The following is an edited transcript of the forty-second in a series of Capitol Hill conferences convened by the Middle East Policy Council. The meeting was held on January 13, 2006 in the U.S. Capitol Building, with Chas. W. Freeman, Jr., presiding.
CHAS. W. FREEMAN, J R., president, Middle East Policy Council
Saudi Arabia is unique, and the impact of its accession to the World Trade Organization is likely to be enormous. It is the only place on the planet that 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. Many Saudis to this day seem to divide the world into two classes of people: Saudis and potential employees.
Saudi Arabia has, because of its history and its oil wealth, been able to play by its own rules for investment and foreign trade. But it is now embracing international norms for the first time. It’s doing so in its own interest and in accordance with King Abdullah’s effort to promote reform in the kingdom. WTO accession really marks the end of an era in many respects, an era in which, some people quipped, 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 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 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 in this sudden move by the Saudis to join the world. We’ll be talking about the impact on issues of concern, both to ordinary Saudis and to foreigners living or doing business in the kingdom. 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 in the United States who specialize in the study of Tibet than in the study of Saudi Arabia; it’s also easier to get a visa and travel to Tibet.
WILLIAM CLATANOFF, former assistant U.S. Trade Representative for Labor
I want to talk about the American interest, 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 –– in particular, after the events of 9/11.
When you looked at world trade from the U.S. perspective, there was a conundrum, an anomaly about the Middle East generally and Saudi Arabia in particular: here is a part of the world that literally gave us the word “bazaar” for trading –– the market, the souk. Yet, as a share of world trade, particularly non-petroleum world trade, they were miniscule. To give you an example, the United States last year imported more non-oil products from Hong Kong alone than from all 24 members of the Arab League combined. They’re not players on the world stage of non-petroleum trade. They’re insular. The way the WTO works is the first step to breaking that up.
In early 2003, President Bush announced his intentions to 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 and Morocco, and just two days ago, the president signed the FTA with Bahrain. 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.
Let me just take about three minutes to walk you through the process of WTO accession. It starts with a country saying to the WTO, “I want to join.” 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 (GATT); others include the General Agreement on Trade in Services (GATS), Trade Related International Property Rights (TRIPS), Technical Barriers to Trade (TBT) and Sanitary and Phytosanitary Standards (SPS). Saudi Arabia had to agree that it would abide by all of those pre-existing WTO agreements and would then negotiate with what’s called a working party.
The WTO rules only by consensus, which means everybody has to agree. Saudi Arabia was the 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, Tonga, which just joined at the Hong Kong ministerial meeting in December. Saudi Arabia’s official accession was formally approved by the General Council of the WTO on November 11, 2005.
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.
It took a long time. They started the process in 1993, and, frankly, they weren’t very serious about it for a long time. I think you have to look at the WTO accession as being two things. One, it’s important from the point of view of the Saudis’ trade relations with the world. But, two, it’s equally important internally. By signing onto these rules, it’s a real commitment –– and I don’t think this got nearly enough press –– to internal economic reform.
To see how much it has changed, in 2001, Saudi Arabia tabled its investment regime and gave it to the WTO working party. It said that there would be a negative list –– that Saudi Arabia would allow foreign investment except in these areas. The first item on the list –– the category in which no foreign investment would be allowed –– was exploration, mining and petroleum products. Some of these conditions were expected, and we, the United States, do the same thing. For example, the manufacturing of explosives and military equipment is a security issue. Real estate investment in the holy cities of Mecca and Medina is excluded; that’s understandable. But all insurance and insurance-related services were on their negative list, as were all transportation services. That’s where they were in 2001. That is precisely why, in the negotiations, the United States was the most difficult. We were the last country to agree to Saudi accession, but it was primarily investment that was at issue as well as some other issues.
But, the WTO working party dealt with foreign investment, sanitary and phytosanitary standards, and technical barriers to trade. One serious obstacle was import licensing and customs valuation. It’s fine to say, we’re going to reduce our tariff from 15 percent to 3 percent of value, but then how do you value it? The Saudis had a very non-transparent system of import processing and customs valuation. Those were the big issues, but they all got worked through. A crucial issue was an 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 indicative of the kinds of domestic economic reforms that Saudi Arabia is going to make in order to live up to its WTO obligations.
