David McHugh

What’s at stake if investors begin to shun Saudi Arabia

FRANKFURT, Germany (AP) — The disappearance of a Saudi journalist last seen entering the kingdom’s consulate in Istanbul has shaken confidence in the country as a place to do business, with potential consequences for billions of dollars in investments going into and out of the country. It’s a blow, analysts say, to efforts by Crown Prince Mohammed bin Salman to convince the world that the country is a reputable place to strike the deals needed to power a wide-ranging transformation of the economy. As allegations emerge that Jamal Khashoggi was gruesomely murdered, political pressure to isolate Saudi Arabia is increasing. Here is a look at the Saudi leader’s economic plans and what is at stake if business leaders begin to shun the country. Q: Why does Prince Mohammed need foreign investors? A: The crown prince wants to diversify the economy away from oil and transform its business and political model. For years, oil revenues paid for plenty of government sector jobs and benefits. That model has come under strain amid a growing population and a period of low oil prices. The prince’s Vision 2030 strategy foresees the creation of a vibrant private sector. As part of that, he wants to develop new industries like alternative energy, tourism and entertainment. Projects include a new business zone near the Red Sea called NEOM that would focus on advanced manufacturing, renewable energy, artificial intelligence and biotechnology. Saudi Arabia has its own companies in more traditional fields like construction, which would get a lot of that investment. But the country would need technology, expertise and financing from outside to carry out Prince Mohammed’s ideas. He wants, for instance, to have his Public Investment Fund — the state-backed investment vehicle — raise more money by selling a stake in chemicals company SABIC to state oil firm Saudi Aramco. Analysts say Saudi Aramco would likely have to borrow to make the deal happen. The PIF itself has already borrowed $11 billion from international banks. “Foreign investment is a main pillar of Vision 2030,” said Sebastian Sons, an expert on Saudi Arabia at the German Council on Foreign Relations. “The old tradition is on the brink. Diversification of the economy is strongly needed and Vision 2030 is the strategy for that.” Q: How would the Khashoggi disappearance affect that? A: Foreign investors already had doubts about the country amid regional conflicts like a blockade of neighbor Qatar and a brutal war against rebels in Yemen. Saudi Arabia ranks 92nd out of 190 countries on the World Bank’s ease of doing business index, which measures things like ability to enforce contracts and get goods in and out of the country. Another cloud was cast over the business environment when Prince Mohammed locked up several dozen members of the Saudi elite in Riyadh’s Ritz-Carlton hotel and seized what the country’s attorney general said was more than $100 billion in assets. The Khashoggi scandal comes at a time when “the private sector is cowed and hurting in many ways,” said David Butter, an analyst with the Middle East and North Africa program at the Royal Institute of International Affairs in London. The hotel incident shows that “they don’t know if their assets are safe from sequestration.” And grisly details reported in news media about Khashoggi’s alleged killing “are just going to make the private sector even more worried,” he said. The war in Yemen has led to horrors such as an air strike by the Saudi-led coalition that killed 40 children, but the Khashoggi incident is harder to play down as a regrettable mishap of war. Butter said Prince Mohammed’s image as the “face of future reform is now much more difficult to sustain.” Turkish authorities say Khashoggi was killed. The Saudis have denied involvement. Q: Are people losing faith in Saudi Arabia as a business destination? A: Foreign business and political leaders are dropped out of the Future Investment Initiative, an annual event started last year to showcase the country as a place to do business. Among those cancelling are U.S. Treasury Secretary Steven Mnuchin, JPMorgan CEO Jamie Dimon, Ford Motor Co. Chairman Bill Ford and Uber CEO Dara Khosrowshahi. Sons of the German Council on Foreign Relations, said the no-shows “are a serious indicator for Mohammed bin Salman that he is losing trust, that Saudi Arabia is not seen as the ideal place to invest.” Q: Why are the Saudis investing abroad as well? A: They’ve been buying stakes mainly in technology firms to diversify their revenue and show the country as forward-looking and tech-friendly place. The sovereign fund has invested $3.5 billion in Uber, for example. It has pledged $45 billion for the SoftBank Vision Fund, a private equity fund that has taken stakes in Uber and messaging software maker Slack Technologies Inc. The question now is, whether companies will be leery of Saudi money for fear it will taint their reputations. Richard Branson, the billionaire founder of Virgin Group, has said he is freezing talks for Saudi investment in his space companies. Other executives have limited themselves to the symbolic rebuke of shunning next week’s Saudi conference. Others have simply kept quiet. Q: How likely are sanctions against Saudi Arabia? A: Republican Sens. Marco Rubio and Lindsey Graham called for Saudi Arabia to be punished if it is confirmed it organized Khashoggi’s disappearance. But they did not specify what that might mean in practice. The 2016 Global Magnitsky Act makes it possible to impose visa bans barring entry into the U.S. and targeted sanctions on individuals for committing human rights violations or acts of significant corruption. Congress can submit proposed names. Analyst Butter at the Royal Institute said the prospect of sanctions was unclear but that “any kind of sanctions would have a strong symbolic effect.” President Donald Trump has promised “severe punishment” if regime involvement is proved, but has also said he does not want to cost U.S. jobs by curtailing U.S. sales of military equipment to the Saudis.

