Speakers:
William Clatanoff
Former Deputy U.S. Trade Representative for Labor
C. Christopher Parlin
Partner, Loeffler Tuggey Pauerstein Rosenthal, LLP
Robert Jordan
Former U.S. Ambassador to Saudi Arabia
Charles Kestenbaum
Former Regional Director, U.S. Dept. Of Commerce
Jean-Francois Seznec
Adjunct Professor, Columbia University's Middle East Institute
Moderator/Discussant
Chas. W. Freeman, Jr.
President, Middle East Policy Council
U.S. Capitol
Washington, D.C.
January 13, 2007
Transcript by:
Federal News Service
Washington, DC
CHAS. W. FREEMAN, JR.: I think we can come to order. If people will take their seats, please, we'll get started. I'm Chas Freeman. It's my honor and sometimes pleasure to be president of the Middle East Policy Council, a small, struggling organization with a history of 25 years of occasionally successful efforts to educate the uneducable about the realities of the Middle East.
Middle East Policy Council, for those of you who don't know us - and I see many of you do because you are familiar faces - does three things. We come up here to the heart of darkness and raise questions that are politically incorrect or neglected, but which require discussion. We take the discussions, which occur here in this room - and you as members of the audience are a major part of these in the last hour and a half in the questions and answers and comments - we take the transcript of these discussions and it becomes the first item in Middle East Policy, a copy of which I don't have here, but maybe somebody does. No? I would like to wave that in your face if I may. The Middle East Policy is the most frequently cited journal in the field, and deals with contemporary issues of concern to Americans and Arabs in particular. The third thing we do - invisible in Washington, but perhaps most important - is we train high school teachers throughout the country how to teach about Arab civilization and Islam. We've trained about 18,000 teachers. We reach about 1.4 million kids a year and confuse them with a fact or two about the region, which they would otherwise never encounter in our splendid public school system.
We've come together today not to hear a pitch from me for an endowment, which we desperately need - and if you have an endowment in your pocket, please bring it forward afterwards - but to discuss a neglected topic, one on which there are more spurious opinions than facts out there. And that is, Saudi Arabia and its accession to the WTO. Saudi Arabia is a unique place, and the impact of its accession to the WTO is likely to be enormous. Saudi Arabia is, after all, the only place on the planet which was never penetrated by Western missionaries, militaries, or merchants. When the West finally came to Saudi Arabia, it was after the discovery of oil had made Saudis wealthy, so westerners arrived not as masters, as they did everywhere else, but as servants of the Saudis. Many Saudis to this day seem to divide the world into two classes of people - "us Saudis" and potential employees.
At any rate, Saudi Arabia has, because of its history and its oil wealth, been able to make up its own rules for investment and foreign trade, and to play by its own rules. But it is now embracing international norms for the first time. It's doing so in its own interest and in furtherance of King Abdullah's effort to promote reform in the kingdom. WTO accession really marks the end of an era in many respects. That was an era where some people quipped that the national motto in Saudi Arabia was "progress without change." This era has come to an end and much change is now in store.
We're here today to explore some of those changes, the nature of the changes we can expect in Saudi Arabia, the impact of WTO accession on Saudi-American relations, and on U.S. interests in particular, and the kinds of socioeconomic transformations and changes in Saudi Arabia's political economy that a shift to globally-derived rules for the conduct of investment and commerce seem certain to bring about. We'll be talking about who wins and who loses by this sudden move by the Saudis to join the world. We'll be talking about what impact there is on issues of concern, both to ordinary Saudis and foreigners living or doing business in the kingdom. And I'm referring specifically to issues of the possible abuse of privilege born of wealth or title or corruption, which has been a serious problem in the kingdom for a long time.
Assembling a panel to discuss these issues is not as easy as you might think. There are actually more people who specialize in the study of Tibet in the United States than who specialize in the study of Saudi Arabia, and it's easier to get a visa and to travel to Tibet also. So I think we're particularly privileged to have such a fine panel, and I'd like to thank the people at the Middle East Policy Council who worked very hard to put it together. There was a brief moment when it didn't look as though we could actually assemble enough expertise to discuss the issue in the way that it deserves.
But we do have a great panel today. You will find on the back of the program little bio sketches of all of them, so I'm not going to repeat all that. But I'll just say that we're going to go in the order of the speakers on the program. And we will start therefore with Bud Clatanoff who has just celebrated his freedom from many years of work at USTR, and is therefore for the first time able to say what he thinks and promises that he will do so. He will be followed by Chris Parlin who is a lawyer here in Washington with a very distinguished firm, which represented the Saudis in the negotiations with USTR, and who is therefore conversant with all of the technical issues concerned. Bob Jordan, Ambassador to Saudi Arabia from immediately after 9/11 - not an easy period - did a wonderful job in my view as ambassador, and we're very honored to have you here, Bob. Charlie Kestenbaum, an old friend who served as commercial councilor in Riyadh and many other places in the region, and who is now engaged in due diligence - that means finding out where the corruption is, I guess - we're delighted to have you here, Charlie. And finally, Jean-Francois Seznec who is an adjunct professor at Columbia, but manages to somehow live in Annapolis while doing that, and who is an expert on the financial relationships with the kingdom internationally.
So these are the panelists. Those of you who have been to these sessions before know that the rules are very simple. Each panelist gets ten minutes. After ten minutes, I haul them away from the mike or cut the electricity or otherwise incapacitate them. We will go through the presentations in order. After that there will be a question, answer, and comment session, and I invite all of you to participate. What you need to do to do that is to signal me. I will make a note - beautiful woman on the aisle, ugly man in the center - and then I will call on you in the order in which I have noticed you. Please come to the microphone, tell us who you are even if I know - or we all know - and make your comment succinct or your question pointed. So that's the rule, and now we come to the topic, which I think is a great deal rather like Richard Wagner's music -- not as bad as it sounds. It is a very interesting topic, and we ask Bud Clatanoff to lead off, please.
WILLIAM CLATANOFF: Good morning. First of all, thanks to the Middle East Policy Council for inviting me. I want to talk a little bit about sort of the American interest in this. But let me stress that the Saudi accession to the WTO was clearly in the interest of the kingdom of Saudi Arabia. They did it. They took the steps they wanted to because they're going to win. We tried to push them in that direction - we, meaning the U.S. government where I worked for a while, but I don't work anymore - in particular after the events of 9/11.
When you looked at world trade from the point of view of the U.S. perspective looking at world trade, there was this conundrum, this anomaly about the Middle East generally, and Saudi in particular, which is that here is a part of the world that literally gave us the word bazaar for trading, right, and the market and the souk and everything like that. And yet, as a share of world trade, and particularly non-petroleum world trade, they were miniscule. To give you an example, the United States last year imported more from Hong Kong alone than from all 24 members of the Arab League combined. They're not players in the world stage of non-oil, non-petroleum trade. They're insular. The way the WTO works is sort of the first step to breaking that up.
I think you're all aware that in early 2003, President Bush announced his intentions that we would negotiate a Middle East Free Trade area, that we would like to have free trade agreements with the entire Middle East. At the present time, there are free trade agreements between the United States and Israel, Jordan, Morocco, and just two days, the president signed the FTA with Bahrain. And hopefully, within a week or two, the administration will send the trade agreement with Oman to the Hill. But before we can negotiate a free trade agreement, we have to have WTO membership by our trading partners.
And so let me just take about three minutes to sort of walk you through the process, if you will, of WTO accession. It starts with a country saying to the WTO, I want to join. Don't ask me why they use the word accession. You accede to the WTO by accepting the World Trade Organization's agreements. There is a whole series of agreements, number one being the General Agreement on Tariff and Trade, or GATT, the General Agreement on Trade in Services, or GATS, Trade-Related International Property Rights, or TRIPS, Technical Barriers to Trade, TBT - in government, you can't work without acronyms - and SPF, Sanitary and Phytosanitary Standards. So Saudi Arabia had to agree that it would accept all of those pre-existing WTO agreements, would abide by them, and would then negotiate with what's called a working party.
And the WTO is a weird animal. It rules only by quote "consensus," which means everybody has to agree. Saudi Arabia was 149th country to join the WTO, so the first 148 had to agree. And Saudi Arabia, as number 149, had to agree to the accession of number 150, that great state of Tonga, which just joined at the Hong Kong Ministerial. Saudi's official accession was formally approved by the General Council of the WTO on November 11, 2005. They wanted that. It was a special session of the council. They wanted to be a full member before the Hong Kong Ministerial, which gave them the right to vote and lobby and so forth in Hong Kong. So their timing was there.