AMB. FREEMAN: This was an excellent introduction of the topic. 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. This 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 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
CHRISTOPHER PARLIN, partner, Loeffler Tuggey Pauerstein Rosenthal, LLP
My firm and I have had 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 will provide a Saudi perspective in my remarks. I should 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 may not exactly be put in the way that 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 joined the WTO because they wanted to do it. And I think 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, who was a strong driving force; State Minister Alireza; and, 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. What were the principal elements of Saudi accession? As Bud has said, the core element in joining the WTO is agreeing to the set of substantive and procedural agreements that are part of the WTO treaty –– as the word is used in international law, not U.S. law. Think about a country club of 148 members. You are seeking to join the club. It is the 148 members who tell you what the rules are. You can say, “Oh, no, no, no. I’m sorry, that’s not what I would like to do in sanitary and phytosanitary standards with respect to scabie-mouthed sheep.” 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 a significant element of less-than-equal bargaining. That notwithstanding, 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 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 get a position in the end that was much more feasible, much more rational, from the Saudi point of view.
What happened? I could 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 overall reality, though, is that, across the board, the Saudis liberalized their markets and restructured their legal regimes. 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 or liberalization. In the area of customs tariffs on goods, there were 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. There also were reductions of barriers across the board in agriculture and services, and a wholesale revamping of the intellectual-property regime. In fact, I think it is not too much of a stretch to say that the Saudis went from a rudimentary –– in some cases, non-existent –– regime of intellectual property coverage, protection and enforcement to one that on paper is world-class, state-of-the-art. Commitment to the rule of law and transparency; these are 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 about which there is no notice will be a thing of the past. There will be publication and announcement ahead of time of changes in government regulation and an ability of commercial actors, non-Saudis as well as Saudis who are interested in the areas, to participate in the discussion process between draft and final regulation.
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 a backlash among the conservative elements in the kingdom? Not likely, in my opinion. Or will there be revolution in the sense that Chas. and Bud have talked about: a major revision of the way that Saudi Arabia deals with the rest of the world?
This remains to be seen, but I think it is safe to say that, if efforts are successful to continue to put into operation the commitments that were made as part of their accession, Saudi Arabia will indeed become a vibrant part of the world community.
AMB. FREEMAN: Both of you mentioned insurance in connection with reactions and the extent of the changes that have been wrought. 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. Saudi Arabia has come a long way toward the modern world in admitting that modern commerce requires insurance.
ROBERT JORDAN, former ambassador to Saudi Arabia; partner, Baker Botts LLP
I want to start by taking a snapshot of a moment in time fairly recently. It was last September. I was sitting in my law office at Baker Botts in Dallas, and the phone rang. I answered it, and the voice said, “Bob.” I said, “Yes.” He said, “This is Jim Oberwetter (the current U.S. ambassador to Saudi Arabia).” He said, “I am standing in the Office of the U.S. Trade Representative (USTR) in Washington, D.C., and we are here to sign the U.S.-Saudi bilateral agreement, which will be the last step necessary for the Saudi accession to the WTO. I know how important this was to you, and how hard you worked on it, so I simply want to pass the phone around the room and let those here present congratulate you 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 for 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.
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 Saudis’ interest necessarily but in America’s strategic interest. It occurred to me that WTO accession was very good for the United States and our national interests; it was also in the Saudis’ best interest. So I set about trying to learn what had been going on. I learned that negotiations had really been interrupted. There had not been a working-party meeting apparently since October 2000. Both sides had lost a tremendous amount of momentum. I decided that, if the Saudis really wanted to do this, we needed to elevate it on the United States end as well.
The Saudis –– and the crown prince –– assured me that this was a high-agenda item for them. So when I was back in Washington in December 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, not simply meeting a bunch of checklists and boxes that had to be checked in the USTR office. I decided to start with the vice president. I had a meeting already scheduled with him and I went in and made my pitch. He was very enthusiastic about the idea and the reasons for it: 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 told him that the vice president had embraced this idea. How did he feel about it? He was enthusiastic. Secretary of State Powell was enthusiastic. Then I made my way around to Ambassador Zoellick’s office, the U.S. trade representative. I 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 unclear whether the Saudis had the will to move forward at this time. The USTR’s office was very busy. They didn’t have a large staff, and they were swamped with a lot of demands on their time.
