Almarai is a Saudi-based company that mainly deals with agricultural products. Over the years, the company has seen its product range diversify to include such agricultural products as dairy liquids, foods, bakery treats, juices, poultry, yogurt and desserts, among others (Almarai para 2). In its quest to become a leading provider of superior beverage and food products in the global market, the management at Almarai has deemed it appropriate to establish a subsidiary of the company in the United States. In this regard, the current report is an attempt to examine the actions that the company needs to take both at home and abroad in order to start this venture. The environmental concerns of the business shall also be taken into consideration, along with the treaties that apply to the new venture. Moreover, the relevant tax laws affecting the business shall also be addressed, in addition to reviewing the legality of the business in line with the WTO rules. Saudi Arabia has been a member of the WTO since 2005 and it will be interesting to note how this is likely to affect business abroad. The report shall also review possible subsidies (or lack of) that the company is likely to enjoy from the Saudi government, and whether this would contravene the WTO laws. The applicability of the MFN laws to Saudi Arabia shall also be reviewed, along with how this is likely to impact the new venture.
Saudi Arabia’s background in the WTO
In December 2005, the Kingdom of Saudi Arabia ascended to the WTO and since then, it has maintained a development strategy with a view to diversifying its economy to rely less on natural gas and crude oil accounted for 23% of the country’s GDP in 2010. In addition, crude oil and natural gas accounted for 86% of the country’s export earnings (World Trade Organization 1). In order to foster this development strategy, the kingdom has embraced structural reforms aimed at creating a business-friendly environment. Consequently, Saudi Arabia enjoyed a positive economic performance for a period of 5 years (between 2005 and 2010) when the country’s real GDP grew at an average rate of 3.2 %. During this period, the country had an average inflation rate of 4.6% per annum (World Trade Organization 3). However, by 2009, these macroeconomic indicators had deteriorated markedly as a result of the global economic crisis (U.S. Department of state 2009).
Saudi Arabia’s economic outlook
Since 1986, the Saudi Arabian riyal (SAR) has maintained a standard rate of SAR 3.75 to the US dollar. This has largely been due to the free and fair trade between Saudi Arabia and the US and has played a key role in fostering social and economic development (U.S. Chamber of Commerce 2005). To a greater extent, Saudi Arabia’s economy relies on international trade and in 2010 the Kingdom was ranked position 12 as one of the leading exporters of merchandise. The average MFN tariff applicable to Saudi Arabia is 5.2%. Based on the definition of the WTO, agricultural products have an average tariff of 6.1%. Following the ascensions of Saudi Arabia to the WTO, agricultural products from the kingdom were bound at an average rate of 15.4%. By venturing into the US market, Amarai would benefit from increased exports by the country which stood at $ 228.5 billion by September 2012, an increase of 1.5% compared with the same period in 2011 (United States Department of Commerce 2013).
Actions to take
As a foreign-based company with investments in the US, there are several procedures and protocols that Almarai has to fulfill both in Saudi Arabia and in the US if at all the company’s venture into the US market should be regarded as legitimate. For example, under the world trade organization (WTO), Almarai is required to ensure that it registers the business entity with the US government as regards the foreign investment policy. Almarai has to obtain a letter and other documents from the Ministry of Trade and Industrialization as regards the priority involved in manufacturing, handling and exporting of products. In addition, the company has to abide by these directives, as stated in Article V of the Royal Decree No. (M/58) (Council of Saudi Chambers para. 1). Almarai shall also be required to comply with all the foreign trade regulations in the US market, such as providing export declaration information for goods shipped into the country (United States Census Bureau 2012). Additionally, it is also the responsibility of Almaria to ensure that it issues proper documentation to the relevant government authorities. Furthermore, Almaria has to take into consideration the issue of geographical limitations as regards this foreign investment. In addition, Almarai has to get the approval of the Saudi Arabian government to export its products through the awarding of an export certificate. It shall also have to have an import certificate issued by the US government. Other relevant documentation that the company has to ensure has been processed before it can start its operations induce bank documents, custom clearance documents, and terminal handling documents, among others.
Relevant tax laws and policies
The United States offers some of the most favorable tax laws to foreign investors. By opening a subsidiary here, Almarai would stand to benefit from these tax laws. For example, a bilateral treaty between the US and Saudi Arabia would ensure that Almaria pays less income tax on its operations in the US. Because both Saudi Arabia and the US are signatory to the WTO, the most-favored-nation (MFN) rule would apply to the operations of Almarai in the US. MFN means that each member state ought to treat another member state equally in its business agreements the WTO agreements state that countries should not be seen to discriminate between different trading partners (World Trade Organization 11). In other words, all trading partners should be treated in the same way. For example, if the US grants certain favors to business entities from other countries who have invested in the country, the same favors should also be extended to Almarai in line with MFN. National treatment would also apply in the case of Almarai. This means that as a foreign-based company with a subsidiary in the US, Almarai should expect to be treated equally with local companies. According to the WTO agreements, once imported goods have entered the market, they should be treated equally with the local products.