It took a long time. They started the process in 1993, and frankly, they weren't very serious about it for a long time. And I think that you have to look at the WTO accession as being two things. One, it's important from the point of view of Saudi's trade relations with the world. But two, it's equally important internally that by signing up to these rules, it's a real commitment - and I don't think it got nearly enough press - it's a commitment to internal economic reform. And it has to be viewed in that light.
And to see how much it's changed, the best example I want to give you is that in 2001, Saudi tabled its quote "investment regime," gave this to the WTO working party. It said that there would be a quote "negative list" that Saudi Arabia would allow foreign investment except in these areas. And the first one on the list is - that will not allow any foreign investment - was exploration, mining, and production of petroleum products. Some of them are expected and we, the United States, have the same thing. For example, manufacturing of explosives. That's a security issue. Production of military equipment, all right? Real estate investment in the holy cities of Mecca and Medina, understandable. But how about all insurance and insurance-related services was on their quote "negative list." All transportation services on their negative list. That's where they were in 2001. And that is precisely why in the negotiations, the United States was the most difficult. We were the last country to agree to the Saudi accession, but it was primarily investment was our issue as well as some other issues.
But very quickly, the WTO working party had foreign investment, sanitary and phytosanitary standards, technical barriers to trade. And one thing that really was a big hang-up was import licensing and customs valuation. It's fine to say oh, we're going to reduce our tariff from 15 percent to 3 percent of value, but then how do you value it? And the Saudis had a very non-transparent system of import processing and customs valuation. So those were the big issues. They all got worked through. And again, I think the crucial thing is - and particularly distribution - the end to the so-called agency system, so that U.S. importers can now send goods directly in and don't have to have an exclusive agent in the country. These are just indicative of the kinds of domestic economic reforms that Saudi Arabia is going to make in order to live up to its WTO obligations. Thank you.
MR. FREEMAN: Thank you very much. Excellent introduction of the topic, and you ended by alluding briefly to two of the revolutionary changes we can expect to see. One, with respect to the sort of protection racket represented by agency relationships promoted with passive partners whose contributions were never quite clear, but whose rake-offs were measured in significant numbers. This is now, one hopes, on the way out. And that is a revolutionary matter, not just in terms of relationships with foreign business people, but also in terms of the potential for smaller businesses in Saudi Arabia now to compete with established merchant houses. Therefore it is, as I think the king intended, empowering for ordinary Saudis who have not been among the privileged in the kingdom. And I thank you very much for not exceeding the time. We turn now to Chris Parlin.
CHRISTOPHER PARLIN: Thank you, Chas. I guess using Chas' description from the introduction, I am a Saudi employee. My firm and I have had the pleasure, continue to have the pleasure to work with the Saudis as their WTO experts. We helped them through the last three years of the negotiating process toward WTO accession and are continuing to help them as they work toward becoming a model WTO citizen. I think it's appropriate that I am placed between two distinguished colleagues with an American perspective. I will provide a Saudi perspective. I should make the note that while I do represent the Saudis, I have not prescreened my remarks with the Saudi government and therefore, I think they would appreciate my saying that what I say conceivably is not exactly put in the way that they might - their officials might say it. I think I have the spirit though.
The spirit of the remarks certainly echoes what Chas said in his introduction and Bud said from the American perspective. The Saudis weren't pushed into WTO accession. They acceded. They joined the WTO because they wanted to do it. And I do think very, very clearly that the vision of King - during most of the process Crown Prince - Abdullah was critical for this effort. They also happen to have an extraordinary team of senior negotiators - Commerce Minister Yamani was a strong driving force, State Minister Alireza, and in my mind first and foremost, their chief negotiator Fawaz al-Alami. Every government should be so lucky as to have people like these moving them along.
Let me shift to some of the technical details, and hopefully technical does not mean boring. What were the core elements of Saudi accession? As Bud has said, the core element is joining the WTO, agreeing to the set of substantive and procedural agreements that are part of the WTO treaty - I use treaty in the international law and not U.S. law sense. There needs to be a footnote though. Think about a country club - 148 members. You are seeking to join the club. It is the members, the 148 who tell you what the rules are. You can say, oh, no, no, no. I'm sorry. My interpretation of what you would like me to do in sanitary and phytosanitary standards with respect to scabie-mouthed sheep. This is the type of exciting issue that you deal with in the real world. I'm sorry, my understanding is different. And at that point, Australia looks at you very politely and says, that's fine. You can sit at the other side of the table for as long as you take that position. So there is an element of slightly less - I'm being polite - than equal bargaining. That not withstanding, I will say from our perspective as the Saudi lawyers - and I think the Saudi government officials would agree with this - the U.S. delegation in particular was incredibly tough, but incredibly fair. We knew where they were coming from and we were able, when the evidence and the arguments were on our side, to shift the direction of the aircraft carrier and to get a position in the end that was much more feasible, much more rational from the Saudi point of view.
Okay, what happened? You can go into the details of all the specifics, the scabie-mouthed sheep, the shortening of the negative list, the negotiations leading to agreement on cooperative insurance. The reality though is across the board, the Saudis liberalized their markets and restructured their legal regimes. In short, they fostered a more open and balanced economy, one that will be infinitely more receptive to foreign participation than had been the case in the past. And there will be countless new opportunities for both Saudi and non-Saudi entrepreneurs in a wide scope of business interests.
As I said, this transformation occurred across the board. In all of the technical areas, there were major reductions. In the area of customs tariffs on goods, significant reductions in the level of tariffs, significant elimination of quota restrictions and other bureaucratic impediments, the agency system and the like, that had made trading with Saudi Arabia difficult, a reduction across the board in difficulties in agriculture, in services, and a wholesale revamping of Saudi's intellectual property regime. In fact, from my perspective, I think it is not too much of a stretch to say that the Saudis went from an extremely rudimentary - in some cases, non-existent - regime of intellectual property coverage, protection, enforcement to one that on paper is world class, state-of-the-art. Commitment to the rule of law, transparency: buzzwords in the legal and international economic WTO community, but buzzwords with a tremendous degree of significance. The Saudis recognized and accepted wholeheartedly that it was important for them to have a system that others could understand. Decisions behind the sheets were to be a thing of the past. There was to be publication and announcement ahead of time of changes in government regulation and an ability of commercial actors, non-Saudi as well as Saudi who were interested in the areas to participate in the discussion process between draft on non-draft.
What does all this mean? I found the title of this seminar fascinating, particularly since in the version that I had the word revolution was not in quotation marks. I spent some time thinking about that. Will there be a revolution in the sense of backlash among the conservative elements in the kingdom who think the 14th century is just fine, thank you. Not likely in my opinion. Or will there be the revolution in the sense that Chas and Bud have talked about, a major revision of the way that Saudi deals with the rest of the world.
The proof is in the pudding, to use probably a non-Saudi analogy. But I think it is safe to say that if efforts are successful to continue to put into operation the promises, the commitments, the agreements that have been made in terms of the accession, that Saudi Arabia will indeed become a very important, vibrant part of the world community.
Thank you very much.
MR. FREEMAN: Not to dwell on sheep, I once had the misfortune to sail downwind of an Australian sheep vessel in Jeddah Harbor, which is - (laughter) - if this every happens to you, you will not forget it either.
Both of you, I think, ,mentioned insurance in connection with reactions and the extent of the changes that have been wrought. That is not a bad topic to mention because when I was ambassador in Saudi Arabia, insurance was officially regarded as sacrilege in the sense that it was a bet against God's will. What will happen is written and known only to God, and to bet against the future with insurance was obviously blasphemous. How far Saudi Arabia has come toward the modern world in admitting that modern commerce requires insurance!
Bob Jordan's tenure as ambassador was dominated, it's fair to say, by the aftermath of 9/11, but it's very appropriate for him to be here today because I think this issue of WDO accession and the benefits it would bring the United States as well as Saudi Arabia was very much at the top of his agenda. Bob, you're invited to take the floor.
ROBERT JORDAN: Well, Chas, thank you very much, and I am delighted to be here today. Chas has provided me a tremendous amount of information from the time I was first contacted about becoming ambassador. It's also a pleasure to be on the panel with Charlie Kestenbaum, who worked in the embassy with me in Riyadh during my time there. They taught me a lot. In fact, I'm tempted to say they taught me all I know. I know there is probably more that I had learned, but I certainly know that they did not teach me all they know. And they are enormous resources.
And I am also delighted to see in the audience today Brian Shukan (ph), who was a political officer in the embassy when I was there and is now the Saudi desk officer. Brian served with great distinction, and was a tremendous asset to our embassy and to our mission in Riyadh.