I felt a little bit of resistance at that moment to moving forward. I said, “I think the vice president supports this [as do] the secretary of state, the secretary of commerce. Bob, how do you feel about it?” 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. 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.
At that time there was 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. I found myself meeting with the Saudi representatives repeatedly and not really getting anywhere. The significant exception to this was Fawaz al-Alamy, who was a hero in much of what has unfolded.
We encountered a great deal of resistance among certain segments of Saudi society. Some had the impression that, if they joined the WTO, they would be required to import pork and alcohol. They would be required to allow the establishment of cinemas that would show pornographic materials. 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 intrusion on their sovereignty.
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. We have now been able to really make it clear to the Saudis how much it’s in their best interest to do this. But it’s also in the best interest of the United States.
We now have an opportunity, as has been said, for transparency. We have an opportunity for 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.
What will it lead to? In the grand vision of things, my belief is that 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 their own human capital. It will probably 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 at the beginning of a new stage of history in which the Saudis finally come into at least part of the twenty-first century.
AMB. FREEMAN: I think your point about the 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. The example of Dubai in the region and the giant sucking sound 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.
CHARLES KESTENBAUM, former regional director, U.S. Dept. of Commerce
In my career I have primarily acted as boots on the ground in these kinds of negotiations and efforts. I would like to add value to the program today to follow up on what Ambassador Jordan said by trying to give you a 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. Then you can get a better sense of 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 40 years in economic terms. They have had open and easy access to everyone else’s markets, but they have protected their markets and access back home. I will give you a simple example. Prince Alwaleed bin Talal is the largest shareholder and a very influential individual in Citigroup’s portfolio of owners, yet Citigroup has in the last year or two withdrawn from its banking venture, Saudi American Bank in Saudi Arabia (SAMBA), sold its last 18 percent and exited the market, even though he is their largest shareholder. When I asked the vice chairman of Citicorp why they did that, he said, “because we had a lot of liability and no control. Our limited ownership didn’t give us the authority we wanted to make the right decisions from our perspective.”
We have a large sense of monopoly in the Saudi economy. It is not entirely the case; everything in the world is complex. Aramco is a monopoly, yet the largest investment that ExxonMobil has made in the world is in the Saudi Arabia Petrochemical Industry. So it’s a bit of a mixed picture, but it’s still a largely monopolized society.
Saudi Arabia is also still a very tribal society. And what tribal society means in the Saudi Arabian context is very interesting. It’s a complex relationship. On the one hand, Bedu ethics are very egalitarian; they are fiercely independent people. Yet, at the same time, they have overlaid on that a very strict and rigid hierarchical system of birth and tribal relationships through age and through family relations.
It is an economy where the leader and the greatest hero of the tribe is somebody who can go and steal his neighbor’s camels and get back without a fight or having to kill anybody. The tribal term in Arabic is ghazu, which means you raid your neighbor and get back. So the concept of business is very different. They didn’t look at business as win-win, everybody goes home happy. It’s win-lose. They stole something you had that wasn’t nailed down and got away with it.
Saudi Arabia is 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. As Americans, we don’t relate to that because our history is egalitarian and resisting monarchy. We don’t understand how in a monarchy; the monarch owns everything or controls everything.
I have seen royal family members drive up to a gas station, have the gas tank filled and drive away without paying, while the Bangladeshi is standing there with the pump in his hand going, “What do I do?” You know he is not writing down the number and calling the police. There is no point; he can’t collect. I have seen royal family members drive through police roadblocks that are searching for terrorists. 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. That sense of the responsibility of entitlement created a system of welfare: you had to provide free education and employment. You had to give everything to everybody or you couldn’t command their loyalty. That created another major economic distortion in the economy. Healthcare, education –– everything –– has to be free. So, again, where is the free market? It’s free as long as it’s given and owned by somebody else.
On top of this is 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 drive? What kind of business can operate in a global arena if they have to shut down five times a day for prayer?
The WTO rules are not going to be implemented in a way that we have been talking about here, not in the short term. Maybe over the long term, and that is probably the intention of the leadership, to create a long Saudi-time transition.
