Trade Discussion Saudi Arabia is considered to be UAE’s most important neighbor. It is the largest neighbor in terms of economy, geographical size and population. KSA’s gross domestic product (GDP) in 2007 was $ 376 billion while UAE’s GDP was $193 billion . Both UAE and KSA are oil-producing countries, which implies that the exports and imports commodities are not crude oil. However, UAE imports refined petrochemicals and plastics, which are considered to be the downstream product of crude oil. Other commodities the UAE imports are steel, cement, fertilizers and foodstuff. On the other hand, UAE exports to Saudi Arabia are re-exports goods such as cars and electrical commodities. In fact, UAE is the third most important re-export center in the world after Hong Kong and Singapore . UAE imports [pic] Figure. 1 UAE imports from KSA in million dirham Vs. years As it’s shown in figure. 1, UAE imports from Saudi Arabia were growing slowly from the years 1984 to 1989. At this period, the imported goods were mainly foodstuff and medicine and there was no heavy industry commodities imported. From year 1990 until 1994 it shows negligible growth in imports. This was the results of the second gulf war where Saudi Arabia was directly involved in the war and UAE indirectly involved. At the beginning of the new millennium, UAE’s economy starts to boom up as well as the population. Therefore, the UAE demand of imports is increasing dramatically. From 1999 until 2006, the UAE demand for steel and cement was high to satisfy the mega construction projects in UAE. In fact, 25 percent of the world construction cranes were in UAE by 2006 . The demand for steel and cement is expected to continue because of real estate booming in UAE. At 2007, the imports from KSA dropped dramatically. This drop could be explained in many ways. It could be that KSA needs the steel and cement for domestic construction project. For instance, by 2006 KSA starts building King Abdullah Economic city which costs about AED 100 MM. so instead of exporting steel and cement to UAE, KSA would prefer using it for its own domestic projects especially when the steel prices are sky rocketing. The steel demand is growing 9 percent because of the high international demand of steel from China, India and other countries . Another explanation could be that UAE is searching for cheaper market for its required imports. It is also important to say that the UAE invested heavily in the industry of plastic. Therefore, the demand of plastic from KSA is expected to drop. Consequently, the imports from KSA will drop as well. The investment of plastic is represented in Borouge a joint venture of ADNOC and Borealis to produce plastics in UAE. UAE exports [pic] Figure. 2 UAE exports to KSA in million dirham Vs. years At the 80’s and 90’s, the UAE export shows steady increase in the Exports to KSA. However, at the beginning of the new millennium, the UAE exports show an exponential increase. This increase is expected to continue if UAE maintained a real GDP growth rate of 7. 4% (2007). As it mentioned above the UAE is one of the most important re-export center in the world so most of the goods exported to KSA are re-exported goods such as cars, electrical and communication devices. The UAE is expected to continue being important re-export center because it has a stable economy and political system. Trade Balance [pic] Figure. 3 Trade balance of UAE with KSA in million dirham Vs. years The trade balance is the value of exported goods and services minus the value of imports. Figure. 3 shows that the UAE trade balance is negative in the past 23 years. In other words, there is trade deficit. At the year 2007, this trade gap starts to shrink. This is expected since the value of the exported goods and services increases (Figure. 2) while the imported goods and services decrease (Figure. 1). However, this trade deficit does not mean that the UAE economy is monitored poorly. This trade deficit includes only UAE and KSA. The overall UAE trade balance is expected to have a trade surplus. In fact, UAE is expected to have trade surplus with most of the countries that do not produce oil because of the high price of oil and the addiction of countries likes USA, China and UK to crude oil as a source of energy. Conclusion and Recommendation To sum up, the UAE exports to KSA are increasing dramatically, while the UAE imports from KSA starts showing a decrease pattern. Thus, it is expected that the trade balance is heading toward a surplus in the near future. To reach this trade surplus, the UAE economics decision maker should consider the factors affecting the trade balance. The exchange rates are one of those factors. Therefore, the UAE should observe the dollar performance in the market. If the dollar keeps going down, they should reconsider pegging the dollar to the emirate dirham. It is suggested that they change from fixed pegging to move pegging like China. Another factor is the trade agreement and trade barriers. It is suggested that both KSA and UAE agree on reducing the barriers of entry to the market. However, at immature industries such as the petrochemical and plastic industry, it is better to keep entering Saudi's firms into UAE market restricted because UAE is new to the plastic industry "Borouge established in 1998" . This restriction will protect domestic producers. On the other hand, UAE should convince the Saudis to open their market for UAE firms that are well experienced like communication firms such as "ETISALAT" or service firms such as airlines flights. The third factor is the tax rate. It is suggested to lower the tax rate between KSA and UAE to refresh the market and maintain low level of pricing. This will increase the imports and the exports between the two countries. If the above recommendations were taken into account, the UAE trade surplus with KSA will be just a matter of time. Finally, no matter how the trade balance is positive or negative trade is always beneficial for both countries. According to absolute advantage theory and comparative advantage theory trade will always benefit both countries. 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