I want to start by taking a snapshot of a moment in time fairly recently. This was last September. I was sitting in my law office at Baker Botts in Dallas, and the phone rang. And I answered it. And the voice said, Bob. And I said, yes. And he said this is Jim Oberwetter. Jim is the current U.S. ambassador to Saudi Arabia.
And he said, I am standing in the office of the U.S. trade representative in Washington, D.C., and we are here to sign the U.S.-Saudi bilateral agreement, which will be the last step necessary essentially for the Saudi accession to the WTO. And I know how important this was to you and how hard you worked on it, and so I simply want to pass the phone around the room and let those here present congratulate on what has occurred.
I say this first as a tribute to Ambassador Oberwetter. It tells you what kind of person he is. But I also say this to emphasize how important this step was from a very long period of time. When I arrived in Riyadh right after 9/11, of course we were consumed with bombing in Afghanistan, we were consumed by the aftermath of 9/11. Fifteen of the 19 hijackers were Saudis.
But I was also very concerned about what might have spawned some of this behavior and what could be done to promote reform in the kingdom, not in the Saudi's interest necessarily but in America's interests, strategic interests. And it occurred to me that WTO accession was very good for the United States in our national interests; it was also in the Saudi's best interest.
And so I set about trying to learn what had been going on. And I learned that negotiations had really be interrupted. There had not been a working party meeting apparently since October 2000. Both sides had lost a tremendous amount of momentum in trying to move forward. I decided that if the Saudis really wanted to do this, then we needed to elevate this on the United States end as well.
Now, the Saudis assured me and the crown prince assured me that this was a high-agenda item for them. And so when I was back in Washington I think in December of 2001, I decided to do what I could to see if the United States government had the will to elevate this to a political level and not simply meeting a bunch of checklists and boxes that had to be checked in the USTR office.
And I decided to start with the vice president. I had a meeting already scheduled with him. I went in and made my pitch and he was very enthusiastic about the idea and the reasons for the idea, that it would be an opportunity for the Saudis to reform their economy. It would be transformative; it would lead to greater public participation in their society.
Armed with his tacit concurrence, I then went to see the secretary of Commerce, Don Evans, and I said that the vice president had embraced this idea. How did he feel about it? And he was enthusiastic. Secretary of State Powell was enthusiastic.
And then I made my way around to Ambassador Zoellick's office, the U.S. trade representative. And I'll have to give them credit. His staff had worked very hard on accession to the WTO. But they had become quite frustrated with the Saudi uncertainties. It was really unclear whether the Saudis had the will to move forward at this time, and so they were very busy; they didn't have a large staff and they were swamped with a lot of demands on their time.
And I felt a little bit of resistance at that moment to moving forward. Well, I said, you know, I think the vice president supports this - the secretary of State, the Secretary of Commerce. Bob, how do you feel about it? And he very clearly understood the importance of it. He understood that we were now marshalling the political will of the senior administration to move forward.
And I think this went a long way toward making clear to the Saudis that we cared about it. And very much to his credit, Crown Prince Abdullah continued to press the president about this.
What was happening at this time was there something of a disconnect between the will of the crown prince, who was not yet king, and some of the bureaucrats who were charged with making WTO accession happen. And I found myself meeting with the Saudi representatives repeatedly and not really getting anywhere. The significant exception to this was Fawaz al Alamy (sp), who has been described - was a hero in much of what has unfolded.
We encountered a great deal of resistance among certain segments of the Saudi society. They had the impression that if they joined the WTO, as some did, they would be required to import pork and alcohol. They would be required to allow the establishment of cinemas that would show pornographic materials in their society. They were then worried that they would have to submit draft legislation to the USTR and to the WTO secretariat in order to have it approved before it was implemented, which was, in their view, a great incursion on their sovereignty.
Well, we worked through these issues. We were blessed with a new minister of commerce, Minister Yamani who came in and helped bring this down toward the goal line. And we have now been able I think to really make it clear to the Saudis how much it's in their best interest to do so, but it's also in the United States best interest.
We now have an opportunity, as has been said, for transparency. We have an opportunity with new insurance laws. We have a new banking law. We have a Saudi stock exchange. We have a foreign investment law. The negative list has been curtailed. We are seeing hopefully the dawn of a new age in Saudi Arabia, in which the Saudis by accession to the WTO have forced themselves to jump through the hoops of economic reform.
Now, what will it lead to? In the grand vision of things, my belief is it will require the Saudis to become more competitive in the world market, to diversify their economy, to improve their educational system so that they can compete with human capital, probably will bring more women into the workforce. Maybe that lowers the birthrate, I don't know, but I think there are some societal factors that really could be in play here over the next couple of generations. We may be really at the beginning of a new stage of history in which the Saudis finally come into at least part of the 21st century.
MR. FREEMAN: Thank you, Bob. I think your point about competitiveness of the Saudi economy improving radically is vital here. One of the clear objectives on the Saudi side has been to raise the rate of return on investment by achieving such efficiency. The timing is excellent because the example of Dubai in the region and the giant sucking sound that is heard from Dubai have had the effect of stimulating a lot of pressure inside the kingdom for economic and commercial innovation, and the WTO provides the framework for doing that.
So now we turn I suppose to the commercial side, and Charlie Kestenbaum.
CHARLIE KESTENBAUM: Okay, thank you. In my career I have primarily acted as boots on the ground in these kinds of negotiations and efforts. So I would like to add value to the program today to follow up what Ambassador Jordan said by trying to give you a little sense of what it is like to stand in Saudi sandals; what the Saudi society and economy are like and how they got that way, and then you can get a better sense of predicting where it's going to and where these changes everyone's talking about are likely to lead.
Please don't misunderstand what I'm about to say, but Saudis have been largely spoiled over the last 25 to 30, 40 years in economic terms. They have been spoiled because they have had open and easy access to everyone else's markets and they have had very restricted markets and access back home, to be protected.
I will give you a simple example. You have Prince Waleed, Prince al-Waleed bin Talal is the - I guess he is the largest shareholder and a very influential individual, and in a Citigroup's portfolio of owners, and yet Citigroup itself has in the last year or two withdrawn from its banking venture this SAMBA, Saudi American Bank in Saudi Arabia - sold its last 18 percent and exited the market, even though he is their largest shareholder.
And when I asked the vice chairman of Citicorp why did they did that, he said because we had a lot of liability and no control, and our ownership didn't - our limited ownership didn't give us the authority we wanted to make the right decisions from our perspective.
So we have large sense of monopoly in the Saudi economy. It is not entirely the case as everything is in the world is complex. You have, you know, monopoly is Aramco, and yet you have the largest investment that Exxon Mobil has made in the world, is in Saudi Arabia Petro Chemical Industry. So it's a bit of a mixed picture, but it's still a largely monopolized society.
Saudi Arabia - and I may be stating the obvious, but it's not really clear what obvious can be - Saudi Arabia is still a very tribal society. And what tribal society means in the Saudi Arabian context is very interesting. Again, it's a complex relationship. On the one hand, as you may know, Bedu ethics are very egalitarian and yet at the same time - cause if you ever run across any Bedu, they are fiercely independent people, and yet at the same time, they have overlaid on that a very, very strict and rigid hierarchical system of birth and tribal relationships through age and through family relations. That is something that we in America can't really understand very well.
Think of an economy where the leader and the most greatest hero of the tribe is somebody who can go in and steal his neighbor's camels and get back without a fight or having to kill anybody, the Saudi - the tribal term in Arabic is Hazu (ph), which means you raid your neighbor and get back. So concept of business is very different. They didn't look at it in a Columbia Business School as win-win; everybody goes home happy with a little smiley face on your lapel. It's win-lose. They still something you have got that wasn't nailed down and got away with it.
So the economic situation is very complex in Saudi society. It's a monarchy; it's not an absolute monarchy because of these tribal relations and because of the overlay of Islam. But there is a tremendous sense of entitlement in any monarchy. We as Americans - again, we don't understand or relate to that because we don't have any - our history is resisting and fighting monarchy and egalitarianism. And so we don't understand how in a monarchy, the monarch owns everything or controls everything.
I have seen Saudi Arabian royal family members drive up to a gas station, have the gas tank filled with gas and drive away without paying, and you know, the Bangladeshi is standing there with the pump in his hand going, ah, ah, ah, what do I do? You know he is not writing down the number and calling the police because there is no point in doing that; he can't collect.
I have seen Saudi royal family members drive through police roadblocks that are searching for terrorists. The guy just - comes in his Lamborghini - zoom - right through. The police are standing there with their guns, they look at the Lamborghini - off he goes. What to do? If I did that they would chase me as far as they could and pull me over. He's a Saudi; he goes right through. So there is a sense of entitlement, and it extends into the economy.