Ambassador Freeman 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 the time. Saudi Arabia is changing every day. WTO accession is a major milestone, as we pointed out. I agree with that completely. The Saudis’ 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 like to make one other point about Saudi Arabia and time. We have to understand a little bit of the history of America. When my mother was born in this country, she couldn’t vote. When I was born in this country, there was segregation. There was discrimination against minority groups. We don’t understand history and the depth of things and how quickly things are moving for us. The Saudis’ heads are spinning over how fast things are changing. So let’s understand that all these changes may not happen, even though they’ve signed on to everything. They’re still going to operate on Saudi time; they’re still going to operate in the Saudi way of doing things –– progress without change or change without disruption, if possible.
AMB. FREEMAN: I’m very grateful for that very stimulating review of Saudi society in relation to change. I take mild exception 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 so unique in that regard.
One issue you mentioned that I think is very important, and it leads directly to Jean François 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 was 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 Arabian region from some of the downstream processing that otherwise would have been done. WTO accession promises to change this. 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.
JEAN -FRANCOIS SEZNEC , adjunct professor, Columbia University’s Middle East Institute
I want to emphasize what my predecessors here have mentioned, that the social issues and the economic issues under these WTO negotiations are absolutely vital. 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 its social aspects. I think they all know that in order to survive, Saudi Arabia must get into the twenty-first century and must really sideline the Salafis. I think the whole game of the WTO project is really just that, the sidelining of the Salafis.
So, given that, after 2001, they decided to really push hard on joining the WTO. Why? Because with the WTO, they can maximize their natural advantages. I hope I won’t be too technical –– that can be pretty boring –– but 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 made 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 seventh largest producer of petrochemicals in the world today, and it is increasing by leaps and bounds. They’re producing about 46 million tons a year. Some of it –– 10 percent –– is from the private sector, and not from SABIC (Saudi Arabian Basic Industries Company).
One of the key issues under WTO is that there was a risk that this Saudi growth 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. We’ll talk about the EU, but I must stress the importance of those petrochemicals. The Saudis sell $20 billion of goods to the United States every month. Every cent of those dollars has a petrochemical component. It may not be much. It could be just the packaging or it could be the whole product, but China could not grow as it has and create the jobs it’s creating without the petrochemicals. And these petrochemicals could not be produced so cheaply without the growth in the Saudi petrochemical industry.
We’re not talking enormous amounts of money at this point –– maybe $20 billion in sales. 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 them. The civil service in Saudi Arabia decided a long time ago –– this 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, is that the minister of oil, the minister of finance and their predecessors had decided to become as important in industry –– in petrochemicals – – as they are in oil today. By 2015, Saudi Arabia will be the largest producer of petrochemicals in the world.
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 this. Even though Germany is the third-largest seller of products to 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.
During the negotiations between the EU and Saudi Arabia, there was a major issue of double pricing. Let me just go quickly through this. The key ingredients of petrochemicals are butane and propane, natural-gas liquids, which come out of the natural gas extracted in Saudi Arabia out of oil. This is sold at about $400 a ton in the world market. The Saudis sell it at a 30 percent discount to SABIC. 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 to stop the double pricing in the agreement with the EU, but they also know that within four years they will not export any natural-gas liquids because they’re growing their industry so fast that it will all be used locally. Therefore, they could agree to having 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 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 per million BTUs. Seventy-five cents per million BTUs would amount to about $4.35 per barrel of oil equivalent. So the Saudi producers of petrochemicals can buy their raw material at $4.35, including a profit for Saudi Aramco of probably $2.50. The Germans, who are competing with the Saudis, are buying at $62 a barrel equivalent today. There is an enormous difference between the two.
The Saudis are increasing their sales to the Far East tremendously every year. They can get any market they want because the Chinese are buying everything they can. They don’t have to have a price war 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. Joining WTO allows the Saudis to compete. The Saudis today can take over any market, wherever they want at any price they want, if the markets start declining.
Eventually the EU –– I suspect because of American pressure –– in the final document, which was signed on November 11, agreed even to drop the double-pricing issue. What is not mentioned today is that the Saudis, Saudi Aramco in particular, can sell its products to its own buyers at cost, all inclusive –– labor, capital, depreciation, et cetera –– plus a fair profit, and it amounts to about $2.50-a-barrel equivalent. The price given by Saudi Aramco is now $4.35. So the Saudis can continue to grow. By 2015, they will be producing over 100 million tons of petrochemicals.
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. They already produce 5 million tons of steel a year. They’re going to go into aluminum. They’re going to bring a lot of goods from inside Saudi Arabia with the new railroads they’re building, and that will develop an enormous export industry.