By virtue of being a company from a developing economy, Almarai could gradually benefit from free trade in case the company decides to pursue persistent negotiations, in line with the WTO principles. As the United States and Saudi Arabia are member states of the WTO, Almaria could in fact attain and agree on a lot of changes with the US through progressive liberalization. For example, the company stands a chance to negotiate for improved trade benefits such as import duties, custom duties, and favorable exchange rate policies, among others. On the other hand, Almarai should expect to encounter fair competition in the US market owing to both the national treatment factor and the MFN factor as enshrined in the WTO agreements to which both countries are signatory.
While establishing a foreign company, the issue of subsidies becomes very important especially in reference to a member country. In the case of Almaria, the company is likely to receive any form of subsidization from the Saudi Arabian government. This is because the company operates under a business category that receives specific subsidies from the government as it deals with agricultural products and this falls under this category. However, this form of subsidies expired on 31st December 1999, and as such, has been rendered null and void. On the other hand, the agricultural agreements peace clause would also enable Almaria to benefit from subsidies, but the clause expired in 2003. However, if at all these subsidies would be valid for the issue to member states this would again contravene the WTO regulations. This is because the WTO agricultural agreements prohibit issuing of export subsidies to agricultural products unless a member state has listed them among its lists of commitments. Therefore, the onus is on the Saudi Arabian government to list these products on its list of commitments so that Almarai can lay claim to them.
Another consideration that Almarai has to take into account is the environmental issues. The US government under the US environmental protection agency (EPA) takes any threat to the environment very seriously and stiff penalties are normally imposed on companies that fail to abide by these laws. It is therefore very important that Almarai ensures that its products exported to the US comply with the EPA import requirements as regards specific chemicals like lead, asbestos, and PCBs (the United States Environmental Protection Agency 2012). Moreover, Almarai has to ensure that it complies with regulations set by the Office of Environmental Quality and Transboundary (EQT) issues, a body that is charged with the responsibility of developing policies on environmental issues in diverse categories of pollution that affects different sectors of the US economy.
The US participates in the negotiations and implementation of various collaborative activities and international agreements in order to avoid harmful pollutants and chemicals from crossing its national borders. This is with a view to protecting both human health and the environment, including addressing the issue of stratospheric ozone layer depletion as espoused in the Montreal Protocol, in addition to controlling the international movement of hazardous wastes through the Convention.
The creation of a subsidiary of the Almarai Company in the US would be a legal move under the WTO rules. This is because the two-member countries have ascended to the WTO and as such, are governed by the principles of trading systems as defined by the WTO. These principles include the awarding of an MFN status to all trading partners equally, not having to raise arbitrarily trade barriers, as well as discouraging such unfair business practices as dumping products and offering export subsidies less than the cost that would enable a company to gain market share. Also, since Saudi Arabia is categorized as a developing country while the US is a developed country, under the WTO agreement, the latter is duty-bound to give foreign investors like Almarai greater flexibility, additional time to adjust, and special privileges as well. This is stipulated in the WTO agreement and as such is not a contravention of its rules.
Importing products to the US market by the Almarai subsidiary in the US would also not be subjected to import duty as the WTO member states proposed and ratified the elimination of such duty by 2000. This should therefore apply to both Saudi Arabia and the US on a most-favored-nation basis. Import bans on certain agricultural products have also been lifted by the WTO member countries. Furthermore, agricultural products being traded by the WTO member countries are also subjected to “tariffication” in a bid to make the market more predictable. This has seen prior tariffs reduced significantly. Also, under the “tariffication” rule, countries that are signatory to the WTO have demonstrated their commitment to lowering export subsidies and domestic support for agricultural products. Again, this would be beneficial to Almarai.
As Almarai prepares to open a subsidiary in the US, there are a number of actions that the company has to take both in Saudi Arabia and in the US market as well, in order to legitimize the business. For example, Almarai has ensured that it has processed and complied with all the documents required to export its products, including custom clearance documents, bank documents, transport documents, export licensing documents, transport documents, and terminal handling documents. The same case applies to its operations in the US. The business that Almarai wishes to engage in is legal according to the WTO regulations. Moreover, because both the US and Saudi Arabia have ascended to the WTO agreement, therefore, Almarai stands to benefit from the MFN rule and the national treatment rule as well. Through persistent negotiations, the company should anticipate fair competition in the US market. Almarai also has to abide by the environmental issue as regards the safety of their products, in line with the established rules set by the US EPA and the EQT issues as well. Moreover, Almurai products exported to the US would also not be subjected to import duty following the elimination of such tariffs by the WTO member states in 2000.
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