At the same time, entitlement brings responsibility. If you own everything you have to take care of everybody. So that sense of responsibility of entitlement created a system of welfare that you had give free education, you had to give jobs and employment. You had to give everything to everybody because if you didn't you couldn't own everything; you couldn't command the loyalty. So that created another major economic distortion in this economy.
So a picture I'm building here is something that we and WTO have no relationship at all to or concept of how it works and why it works the way it does and how it changes. Healthcare, education - everything is free or it has to be free. So, again, where is the free market? Well, it's free as long as it's given and owned by somebody else.
Then we overlay Islam. And I apologize if I'm moving very fast, but I like to just give a - we can get into any of these issues and later in the extensive Q and A period. Islam - what kind of free and open market, what kind of WTO can you have when half the population is not allowed to work or can't get to work because they can't even drive to work? What kind of business can operate in a global arena where they have to shut down five times a day for prayer?
As a kind of humorous aside, in my experience Saudi time is so different than ours. Nothing ever comes on time in Saudi Arabia except prayer; that you can count on; that is clockwork. So it is a very different society, again, culturally. The WTO rules are not going to be implemented in a way that we have been really talking about here, not in the short term. Maybe over the long term, and that is probably the intention of the leadership in designing the WTO is to create a long Saudi-time concept of transition.
There is a - Ambassador Freeman here has said that Saudi Arabia is characterized by progress without change, but we all know that that is impossible. There is change going on all of the time. Saudi Arabia is changing every day. The WTO accession is a major milestone as we pointed out, and I agree with that completely. The Saudi's fear is change without stability. They want it to be stable; they want predictability. They want to know what is going to happen and how to get it.
I would just like to make one other point about Saudi Arabia and time - and I have got my three-minute notice - which is that we have to understand a little bit of sense of history in America. I appeal to all of those in the audience, many of whom are very knowledgeable and experienced in the Middle East.
My mother was born into this country; she couldn't vote. I was born into this country, there was segregation, there was discrimination against minority groups. Go to the movie theater today, when you go home this evening, and watch the movie about the Texas western integration of basketball. That's probably in almost everybody's lifetime here.
So we don't understand history and the depth of things and how quickly things are moving for us, but the Saudis are being - their heads are spinning in this thing, in how fast it's changing. So I appeal to that to understand that WTO and all these changes may not happen, even though they've signed onto everything. They're still going to operate in Saudi time; they're still going to operate in Saudi way of going about doing things that's going to have progress without change or change without disruption.
Thank you very much, and I'd be happy to talk about any issues - what happens in agriculture, what happens in insurance, in services - in detail because I was a commercial person, but I wanted to add a sense of non-commercial perspective to understand that. Thank you.
MR. FREEMAN: Thank you - very grateful for that very stimulating review of Saudi society in relation to change. I take mild exception to you about our inability to understand the clockwork nature of prayer. You obviously haven't been to Texas recently - (laughter) - or you would understand that the Saudis are not quite so unique in that regard.
One issue you mentioned I think is very important, and it leads directly to Jean-Francois Seznec, who I hope is going to discuss a little bit of the impact of this on Saudi Arabia's relations with other countries beyond the United States. One of the reasons that Saudi Arabia has not been able to develop its comparative advantage in petrochemicals has been the closed nature of the EU market. There were some very anomalous results recently - in my business capacity, in a neighboring country I've been approached to deal with a lubrication oil project, and I discovered to my surprise that although this country is itself a major oil exporter, it actually imports base oil from Europe in order to make lube oil.
So the Europeans, by various tricks based on their history, have managed to exclude the producers in the region - in the Arabian region - from some of the downstream processing that otherwise would have been done. WTO accession promises to change this, and it will make Saudi Arabia, in particular, in my view, a major manufacturer in the petrochemical area in a way that it has not been. And, Jean-Francois, you may disagree with me if you wish.
JEAN-FRANCOIS SEZNEC: I don't - it's too bad. (Chuckles.) I just wanted to emphasize what my predecessors here have mentioned, is that I think the social issues and the economic issues under these WTO negotiations are absolutely vital. I think there was a policy by certain groups in Saudi Arabia, namely some of the civil service - finance, oil, commerce and industry - to totally modernize the country and chose the social aspect of the country. I think they all know that in order to survive, Saudi Arabia must get into the 21st century and must really sideline the Salafis. And I think the whole game of these WTO is really just that, is the sidelining of the Salafis.
So given that, they have pushed after 2001 - they have decided to really push hard on joining WTO. Why? Because from now on, with WTO, they can maximize where they have a natural advantage. And I hope I won't be too technical because it can be pretty boring to be so technical, but the fact is Saudi Arabia has the cheapest feedstock in the world. To make petrochemicals you need various feedstocks, either natural gas, natural gas liquids, or oil or naphtha out of oil. The cost to Saudi Arabia is below $2 a barrel, whether it's in gas barrel equivalents or in oil. That allows them to start taking over the markets. I should add that Saudi Arabia is already the 7th-largest producer of petrochemicals in the world today, and that is increasing by leaps and bounds. They're producing about 46 million tons a year. Some of it - 10 percent of that is from this private sector and not only from SABIC.
But because of the - one of the key issues under WTO is that there was a risk that the Saudi growth in industry was going to be shut out of the main market - China - because China is a member of WTO. The main investor in China in petrochemicals is Germany. And we'll get talking about the EU, but I must stress the importance of those petrochemicals because every - you know, the Saudis sell $20 billion of goods to the United States every month. Every cent of that dollar - of those dollars has a component of petrochemicals. It may not be much but it has something - either the packaging or something - and that comes from China, and China could not grow as it is and create the job it's creating without the petrochemicals. These petrochemicals could not happen without the growth in the Saudi petrochemical industry.
So we're not talking enormous amounts of money at this point, maybe $20 billion of sales - which is substantial really - but it is strategically very important from a commercial standpoint. So the Saudis needed to make sure that they still had access to these markets, and could grow these markets, because the civil service in Saudi Arabia has decided a long time ago - that goes back to 1976 - that they were going to be a major player in industry in the world. My personal analysis - and it's not proven by any means, but it's my feeling that the minister of oil, the minister of finance, and their predecessors, had decided to become as important in industry - petrochemicals - as they are in oil in the world today. By 2015 Saudi Arabia will be the largest producer of petrochemicals in the world.
Now, this is very interesting because who is the largest producer of petrochemicals in the world today? It's Germany. And Germany has been working against Saudi Arabia in that sense. Even though Germany is the third-largest seller of product into Saudi Arabia, Germany does not cooperate with the Saudis on petrochemicals or any energy-based industry. There are no German joint ventures in the region. The only one there was has just been sold to an Indian company. So it is quite interesting.
During the negotiations between the EU and Saudi Arabia, there was a major issue of double pricing. Let me just go quickly through this. One of the key ingredients of petrochemicals is butane and propane, which is called natural gas liquids, which come out of the natural gas extracted in Saudi Arabia out of the oil. This is sold at about $400 a ton in the world. The Saudis sell that at 30-percent discount to SABIC, and the Europeans said, this is unfair and if you want to join WTO you've got to stop this double pricing. The Saudis actually agreed, but if you read between the lines they agreed wholeheartedly to stop the double pricing in the agreement with the EU. But they also know that within five years - within four years from now they will not export any natural gas liquids because they're growing their industry so fast right now that it will all be used locally, and therefore they could agree to having no double pricing because there would be no double pricing; it would all be sold at a discount in Saudi Arabia.
The other issue is the price of natural gas. Natural gas is sold by Aramco - Saudi Aramco - to the users, whether it's electricity companies or water desalination companies or SABIC or the private sector at 75 cents per million BTUs. Today the market in New York is about $8.60 a million BTU. That's to show you the difference in price. At 75 cents per million BTUs, that's the equivalent about - if my tables are right; I'm not too great a calculator of these things - it would amount to about $4.35 per barrel of oil equivalent.
So the Saudi producers of petrochemicals can buy - including a profit for Saudi Aramco of probably $2.50 - can buy their products, their raw material, at $4.35. The Germans, who are competing with the Saudis, are buying at $62 a barrel equivalent today. So there is an enormous difference between the two.
Now, the Saudis are increasing their sales to the Far East tremendously every year, and of course they can get any market they want because the growth is such now that the Chinese are buying everything they can. They don't have to have any price war on the prices or anything of this nature. However, if the Germans felt that the Saudis were going to gain the markets they could start putting WTO blocks against Saudi Arabia in China, because that is where their biggest investments are.
