Saudi Arabian Standards Organization 2010, Imports Standardization. Web.

Travis, Thomson. Doing Business Anywhere: The Essential Guide to Going Global, Hoboken: John Wiley & Sons, 2007, Print.

World Bank.Doing business 2008: comparing regulation in 178 economies, New York: World Bank Publications, 2009. Print.

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