I think the EU is going to be a big loser on this issue, because the French are investing in Saudi Arabia but the Germans, who are the largest, are not. Even though the EU is the largest trade partner to Saudi Arabia today, the big gainer is the American companies. 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 the Chinese relationship with the Saudis is going to increase tremendously compared to that of the Americans, but some of t hose commercial relations will be coming from American companies.
AMB. FREEMAN: 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. I’ll just go back, if I may, to something you said, Jean François, 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. 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.
Finally, just to underscore Charlie Kestenbaum’s point about the absurdity of progress without change, let me tell you a story that 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 in my lousy Arabic to the two guards who had been assigned to me by Prince Nayef. I realized I didn’t know much about their background. 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. The guy that I was talking to said, “Well, of course that’s not a surprise because they’re Bedu, like me.” I said, “I don’t really know much about your background. What did your grandfather do for a living?” He said he sold shoes. I said to myself, shoes? Maybe I misheard. Shoes? He said, “Yes, shoes.” I said, “Where did he get the shoes?” He said he killed pilgrims and took them. This was not that long ago. (Laughter) Nobody is killing people for shoes in Saudi Arabia these days. It is an illustration of how remarkably rapid the transformation of that society has been.
Q & A
Q: If you go to the WTO website and read the language of the various announcements that had to do with Saudi accession, it appears 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. PARLIN: Not surprisingly, this was one of the more frequently addressed issues, the question of pork and alcohol being second to it. The Saudi delegation and 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 Arabia and other WTO members, including Israel. They did not exercise this treaty authority. 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 and tertiary boycotts had not been enforced and would not be enforced in the future. I believe this went back to 1985. These are the treaty obligations. Will there instantaneously be a welling up of trade between Israel and the kingdom? That remains to be seen. And the reactions, if it 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.
AMB. FREEMAN: One of the great ironies of the modern age is that the United States, which for so long opposed secondary boycotts, is now the primary practitioner of them. With respect to countries like Iran, for example, where the United States has unilaterally imposed sanctions, we penalize anyone else who trades with Iran even though there is no basis in international law for that action. So the principle 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 measure of trade between Israel and Saudi Arabia, clandestinely. The most notable example in my own experience was when I went down to the computer souk to check out the software in my capacity as ambassador, looking for illegal software that 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). It wasn’t much of an advertisement for the product. But, 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. You may be holding your breath for that, but I’m not.
Q: This relates what Dr. Seznec talked about in terms of petrochemicals or industries that might gain competitive advantage with the WTO. What do we see in terms of employment generation coming out of this? In the industries that might grow 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 membership that will enable further employment generation?
PROF SEZNEC: Yes, of course. But petrochemicals do not employ that many people. It employs a lot more people than just the production of oil, but by itself it does not generate an enormous amount of employment. But all the related industry and the downstream from petrochemicals is already employing a great number of people. I don’t know what the multiplier effect is on labor, but it will create a tremendous number of jobs. That’s the purpose of this whole issue: They want to create jobs for the Saudis, which means the Saudis have to be well-trained, and they have to employ women. This goes back to the social issues that were mentioned earlier, because that’s how the Salafis are going to be sidelined. The Saudis are going to have to have a very good technical educational system, which they are trying to start establishing now, mostly privately. I think in the long run they will create more jobs, definitely, and in all manner of industries downstream from petrochemicals.
AMB. 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 that actually encouraged the investigation of how nature worked.
AMB. JORDAN: 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 business travel, hotels, tourism, telecom. 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. KESTENBAUM: I just offer a note of some skepticism to this issue of labor. The biggest challenge that the Saudi government and leadership face is in the employment of Saudis in a competitive manner. If they open up their economy more to competition, then they will have to employ people properly. There is an ExxonMobil representative in the room. We won’t put him on the spot and force him to say anything, but my understanding is that in a petrochemical complex that produces several billion dollars worth of products per year, they probably employ 150 people, at most, in a modern and efficient petrochemical complex in Jubail or Yanbu.
So even the massive expansions that are being anticipated won’t produce any kind of mass employment. The Saudis have struggled with the issue of employment, of Saudiization. They went through the gold souk and threw all the Yemenis out and tried to employ Saudis there; they’ve done it in a vegetable souk and throughout the insurance industry, in banking and services. The biggest challenge they face today is the massive population bulge and the effort to educate them. How many people are graduating with Islamic studies degrees from university now – 40 percent?