Now, they decided not to - finally, by joining WTO, that allows the Saudis to compete. The Saudis today can take any market wherever they want at any price they want if the markets start declining.
Eventually the EU agreed to this double pricing, and eventually - and I suspect because of American pressure - also finally in the final agreement, which was signed on November 11th, agreed to even drop this double-pricing issue. What is mentioned today is that the Saudis - Saudi Aramco in particular, can sell to its own buyers its products at cost, all inclusive - labor cost, capital cost, depreciation, et cetera, et cetera, plus a fair profit, and that probably amounts to about $2.50-a-barrel equivalent, and the price which is given by Saudi Aramco is now $4.35. So eventually the Saudis can continue to grow. By 2015 the Saudis will be producing over 100 million tons of petrochemicals.
Just a final word is it's not only petrochemicals but all manner of other products. Cement is very energy intensive and Saudi Arabia today is a big exporter of cement and will increase that tremendously. Steel - they already produce 5 million tons a year. They're going to go into aluminum. They're going to bring a lot of goods from the inside Saudi Arabia with the new railroads they're building, and that will develop an enormous exports industry.
So the EU, if you like - to just conclude on this, I think the EU is going to be a big loser in this issue because the French are investing in Saudi Arabia but the Germans, who are the largest, are not. And even though they are the largest trade partners to the - the EU is the largest trade partner to Saudi Arabia today, the big gainer is the American companies because they're already there, they already have $5 (billion) or $6 billion of joint ventures in Saudi Arabia, and they can continue to take this market over. They will produce in Saudi Arabia for the Chinese market.
There is a strategic issue here, though, because it means that the Chinese relation with the Saudis are going to increase tremendously compared to the Americans, but some of those commercial relations will be coming from American companies as well. And I'm running out of time.
MR. FREEMAN: Thank you. I guess, on the basis of what you said, that ExxonMobil knows what it's doing keeping its investments and indeed increasing them in Saudi Arabia.
We come now to the question, answer and comment period, and while you're formulating your questions, I'll just go back, if I may, to something you said, Jean-Francois, about the Saudi relationship with China. I learned a few days ago that in a remarkably far-sighted move, Saudi Aramco some years ago sent a group of high-school kids to China to learn Chinese and to go through the Chinese university system to become engineers, understanding where the fastest-growing market is and preparing to deal with it directly. And so it's not the case that some of the changes that are going on in the world were unanticipated. There were some smart people - not just at ExxonMobil but at Saudi Aramco as well - who saw which way the commercial winds were blowing.
And finally, just to underscore Charlie Kestenbaum's point about the absurdity of progress without change, let me tell you a story which illustrates the fact that Saudi Arabia, as recently as the 1940s, had a standard of living and social conditions rather similar to those of Mauritania today - incredibly poor: no electricity, no contact with the outside world in much of the country.
There was a moment during the Gulf War when I was ambassador when I had a chance to talk to the two guards who had been assigned to me by Prince Nayef, in my lousy Arabic. And I realized I didn't know much about their background, and I asked one of the guards about the battle of Al Khafji -- where the Saudi Arabian national guard performed quite heroically in expelling the Iraqi troops that had come over the border into Saudi Arabia. And the guy that I was talking to said, well, of course that's not a surprise because they're Bedu, like me. And I said, well, you know, I don't really know much about your background. What did your grandfather do for a living? And he said, he sold shoes. And I said to myself, shoes? You know, maybe I misheard. Shoes? He said, yes, shoes. I said, well, where did he get the shoes? He said, he killed pilgrims and took them. (Scattered laughter.) That was not that long ago. (Laughter.) And nobody is killing people for shoes in Saudi Arabia these days, and it is an illustration of how remarkably rapid the transformation of that society has been.
We're now ready for questions. Yes? Please come to the mike and tell us who you are.
Q: Good morning. Thank you, gentlemen, for the extremely informative presentations. My name is Tom Lippman. I'm with the Middle East Institute. The question I'm about to deliver to you is one that is asked to me when I talk to high school and college groups, as I often do. If you go to the WTO website and read the language of the various announcements that had to do with Saudi accession, it appears to me that it's constructed in such a way that Saudi Arabia is not required to trade with or abandon the primary boycott of Israel. Is my reading correct?
MR. FREEMAN: Chris, do you want to address that?
MR. PARLIN: Not surprisingly, this was one of the more frequently addressed issues. If I can just put a caveat, the question of pork and alcohol being second to it, the Saudi delegation - Minister Yamani - were very clear that they would not utilize the opportunity that existed in the WTO to declare that there would not be WTO trading relations between Saudi and the other WTO members, including Israel. They did not exercise this treaty authority. And Minister Yamani made very clear that the Saudis would respect the obligations of the WTO. He also made very clear that despite assertions to the contrary, the secondary tertiary boycotts had not been enforced and would not be enforced in the future. I believe this went back to 1985, if memory serves me correctly.
So these are the treaty obligations. Standing back in a personal capacity, will there instantaneously be a welling up of trade between Israel and the Kingdom? That remains to be seen. And the reactions, if such happens, also remain to be seen. But as a legal matter, there is nothing special in the Saudi relationship coming out of the WTO treaty.
MR. FREEMAN: Let me make a couple of comments on this. One of the great ironies, Tom, of the modern age is that the United States, which for so long opposed secondary boycotts, is now the primary practitioner of them; that with respect to countries like Iran, for example, where the U.S. has unilaterally imposed sanctions, we penalize anyone else who trades with Iran even though there is no international - no basis in international law for that action. So the principle which we once defended with great vigor - I remember doing so myself as a young diplomat - we now routinely violate.
The second point I'd make is that there always has been a level - a measure of trade between Israel and Saudi Arabia, clandestinely. The most notable example in my own experience when I went down to the computer souk to check out the software in my capacity as ambassador, looking for illegal software, which I might try on my home computer, I bought an anti-virus program that was made in Israel, which of course contained a virus - (laughter) - which wasn't much of an advertisement for the product. But at any rate, as a practical matter, the animosities between ordinary people on both sides of that divide are not going to go away until something fundamental happens in the Holy Land to reconcile Palestinians and Israelis. And you may be holding your breath for that, but I'm not.
Sir?
Q: Chris Schaffer (sp). I have a question about - this relates what Dr. Seznec is talking about in terms of petrochemicals or industries that might gain competitive advantage with WTO. What do we see in terms of employment generation out of this? And in the industries that might grow, say, in the near- to medium-term in petrochemicals for example, are these high employment-generating, or are there other industries that will profit from the accession that - or membership rather that will enable further employment generation?
MR. SEZNEC: Well, yes, of course. I mean, petrochemicals does not employ that many people. It employs a lot more people than just the production of oil, but by itself it is not an enormous generation of employment, but all the related industry and the downstream from petrochemical will - and is already employing a great number of people. So I don't know what the multiplier effect is on labor - maybe actually Bud might know that better - but the fact is it will create a tremendous number of jobs. And that's the purpose of this whole issue: They want to create jobs for the Saudis, which means the Saudis have be well-trained, they have to employ women, and we go back to the social issues that were mentioned earlier because that's how the Salafis are going to be sidetracked is all of a sudden we're going to have to have a very good technical educational system, which they are trying to start establishing now mostly privately, but that's another issue.
But I think in the long run they will create more jobs, definitely, and in all manners of industries downstream from petrochemical.
MR. FREEMAN: There is certainly no contradiction between Islam and science. In fact, historically Islam was the Abrahamic religion of science, the only one of the three Abrahamic religions that actually encouraged the investigation of how nature worked.
Bob, you had a comment on this?
MR. JORDAN: Well, I think there are other employment opportunities in some of the markets that are being liberalized - insurance and banking for example. These are service industries, but there will be, I think, increasing opportunities there. We will also see most likely an increase in travel - business travel, hotels, tourism, telecom. And so, again, you're going to have to have some education - this isn't employment for ditch-diggers - but that's the whole point. There is a human capital element here that has to be developed and exploited and it's going to be a challenge for the Saudis to do so.
MR. FREEMAN: Charlie?
MR. KESTENBAUM: Yes, I just offer a note of somewhat skepticism to this issue of labor, and a concern that the biggest challenge that the Saudi government and leadership face is in the employment of Saudis in a competitive manner, particularly if you open up your economy more to competition, then you have to employ people properly, and that's - I don't know, Oscar's here. There is an Exxon Mobil representative in the room. We won't put him on the spot and force him to say anything, but I've just - my understanding is that in a petrochemical complex that produces several billion dollars worth of products per year, they probably employ anywhere from about maybe 150 people, at most, in a modern and efficient petrochemical complex in Jubail or Yanbu.
