On July 3rd the Saudi government issued a decree stating that preferential market access under the six-member Gulf Co-operation Council (GCC) tariff agreements would no longer apply to goods coming from free zones or those including any Israeli input.

Although the decree was promoted as being designed to support localising industrial production throughout the GCC, the move comes just as the GCC’s two dominant powers—the UAE and Saudi Arabia—have been engaged in a public clash over OPEC+ quotas as their oil interests diverge. The traditional allies are increasingly prioritising their national interest over GCC unity.

A large proportion of Emirati exports come from its free zones (which offer preferential tax and customs treatment), particularly Dubai’s Jebel Ali. The UAE and Saudi Arabia are important trade partners, with total trade between the two averaging US$15.5bn a year in 2019‑20. The UAE became the first Gulf state to establish diplomatic relations with Israel in August 2020 (followed by Bahrain). Israel and the UAE have subsequently concluded numerous commercial agreements with bilateral relations becoming a key facet of foreign and economic policy for both. Saudi Arabia has resisted normalisation and its access to products with Israeli input is mostly via the UAE.

According to the Saudi decree, products manufactured by firms with a local workforce lower than 25% or under 40% local value-added will be excluded from the tariff-free access given to goods traded within the GCC, explicitly targeting those made in free zones but also with wider implications give the UAE’s abolition in June of limits on foreign ownership of onshore companies. The Saudi move reflects an accelerated drive both to incentivise domestic industrial development (by making imports less cost-competitive) and to supplant the UAE as the region’s business centre. In February Saudi Arabia announced that it would restrict public-sector contracts to businesses with their regional headquarters in Saudi Arabia from 2024; most are currently based in Dubai given favourable conditions there. Although consistent with Saudi Arabia’s Vision 2030 goals for industrial expansion and job creation, the latest announcement is indicative of increasing rivalry and divergence in geopolitical priorities between the hitherto close allies.

The Saudi announcement is consistent with our forecast of ongoing GCC disunity and increasing economic rivalry between Saudi Arabia and the UAE; the UAE will remain the leading business hub regionally but Saudi Arabia will use its regional economic weight to compete more directly with the UAE.

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