AMB. FREEMAN: Just to fill in behind your comments, the principal employment opportunity that the expansion of the petrochemical industry presents is not directly in the operation of the industry itself. 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. These are areas in which American and Japanese, as well as European firms, compete very vigorously for the Saudi market. 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. I believe there will be an increased demand for well-educated, hardworking Saudis, who are more numerous than many suspect.
MR. CLATANOFF: I think it is beyond doubt that the one reason the Kingdom of Saudi Arabia so much wants to undertake an economic revolution or economic liberalization and expansion that’s dictated by WTO terms is for employment generation. 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 concerns technical education and the number of graduates in engineering, math and science, not to mention business and finance.
AMB. JORDAN: 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.
Q: 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 Abdullah dies. Do you think that after the crown prince goes, there might be a decision at the top level of government to move away from some of the reforms that Abdullah has been pushing?
AMB. JORDAN: 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, 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 expectations of these reforms and expectations 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 a lot of it depends on that. But a critical mass is developing of members of the royal family, 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 at some point it will also play a role in how far they go. But this is speculation; we really don’t know.
AMB. FREEMAN: I think a great deal will depend on how far advanced the process of implementing the agreement has proceeded before succession occurs. 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. Therefore, as the agreement is actually implemented, it will gather its own momentum and will be very hard to reverse.
The second point I’d make is that, as Ambassador Jordan has said, the issue of succession is one of the favorite games 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 this has always proven wrong. Saudi Arabia has a remarkable record of stability and continuity in policies from one monarch to another. 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. 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. Therefore, while I think the question is excellent, I’m not sure that it’s worth losing any sleep over.
Q: One of the panel made the comment that the silent-partner operations that are quite common in Saudi Arabia will no longer be permitted under WTO. What does WTO say that excludes silent partnerships?
MR. CLATANOFF: There is nothing to prevent having silent partners, but the WTO agreement brings an end to the so-called agency system, where 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. The worst thing was that you couldn’t fire the guy. Whether your agent was good or bad, you were stuck with him. Now any firm can directly import and sell without using an agent. That’s the crucial thing.
AMB. FREEMAN: This is something that 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.
MR. PARLIN: First, a caveat. I am not speaking to what you term silent partnership; that’s out of my range of knowledge. But, in the course of the negotiations with the United States in particular, the Saudis agreed that they would eliminate restrictive elements in the importation and distribution of goods. (This WTO obligation is part of the basic nondiscrimination element at the root of the WTO). 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: From a very practical commercial perspective, the successful business model in Saudi Arabia doesn’t require a Saudi partner, distributor or agent, but it is certainly much better prepared if you have one. I’ve talked with a lot of the big companies that are global in their nature and reach and have billions of dollars of resources, and invariably they all want Saudi partners, agents or distributors. It facilitates their knowledge of the market, their access to the market, and the investment and commitment to the market. There may be some –– a small group –– that say, I can do it myself, I want to do it myself, and they’re free to do it now. 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.
AMB. FREEMAN: 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. 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. Finally, I agree completely with Charlie Kestenbaum. 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 coming in and blundering about as an ignorant foreigner.
Q: To follow up on Ambassador Freeman’s point that the speed of implementation is one of the keys, both politically and economically, accession is not the end of the WTO process. 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.
AMB. JORDAN: You can see this 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 the Chinese. My guess is that there will be the same kind of pressure on the Saudis.
AMB. FREEMAN: I’d like to ask a question myself, since the issue of DVDs and counterfeits has been raised. One of the more anomalous practices in Saudi Arabia was the official ban on music and videos, coupled with the ubiquitous availability of cheap cassettes, DVDs and videos on every street corner in practically 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 products in the kingdom?
MR. PARLIN: I’m not going to be presumptuous and say it will have the effect of eliminating pirated videos from the souk. I can’t resist making the point that one need only go about 15 steps from USTR’s front door to find a gentleman there almost every day selling videos whose parentage, shall we say, is dubious. Throughout my years at USTR, I was amazed that somebody didn’t at least ask him to move around the corner. (Laughter) What I can say is that, as a matter of WTO law, as part of the enforcement commitments that the Saudis have made in the intellectual-property area, WTO members have a range of options to use the WTO enforcement mechanisms, starting with official complaints in the various WTO 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 Arabia as well as all other WTO members, that type of practice is now actionable in ways it was not before.