So even the massive expansions that are being hoped for and anticipated won't produce any kind of mass employment. And the Saudis have struggled with the issue of employment, of Saudi-ization. Again, they went through the gold suk and threw all the Yemenis out and tried to employ all the Saudis there, and they've done it in a vegetable suk and through the insurance industry - its banking and services. So the biggest challenge they face today, realistically, is this - as we all know, the massive population bulge and the effort to educate them when you have - what's the - I don't want to give a wrong number - how many people are graduating with Islamic studies degrees from university now - 40 percent?
MR. FREEMAN: I think the figure is going down fairly steadily, but -
MR. KESTENBAUM: Oh, please - so that's the challenge.
MR. FREEMAN: But that of course - just to fill in behind your comments - the principal employment opportunity that the expansion of the petrochemical industry presents is not directly in the petrochemical industry itself and the operation of that, whereas you say it's a very capital-intensive, not labor-intensive industry. The principal employment opportunities are going to be for engineering and construction services as these industries are laid out. And these are areas in which American and Japanese, as well as European firms, compete very vigorously for the Saudi market, and increasingly I believe the Chinese will be in that competition.
But there will be a requirement to employ Saudis, and there are universities in Saudi Arabia, like King Fahd University in the Eastern Province, which graduate very qualified engineers. There is indeed a new engineering university being established in Riyadh with assistance from Boeing, and I believe there will be an increased demand for well-educated, hardworking Saudis, who are more numerous than many suspect.
I think, Bud, you wanted to make a comment?
MR. CLATANOFF: Just very briefly is that I think there is - beyond a doubt that the one reason why the king of Saudi Arabia so much wants to undertake an economic revolution or economic liberalization and expansion that's dictated by the WTO terms is for employment generation, that they're into it for the jobs. They know that they have this population bulge. They know that they have a problem with employment for younger Saudis. And I think they have a commitment to work on it from both sides of the supply and demand equation in the labor market, that economic liberalization should create jobs, increase the demand for labor, but they know they need to work on the supply side as far as their technical education, the number of engineering graduates, math, science, not to mention business and finance and things such as that.
MR. FREEMAN: Bob, another comment?
MR. JORDAN: Just briefly, I would also note that in Jeddah, Effat College, a private women's college, is in partnership now with my alma mater, Duke University, to educate women engineers.
MR. FREEMAN: Sir. Again, tell us who you are, Brooks.
Q: Brooks Wrampelmeier. I had a question to the panel as a whole. You've talked a bit about the fact that much of the movement towards WTO membership by Saudi Arabia has been from the crown prince, now king. He is of course a fairly elderly gentleman. We don't know exactly who will succeed him - if Prince Sultan will still be alive when he dies. My question is, do you feel that after the crown prince goes, may there possibly be a change in the top level of the Saudi Arabia government that may decide to move away from some of the reforms that Abdullah has obviously been pushing?
MR. FREEMAN: Bob?
MR. JORDAN: Well, this is a parlor game that has been played in Saudi Arabia for a number of years, and it is certainly a relevant question. The short answer is, we don't know. The longer answer is I think the processes are being put in place now that will make it harder for anyone to retrench too much from the economic reforms that have been undertaken. The society now has an expectation of these reforms and an expectation of what has been announced.
Prince Sultan has actually embraced these reforms in his public statements. Again, we don't know who might succeed him, and so a lot of it depends, but there is I think, developing, a critical mass of members of the royal family, of the business community, the merchant families, and the technocrats who have something invested in this. I think world opinion is also important to Saudis, and I think at some point it will also play a role in how far they go. But again, this is speculation; we really don't know.
MR. FREEMAN: I think a great deal of the answer to that question will depend on how far advanced the process of implementing the agreement has proceeded before succession occurs. And I say that because whenever economic change occurs - for example, a change of policy, the imposition of sanctions, or, in this case the removal of restrictions and the opening of a market, people adjust and very quickly acquire a vested interest in the continuation of the status quo, which I think is the point that Ambassador Jordan was making. Therefore, if there is any time at all for this agreement actually to be implemented, as it is implemented it will gather its own momentum and it will be very hard to reverse.
The second point I'd make is that - again, as Ambassador Jordan said, the issue of succession is one of the favorite games that people play, in Saudi Arabia and elsewhere in the Middle East with respect to Saudi Arabia. For decades there has been speculation that succession in the monarchy would bring about radical instability or change, and that has always proven wrong. Saudi Arabia has a remarkable record of stability and continuity in policies from one monarch to another. Now, clearly King Abdullah has a major objective: the reform of the Saudi political economy and the updating of it, and the restoration of a more cordial relationship with the United States, which is one part of this agenda, I believe, and he needs some time as king to see that agenda through. But I believe those objectives are much more widely shared in the Kingdom. They're not dependent on a single person. And therefore, I guess while I think the question is excellent, I'm not sure that it's worth losing any sleep over.
Q: Dave Ottaway from the Washington Post. One of you made a comment - and I can't remember who it was - that the silent partner operations that are quite common in Saudi Arabia, will no longer be permitted under WTO, and I'm wondering what specifically does - how does that happen? What does WTO say that excludes silent partnerships? Could you elaborate on this? I can't remember who made that comment.
MR. FREEMAN: Well, I think actually the comment was initially made by Chris and then I amplified it. And, Chris, perhaps you, as the expert on this, might take the microphone. And, Bud, you might want to talk, too.
MR. PARLIN: There is nothing to prevent you having silent partners, but the big thing with the WTO agreement is an end to the so-called agency system where any American firm had to have - or any foreign firm - had to have a local agent. You could not directly export goods into Saudi Arabia; you had to have a local agent. And by Saudi domestic law, that was an exclusive agent. You couldn't have one on the West Coast and one on the East Coast, you couldn't get competitive bids, and you couldn't fire the guy was the worst thing, so that whether your agent was good or bad, you were stuck with him. Now any firm can directly import and sell without using an agent. I mean, that's the crucial thing.
MR. FREEMAN: This is something that has already - was actually pioneered in the region in Qatar, and you can look at the results there. Many people, for their own reasons, when they do business in Qatar, continue to have a local agent, and that may well be the pattern in Saudi Arabia. But the fact is that the extortion element of this is being greatly reduced and maybe even eliminated.
Chris, did you want to comment?
MR. PARLIN: First, a caveat. I am not speaking to what you term silent partnership. That's out of my range of knowledge. But just to back up from the perspective that we had, what Bud has said, yes, indeed, as a reality in the course of the negotiations with the United States in particular, the Saudis agreed that they would eliminate restrictive elements in the importation, distribution of goods, a WTO obligation, part of the basic nondiscrimination element at the root of the WTO, and they also agreed in the course of the service negotiations to voluntarily accept similar obligations of non-discrimination.
So the effect on paper in law through the WTO will be that this practice of commercial agency will cease to be the impediment that many non-Saudi companies complained about in the past.
MR. KESTENBAUM: Look, from a very practical commercial perspective, the successful business model in Saudi Arabia almost - doesn't require a Saudi partner, distributor, agent, but is certainly much better prepared if you have one. I've talked with a lot of the companies, the big companies, that are global in their nature and their reach and have billions of dollars of resources to bring, and invariably they all want Saudi partners, agents, or distributors because it facilitates their knowledge of the market, their access to the market, and the investment and the commitment to the market. So there may be some, a small group, that say, I can do it myself, I want to do it myself, and they will go and do it now they're free to. But I'm sure that the vast majority of companies will continue to operate with Saudi partners and Saudi agents or distributors, and in the rest of the region as well.
MR. FREEMAN: And in practical terms people will probably stick with the agents they have, but legally now they're not obliged to. That makes a big difference. Also, as I said earlier, I believe that smaller Saudi firms - start-up firms, in effect - now will have opportunities that they did not have that many of my friends in the Jeddah business community have in effect enjoyed - essentially a monopoly position because of their prominence. And that will now be less of a monopoly.
We still have the issue, of course, that you can't get to Saudi Arabia without a sponsor for your visa, which is why it is easier to go to Tibet than to Saudi Arabia. And when you pick a sponsor you are implicitly picking an agent if you're going there to look at business opportunities. So the issue isn't immediately and totally resolved by WTO.
And finally, I agree completely with Charlie. As a practical matter, you're much better off generally in any environment - and Saudi Arabia is not an exception - working with someone local than you are coming in and blundering about as an ignorant foreigner.
Sir?
