China-Gulf free trade talks stall on Saudi industrial agenda, sources say

By Thomson Reuters May 14, 2024 | 6:08 AM

By Alexander Cornwell

DUBAI (Reuters) – Negotiations between China and an Arab bloc for a free trade agreement have stalled over concerns by Saudi Arabia that cheap Chinese imports could undermine its ambitions to transform the kingdom into an industrial powerhouse, sources say.

Saudi Arabia has backed renewed efforts over the past two years for the Gulf Cooperation Council (GCC), the Arab bloc which includes the kingdom, United Arab Emirates and Qatar, among others, to finally seal a long sought deal with China.

But five sources briefed on the negotiations said the sides were at an impasse over Saudi reservations with a list of goods put forward by Beijing to be exempt from Gulf import duties.

Saudi Arabia is worried that a wave of lower cost Chinese versions of products that it hopes to manufacture domestically would be damaging to its industrial agenda, the sources said.

Saud Arabia’s government communication office, the GCC Secretariat and China’s commerce ministry did not respond to Reuters requests for comment on the trade negotiations.

The kingdom, the world’s biggest oil exporter, has a nascent manufacturing industry that the government hopes will one day make everything from computer chips to tires as part of a wider economic transformation plan to create a vibrant private sector.

Saudi Arabia is spending trillions of dollars developing its economy under that program, known as Vision 2030, driven by the country’s de facto leader, Crown Prince Mohammed bin Salman.

Prince Mohammed wants Saudi Arabia to not only lessen its dependence on oil rents by creating a strong private sector but also to transform the kingdom into a major global business hub.

The industrial part of that transformation plan faces challenges even without competing with lower cost Chinese goods. That includes finding skilled workers among its citzens in a country where about 60% of the 32 million population are Saudi nationals.

To build its own manufacturing industry, Saudi Arabia is partnering with foreign firms, including from China, to develop local capabilities and manufacturing lines in the kingdom.

The sources said a China-Gulf trade deal was not off the table but that the Saudis and the Chinese would likely have to settle on some sort of compromise to see the deal finalised.

Gulf officials last October spoke of reaching a deal soon. China’s Ambassador to Saudi Arabia Chen Weiqing was quoted by local media in January as saying that although progress had been made, there were difficult issues that needed to be resolved.

China and the GCC, which also includes Oman, Kuwait and Bahrain, started trade talks almost 20 years ago. But the loose political and economic Arab bloc has finalised very few deals. It signed a free trade agreement with South Korea in December.

China is a massive buyer of Gulf energy and in 2023 bilateral trade between China and the Gulf stood at $286.9 billion, according to Chinese customs data, with Saudi Arabia accounting for nearly 40% of trade between the Gulf and China.

China and the Gulf states have deepened economic cooperation in recent years, to the concern of the United States, which has long been the core security partner of the Gulf Arab states.

U.S. officials have increasingly sought to drive a wedge between the Gulf states and China, including issuing ultimatums to pick between American and Chinese technology.

(Reporting by Alexander Cornwell, additional reporting by Rachna Uppal, writing by Alexander Cornwell, editing by William Maclean)