PROF SEZNEC: I have a question somewhat related to this. I think one of the key components of this WTO agreement is to have transparency in the law. This is a major issue as far as I’m concerned. 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. What I’m not sure of is what the real text is under the WTO agreement. I couldn’t really understand from reading it whether there was full transparency of the law and how it was going to be implemented under Sharia.
AMB. JORDAN: 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 is still a lot of play in the joints. The negative list still imposes some 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 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 the concept. The content of theatrical releases on satellite and cable facilities in the kingdom is almost without regulation. 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.
AMB. FREEMAN: The American ambassador, for much of his time in the kingdom, is a TV repairman (laughter).
MR. PARLIN: There is nothing in the WTO that requires a country to accept what it considers to be morally unacceptable cinema or to import and distribute pork or alcoholic products. That’s not what the WTO is all about. The Saudis are perfectly within their rights to maintain these religiously and morally based restrictions. What the WTO says is, no discrimination. What you cannot do is allow your locals to make and distribute X-rated cinema while preventing foreign cinematographers from exporting their productions into Saudi Arabia. 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.
AMB. JORDAN: This point was not fully recognized during some of the negotiations with the USTR. 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 not for pornography. Finally, that got through. I recall 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. Someone in the room said, there is a country that is allowed to prohibit the importation of pork, and its name is Israel. That broke through a stalemate in the discussions at the time.
AMB. FREEMAN: I understand the Israelis actually raise pork in cages that ensure that the pigs do not set foot on the land of Israel because they are off the ground. Such are the wonders of Talmudic interpretation.
MR. KESTENBAUM: This is exactly what I was trying to get at in my remarks –– 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 how clever they are at adapting. When King Faisal was trying to introduce the telephone, one of the imams came to him and said, that is the instrument of Satan and we are going to ban it. The king said, wait a minute, and he dialed up the imam at the holy mosque in Mecca. Then he put the imam on the phone, and he heard the call to prayer. King Faisal said, there you are; Satan couldn’t possibly do that.
When the mutawain were going through the souk years ago smashing wine glasses because, they said, we don’t allow wine here, the king held a big banquet, invited all of the ulama to the banquet and served them orange juice in wine glasses and showed them holy water from Zamzam in the glasses. He said, see, they are holding holy water; there is no wine here, so stop smashing the glasses.
Intellectual property rights are probably the most difficult subject that the Saudis are going to face in adjusting to the WTO, as it is for all of the countries. China is the largest source of pirated products in the world today, and they are members. And the Internet is changing everything, whether people like it or not. All of my friends have satellite dishes, and every time somebody scrambles a signal, they run down to the souk and pay some money and get a chip or a card that de-scrambles it until the broadcaster can rescramble it again.
AMB. FREEMAN: Charlie has illustrated a very important point, which those who watch Saudi Arabia quickly come to understand. The process of change in that kingdom –– and 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 populace. So the issue of leadership is quite relevant in this regard.
MR. CLATANOFF: I just want to stress this idea of what they have to let in and what anybody can keep out under WTO rules. The technical term is “national treatment.” You must treat the goods of a foreigner the same as you treat the goods produced in your own country. You get “national treatment.” So, since the Saudis obviously don’t allow local production of alcohol or pork, they have no reason to discriminate. As far as banning pornography or books or things like that, it’s illegal to import goods into the United States that are made with forced or bonded child labor. This is completely consistent with the WTO, because we say you can’t use forced or bonded child labor to make goods in the United States. We say we do this, but I don’t know how well we do it. 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 pork, they certainly have the right not to, as long as they are providing “national treatment.”
Q: I wonder if we could expand the discussion beyond the WTO to other trade agreements or prospective trade agreements. Do you think we’re at a point where it’s going to take some time to digest this, or will there be other agreements?
MR. PARLIN: Certainly among the people that we deal with on a regular basis, the WTO is clearly not the end of the process. Rather they are keen to either push the negotiating or initiate negotiations of new agreements –– the BIT (Bilateral Investment Treaty) and potential Free Trade Agreements with the United States, with the EC, with others, both in the name of the kingdom and GCC-wide agreements. The WTO is just the tip of the spear in the Saudis’ effort at internationalization and globalization.