Q: Mike Daniels (sp). I'm a partner - (inaudible) - firm. Just to follow up on Ambassador Freeman's point that implementation and the speed of implementation is one of the keys, both politically and economically. Just to point out that accession is not the end of the WTO process, that there is tremendous pressure to enforce compliance. They're not perfect mechanisms but they consist of reviews, and in extreme cases dispute settlement. But the pressure will be there. The United States, among others, is assiduous in monitoring what's going on. So there will be that kind of pressure on the Kingdom.
MR. FREEMAN: Thank you. Go ahead.
MR. JORDAN: I would just add that you can see this in a case history in the case of the accession of China. China has a long way to go to be what we would call fully compliant with their WTO obligations. You can still buy any kind of pirated DVD you want to in Beijing. There are a lot of issues there but they are being pointed out by the international community, and there is pressure on them, and my guess is will have the same kind of pressure on the Saudis.
MR. FREEMAN: I'd like to ask a question myself of the experts. The issue of DVDs and counterfeits has been raised. One of the more anomalous practices in Saudi Arabia was the official ban, if you will, on music and video, coupled with the ubiquitous availability of cheap cassettes, DVDs and videos on every street corner practically in any major Saudi city. I presume the WTO agreement will effectively eliminate this hypocrisy, but what will be the effect on the motion picture and entertainment industry and its produce in the Kingdom?
MR. PARLIN: I'm not going to be presumptuous enough to say, yes, indeed it will have the effect of cleaning out pirated videos from the suk. I can't resist making the point that one need only go about 15 steps from USDR's front door to find a gentleman who almost every day there is selling videos whose parentage, shall we say, is dubious. What we can say, though - I can't resist that. Throughout my years at USDR I always used to be amazed that somebody didn't just figure out some way to at least ask him to move around the corner. (Laughter.)
What I can say is that certainly as a matter of WTO law, that as part of the top-of-the-line enforcement commitments that the Saudis have made in the intellectual property area, that MPAA, whatever the record association is - I can't remember the acronym; I'm not a good Washington insider on that - they now, and their members, have a range of ability to use the WTO enforcement mechanisms along the lines my partner, Mike Daniels said, starting with official complaints in the various committees, following up in the annual trade policy reviews that the Saudis will undertake, as is true with all WTO members, and finally in dispute settlement, should it remain notorious enough and of enough commercial significance.
So as a matter of law, for Saudi as well as for all other WTO members, that type of practice is now actionable in way it was not before.
MR. FREEMAN: Jean-Francois.
MR. SEZNEC: Actually, I don't really have a comment directly on this; I mostly have a question actually, but somewhat related to this. I think one of the key components of this WTO agreement is to have transparency in the law, and that is a major issue as far as I'm concerned because if there is true transparency in the law it means that the royal family will lose its main privilege: its ability to control the judges.
So what I'm not sure is what is the real text under the WTO agreement. Reading all this stuff I couldn't really understand whether there was a full transparency of the law and how it was going to be implemented under Sharia.
MR. FREEMAN: Well, we have - I'm a recovering lawyer but he's a real one, so we'll ask Bob Jordan to comment on that.
MR. JORDAN: Well, when you talk about cinema, for example, which was one of the great concerns of the conservatives when we were trying to push accession forward, there are still a lot of play in the joints. The negative list I think still imposes some regulations on - stringent regulations on the content of motion pictures that might be imported into the Kingdom. There is no plan that I know of at this moment that has legalized or promoted motion picture cinema institutions throughout the Kingdom, but I have seen a recent press report that they are building some shopping malls and other facilities that do have the capacity to include theaters and cinemas in them, in the event that the society moves in that direction sometime in the near future. So at least some people are investing money in that concept.
Now, the content of theatrical releases on satellite and cable facilities in the Kingdom is almost without regulation as a practical matter, and I can't tell you how many members of the royal family contacted me to be sure that they had access to the Armed Forces television network on their satellite dishes, which were nominally illegal at the time.
MR. FREEMAN: The American ambassador, for much of his time in the Kingdom, is a TV repairman. (Laughter.)
Chris?
MR. PARLIN: Thank you, Chas. Just a further amplification. There is nothing in the WTO that says that a country must accept what it considers to be morally unacceptable cinema - let me go broader - that requires it to import and distribute pork products, import and distribute alcoholic products. That's not what the WTO is all about. This was a point we had to make repeatedly with Saudi officials up to and including the ministerial level - equally with U.S. business interests that saw some opportunity to grow - rush into a market that they had seen as closed.
The Saudis are perfectly within their rights to maintain these religiously based, morally based restrictions. What the WTO says is no discrimination. What you cannot do is allow your locals to do it, to make and distribute X-rated cinema while preventing Napa Valley from exporting its fine productions into Saudi.
So in the area of DVDs, as with the others, as long as there is no element of discrimination, a country is not required to change its social standards.
MR. JORDAN: I would just add that this point was not fully recognized during some of the negotiations with the USTR, and we kept trying to make the point - the Saudis kept trying to make the point that the rationale for this is are you trying to subsidize a domestic industry or trying to protect that industry by refusing to import these substances. Obviously in Saudi Arabia there is no domestic industry for alcohol, for pork, for cinema, certainly for pornography.
And so finally that got through and I recalled one discussion in which there was some musing going on about whether to agree to this concept of allowing the prohibition of some of these things, and someone in the room said, well, you know, there is a country that is allowed to prohibit the importation of pork, and its name is Israel. And that sort of broke through a stalemate in the discussions at the time.
MR. FREEMAN: I understand the Israelis actually raise pork in cages that ensure that the pigs do not set foot in the land of Israel because they are off the ground - such are the wonders of talmudic interpretation.
Charlie?
MR. KESTENBAUM: Yeah, I just wanted to remind you that that was exactly what I was trying to get at in my remarks was to how unique Saudi Arabia is and how you have to look at it in the context of what is being discussed here in terms of religion and culture.
I would like to give you one story briefly that gives a sense of that - how they adapt and how clever they are at it. When they were trying to introduce - I don't know if this is a true story or not, but it's what Saudis told me, and they are very proud of it, actually, the ones who told me - was that when King Faisal was trying to introduce the telephone that one of the imams came to him and said that is the instrument of Satan and we are going to ban it. And he said, wait a minute, and he dialed up the imam at the holy mosque in Mecca and he put him on the phone and he heard the call to prayer, and he said, there you are; Satan couldn't possibly do that.
When they were - Mutawa were going through the suk years ago smashing wineglasses because they said we don't have - we don't allow wine here. So the king held a big banquet, invited all of the ulama to the banquet and served them orange juice and - I don't know if this is true or not and - this is the holy water from Zamzam in the glasses and said, see, they are holding holy water; there is no wine here, so stop smashing the glasses.
So the Saudis have a very unique perspective on things and a very unique way of going about adapting themselves to the world around. So keep that in your perspective as to how you seen them adjusting and adapting to all of these things.
One other quick comment is that on intellectual property rights is probably the most difficult subject that they are going to face in adjusting to the WTO, so with all of the countries. China is the largest source of pirate products in the world today and they are in there. And the Internet is changing everything. Whether they like it or not they are changing because all of my friends have satellite dishes and every time somebody scrambles a signal, somebody - they run down to the suk and get - pay some money and get a chip or a card and that de-scrambles it until the broadcaster can re-scramble it again.
MR. FREEMAN: Charlie has illustrated a very important point, which those who watch Saudi Arabia quickly come to understand, and that is that process of change in that kingdom, not just in this instance but generally, is top-down. Liberalizing movements have always come from the rulers and been sold to a rather reluctant and socially very conservative populous. And so the issue of leadership, which someone asked about earlier, really is quite relevant in this regard.
MR. CLATANOFF: But I just want to stress this idea of what they have to let in and what anybody can keep out under WTO rules this WWTO consist of - is determined that it has been used as non-discriminatory. The technical term is, quote, national treatment, that you treat the goods of a foreigner the same as you treat the goods produced in your own country. You get, quote, national treatment.
And so since the Saudis obviously don't allow local production of alcohol or pork, then they have no reason to do it. And, you know, as far as banning pornography or banning books or things like that, I want to remind you that in the United States of America, it's illegal to import goods in the United States with forced or bonded child labor.
Now, that is completely consistent with the WTO because we say you can't use forced and bonded child labor to make goods in the United States. It's a weird little thing. We say we do it. I don't know how well we do it, but that is a part of our trade law, and the idea that you can't import goods made with slave labor has been in U.S. law since the tariff act of 1893, and it's certainly WTO consistent.
So if Saudis say they don't want to bring in pornography, or they want to bring in pork, they certainly have the right to do that as long as they are, quote, national treatment.
MR. FREEMAN: Could you identify yourself again?