Q&A: World Trade Organization’s role in US-China dispute

FRANKFURT, Germany (AP) — China is turning to the World Trade Organization as a way to fight back against the latest tariffs proposed by U.S. President Donald Trump. Its complaint to the organization, which oversees global trade rules, comes less than one week after the U.S. government proposed 10 percent tariffs on a $200 billion list of Chinese goods, to take effect in September at the earliest. The Trump administration on Monday also said it’s filing a challenge at the WTO against China, the European Union, Canada, Mexico and Turkey for tariffs they imposed against the U.S. in retaliation to earlier U.S. tariffs on steel and aluminum. The moves put a spotlight on the WTO, a multinational forum that is based on rules, in contrast with Trump’s nationalistic approach that emphasizes country-to-country relationships. Here’s a look at the WTO and what its role will be in the trade tussle. What is it? Launched Jan. 1, 1995, as the successor to the General Agreement on Tariffs and Trade, the WTO’s mission is to facilitate free and fair trade. It does that by establishing rules, settling disputes and getting countries to talk to work out their differences. It is run by the governments of the 164 members through ministerial meetings at least once every two years, and by ambassadors and delegates at the organization’s headquarters in Geneva. Countries that join commit in principle to apply their lowest tariff rate on goods from other member countries, called most-favored nation treatment. Countries that think other members are acting unfairly can use WTO councils, committees and its dispute settlement system — which essentially rules on trade squabbles — to seek and obtain redress. Why is China going to the WTO? Membership in the WTO has been part of China’s rise to global economic influence since it joined in 2001. Members are barred from discriminating against each other in their trade practices, meaning China’s exports were shielded from protectionist moves by other countries. That was been a key factor in China’s export boom. China has previously prevailed in WTO dispute settlement against the United States in a successful challenge to restrictions on steel imports imposed under President George W. Bush in 2003. While China takes advantage of WTO protections for its goods exports, it has been criticized for not upholding WTO rules requiring enforcement of trademarks and patents and for subsidizing selected domestic sectors. Why is the US going to the WTO? The U.S. is filing a challenge to the tariffs that China, the EU and several other countries imposed on the U.S. in retaliation to U.S. tariffs on their steel and aluminum. The U.S. says its tariffs on steel and aluminum are fair but that the other countries’ were not. The U.S. has said its tariffs were imposed on grounds of national security, saying it needs to strengthen its own steel and aluminum industry to ensure supplies to its military and infrastructure. But China, the EU and the others argue that’s just an excuse. The EU and Canada in particular note that they are longtime allies and that their exports to the U.S. cannot be considered a national security threat. Could the WTO be used to make the US back off tariffs? Yes, although it could take a while. If a U.S. trading partner wants to go through the WTO’s dispute settlement process, it can make a “request for consultations” that would start a 60-day period to talk about the issue. If there’s no deal, it could ask a dispute panel to rule on the tariffs — which generally takes about 18 months. An Airbus-Boeing dispute, for example, took more than a decade to produce a final ruling. Ultimately, the judges in the WTO’s dispute settlement process could rule that the United States should end the tariffs. Washington could refuse to implement such a ruling but would then face the possibility of sanctions. At the very least, Trump is buying time: it can take months or even years before disputes get resolved through WTO bodies or are settled outside between the sides. At times, the disputes simply fizzle as participants lose the ambition to resolve them. Trump’s administration has already caused headaches for the WTO’s dispute settlement process: It has balked at appointing new members to the seven-member appellate body, which now has only four members. In practice, that slows the body’s ability to rule on disputes. Does China have other options? The WTO is only one way of responding. China may run out of U.S. imports to hit with tariffs but can retaliate with other measures. It could deploy measures against U.S. multinational companies operating in China such as consumer boycotts. That tactic was used in disputes with other Asian countries. But China might be reluctant to do that because many products sold by multinational companies, such as General Motors or Apple, are made in China by local workers. China could also seek to lower the exchange rate of its currency against the dollar. That could also backfire by causing an outflow of funds from the country, and because China is no longer merely seeking to profit from cheap exports but wants to move to an economy driven by domestic demand and production of more advanced goods. Jamey Keaten contributed from Geneva.
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