AMB. JORDAN: In July 2003, the Saudis signed with the United States a TIFA or Trade Investment Framework Agreement, which alone really means nothing, simply that you are going to agree to agree on various bilateral trade issues. But this clearly is moving forward with a series of bilateral agreements. Finally, the president has made it clear that his vision is some sort of a free trade zone in the Gulf, and this would contemplate a Gulfwide environment that is really a free-trade area. So this is all part of a larger picture.
PROF SEZNEC: The whole issue of transparency of the law is very important. Since Amb. Jordan and Chris Parlin have been in the actual negotiations of these things, what has really happened regarding having a transparent commercial law, and to a certain extent a transparent criminal law, in the kingdom? Until now, we really never knew how the discussions in courts would take place. Now I think the Saudis have to abide by transparency. This implies a complete change in the actual magistrates. I would like to hear comments from people who have been actually involved in this.
MR. PARLIN: 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, and judicial decisions. In every instance there is a commitment to use either the existing official gazette, the Umm Al-Qura, or to establish new official journals and gazettes whose existence will be widely known. There also is an increased use of the Internet. Various agencies, ministries and judicial entities are setting up websites, most of them available not only in Arabic but at the very least with English translation. So there is a broad commitment to make the commercial and economic world within the kingdom much more transparent.
The WTO does not regulate criminal matters, and so I can’t speak to what, if anything, will change in that area.
AMB. 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 in Saudi Arabia that deals with commercial disputes. 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 the decisions of arbitration panels. So much of 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 in conflict with Sharia would be in conflict with the public policy of Saudi Arabia and, therefore, might not be enforced. When I advise companies doing business in the kingdom, I remind them of this potential risk. It’s just part of the package of business risks that you take when you go forward. My hope is that the WTO accession will make these outcomes a little more certain, and the transparency aspect of it will be enhanced.
MR. KESTENBAUM: I like to be the voice of practical reality. Let me give you an example of how that works in Saudi Arabia. Ambassador Jordan’s predecessor called me up to his office one day early in 2001. He said, “We have a problem. The Supreme Council of Ulama have just banned Pokémon as Satanic and Zionist creatures, and the Ministry of Commerce has issued an order to cease all imports and to have all Pokémon products removed from the marketplace.”
So I went to some Islamic lawyers in Saudi Arabia and asked why were we involved? This was Nintendo, right? Japanese? No, it was Nintendo USA, and they came to the American embassy for help. I went to a friend who was an Islamic lawyer trained in Mecca and working for an American law firm, and asked how this had happened? He said that somebody brought it to the attention of the ulama, and they reviewed the case and pronounced a fatwa. I asked, is it disputable? Can you ask for a review? How do you get it overturned? He said, don’t, can’t. I assume Pokémon is still banned. Nintendo never had a chance to dispute it; there was no mechanism by which to claim that these weren’t Zionist or Satanic creatures.
In another case, Coca-Cola was almost banned again after all of those years on the Arab-boycott blacklist. One day somebody read a Coca-Cola can where it says Coca-Cola in Arabic. He was reading it, and he looked at it in a mirror. Backwards, he interpreted the logo as saying la Mecca la Muhammad. He brought it to the attention of the ulama, and they were about to issue a fatwa. Fortunately, Coca-Cola was quicker than Nintendo and was able to present the case that this was a misinterpretation of what was read and that it wasn’t intentional. They didn’t get banned. So it’s very important that mechanisms of arbitration and transparency be put in place and the Saudis agree to them, 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 easily.
PROF SEZNEC: It also shows that Coca-Cola had a better agent than Pokémon.
AMB. FREEMAN: Here is the recovering lawyer in me speaking: I think it’s fair to say that what is happening in Saudi Arabia, with the accession to WTO and the shifts in the nature of the legal system to 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 certainties 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. The Japanese went to the foreigners and said, now what is your excuse? All 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.
This is a very common pattern, one that every non-Western country has to struggle with as it adapts to an international system that was basically made somewhere in the Atlantic, not in the Arabian Gulf. I expect Saudi Arabia will have many difficulties as it proceeds, but it has taken the historic step of committing itself to join the world. As several of the speakers have said, it will be under scrutiny and 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 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. In Germany, 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 to be elements of peculiarity in the way the Saudis interpret international legislation, and I think in many cases they will be entitled to that.