Q: (Off mike) - Schaffer. I appreciate taking a second question. This is probably for Mr. Parlin or Ambassador Jordan, but I'm wondering if we could expand the discussion a little bit beyond the WTO - and if you - to other trade agreements or perspective trade agreements. And I'm wondering if you think that we're sort of at a point where it's going to take some time to digest this, or if there will be other - I know that BIT might come on line or be launched and then FTA with the U.S. - so these sorts of things, and whether you see internally in the kingdom some momentum for this or where we are vis-à-vis other agreements.
MR. PARLIN: Certainly among the people that we talk to on a regular basis that we deal with, the WTO is clearly not the end of the process. Rather they are keen in either pushing the negotiating or in initiating negotiations of new agreements. The BIT, the Bilateral Investment Treaty, potential FTA's, Free Trade Agreements, with the U.S., with the E.C., with others, both in the individual name of the kingdom, and also GCC, Gulf Cooperation Council-wide agreements. So among this liberalizing corps, the WTO is just the tip of the spear in their effort at internationalization and globalization.
MR. JORDAN: I would just add that in July of 2003, the Saudis signed with the U.S. a TIFA, Trade Investment Framework Agreement, which alone really means nothing; it simply means you are going to agree to agree on various bilateral trade issues, but this clearly kind of plays moving forward with a series of bilateral agreements. And then finally I would say, you know, the president had made it clear that his vision is some sort of a free trade zone in the Gulf, and this would contemplate I think a Gulf-wide environment that is really a free trade area. And so this is all part I think of a larger picture.
MR. FREEMAN: Do we have other questions or comments?
MR. SEZNEC: Could I -
MR. FREEMAN: Please.
MR. SEZNEC: I started hinting at this earlier, but there really is a question for Ambassador Jordan and for Chris. I mean, this whole issue of transparency of the law to me is very important. And I was just wondering since you have been in the actual negotiations of these things, what has really happened on having a transparent commercial law and to a certain extent transparent criminal law in the kingdom in the sense that until now we really knew how the discussions in courts would ever take place.
And now I think Saudis have to abide by that, which is a - implies a complete change in the actual magistrates that are doing this and - well, anyway, I would love to hear comments from people who have been actually involved in this.
MR. FREEMAN: Chris, do you want to lead off?
MR. PARLIN: You bet. As with many of my answers, I have to say that what I talk about is what has been agreed to on paper. I cannot swear that at this moment all of this has actually been operationalized, but clearly there is a commitment to the full range of WTO-required transparency including publication and dissemination of laws, regulations, administrative decrees of general effect and operation, judicial decisions.
In every instance there is a commitment to use either the existing official gazette. I butcher the translation, but the umkara (ph) or to establish new official journals and gazettes that will be - whose existence will be widely known in many, if not all instances. There also is an increased use of the Internet - various agencies, ministries, judicial entities are setting up website, most of them available not only in Arabic but at the very least with English translation - so a broad commitment to make the commercial and economic world within the kingdom much more transparent.
I should note that the WTO does not regulate criminal matters, and so I can't speak to what if anything will change in that area.
MR. JORDAN: The criminal code in Saudi Arabia was revised fairly recently to provide greater rights to the accused. That is aside from the WTO. There is a commercial court now essentially in Saudi Arabia that deals with commercial disputes.
I think one of the things to watch, and frankly an area of concern is the extent to which Sharia law will trump some of these decisions, including decisions of arbitration panels. So much of commerce, international commerce relies upon dispute resolution through arbitration, and while the Saudis have signed the New York Convention on Recognition of Arbitral Awards, they have made it clear that an arbitration award that is conflict with Sharia would be in conflict with the public policy of Saudi Arabia, and therefore might not be enforced.
When I advise businesses doing business in the kingdom, I remind them of this potential risk, and so it's just part of the package of business risks that you take when you go forward. My hope is the WTO accession will make these outcomes a little more certain, and the transparency aspect of it will be enhanced.
MR. FREEMAN: Charlie?
MR. KESTENBAUM: I like to be the voice of practical on-the-ground reality. Let me give you an example of how that works in reality in Saudi Arabia. Ambassador Jordan's predecessor called me in one day early in 2001 and said get up here to the ambassador's office. I went up and he said we have a problem. The Supreme Council of Ulama have just banned Pokemon as Satanic and Zionist creatures, and the ministry of commerce has issued an order to cease all imports and to have all Pokemon products removed from the marketplace.
So I went to a bunch of Islamic lawyers in Saudi Arabia and said - and why were we involved? This was Nintendo, right? Japanese? No, it was Nintendo USA, and they came into the American embassy for help. And I went to a friend who was an Islamic lawyer trained in Mecca, worked for an American law firm, and I said, how did this happen? And he said, well, somebody brought it to the attention of the ulama and they reviewed the case and they pronounced a fatwa. And I said is it disputable? Can you ask for a review? Under what - how do you get it overturned? And he said - don't; can't.
I don't know if anybody has been in Saudi Arabia lately. Pokemon is still banned. I'm assuming they are. Nintendo had never had a chance to dispute it; there was no mechanism by which to claim that these weren't Zionist or Satanic creatures.
And I'll give you another case - was Coca-Cola was almost banned after all of those years on the Arab boycott blacklist they finally got back into Saudi Arabia. And one day somebody read a Coca-Cola can where it says Coca-Cola in Arabic and he was reading it and he looked at it in a mirror and backwards he interpreted it as saying la (ph) Mecca la (ph) Muhammad, and brought it to the attention of the ulama, and they were about to issue a fatwa.
Fortunately, Coca-Cola was quicker in the market than Nintendo and were able to present the case that that was a misinterpretation of what was read and it wasn't any intentional misunderstanding, and they didn't get banned.
So I say it's very important that mechanisms of arbitration of transparency be put in place and the Saudis agree to it, but I wouldn't hold my breath waiting for that to actually happen. If the ulama issue a fatwa, I wouldn't expect a commercial court to overturn it on an easy basis.
MR. SEZNEC: It also shows that Coca-Cola had a better agent than Pokemon. (Laughter.)
MR. KESTENBAUM: It's probably true. (Laughs.)
MR. FREEMAN: Here is the recovering lawyer in me speaking. I think it's fair to say that in the sweep of history, what is happening in Saudi Arabia with the accession to WTO and the shifts in the nature of the legal system to our - one more compatible with the international system, is a process that has gone on in every successfully modernizing non-Western society.
It is not remembered, for example, that Japan, like China, suffered from extraterritorial regimes in its ports imposed by Western powers, ourselves included. Unlike the Chinese who dealt with this with anger, the Japanese tried dialogue. They went to the Western occupiers and said why are you doing this? And the answer was, well, you have a barbarous and unpredictable legal system that doesn't have an adequate commercial code, which imposes unacceptable penalties on the criminal legal level, and therefore, we need the protection - certainties of our own law, and the protections of our own practices in criminal law.
So the Japanese sent 10,000 students to Germany, some of whom studied to be judges, some to be lawyers, some to be clerks, and they translated the entire German legal code into Japanese. The 10,000 students returned. The Diet met and passed the German legal code into law. And the next day the courts opened for business, the lawyers hung out their shingles, and the clerks sat there waiting for cases.
And the Japanese went to the foreigners and said, now what is your excuse? And all of the foreigners -- with the exception of course of the Belgians -- agreed there was no excuse. The Belgians hung onto their extraterritorial rights until almost 1920 I believe.
But this is a very common pattern and it is one that every non-Western country has to struggle with as it adapts to an international system that is basically - was basically made somewhere in the Atlantic, not in the Arabian Gulf. I expect Saudi Arabia will have many difficulties as it proceeds, but the fact is that it has taken the historic step of committing itself to join the world. And as several of the speakers have said, it will be under scrutiny and it will be under pressure to make good on this commitment.
A final footnote on the Japanese experience, which I think may be instructive. Both the German and the Japanese laws obviously were identical. In the case of the family law, in order to get a divorce under this legislation, you were required to go through a period of mandatory mediation by a court-appointed mediator. And in Germany, of course, the mediator meets with the estranged couple and tries to reconcile them so as to bring the marriage back together. In Japan, the purpose of the mediator is to speed the separation and to make it amicable.
So the same provision of law works 180 degrees apart in the two societies. I expect there will be elements of peculiarity in the way the Saudis interpret international legislation, and I think in many cases they will be entitled to do that.
I think we have brought this to a moment when perhaps it's appropriate to conclude it. I would like to thank the panelists for taking a subject, which I think is important, and making it interesting, lively, and transparent. Would you join me inn a round of applause for the panelists?
(Applause.)
(END)
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