This short study examines the importance of Saudi Arabia to America as a commercial partner, in the past and for the long-term. Compared to America's other major suppliers of imported oil, the commercial relationship between the U.S. and Saudi Arabia has been remarkably balanced.

The Stakes over the Decade

Over the last decade, Saudi Arabia's overall commercial relationship with the United States has been remarkably balanced. This is in sharp contrast to all of America's other major suppliers of imported oil, where the relationships can be characterized by their deep and chronic deficits for the United States.

The American economy also benefits when Saudis visit, do business, and invest -- spending on attractions, shopping at malls, engaging local services, and investing in local and national markets. The net positives to America since the Gulf War-1 can be counted in the tens of billions of dollars added to U.S. domestic GDP, and in the tens of thousands of prized industrial and services sector jobs in communities across the country.

Ongoing Stakes

There are also intangible but nevertheless real benefits deriving from the role Saudi Arabia plays to stabilize oil markets in the face of numerous unexpected supply disruptions caused by others - whether out of malice or because of political or technical failures. For the global economy Saudi Arabia is the "Federal Reserve of oil." No other has such large capabilities to raise output in order to fill supply gaps as they occur. By paying the expense to maintain that capacity, Saudi Arabia has repeatedly cushioned the global economy from hundreds of billions of dollars of costs that would have had to be paid were oil prices allowed to spiral out of control.

Also intangible but nevertheless real is the value of the position Saudi Arabia holds with other Arab and Islamic countries. It has both the economic size and the political and cultural prestige needed to deliver the messages and establish the goals of economic and good governance reforms to its part of the world.

Stakes for the Future

International economists point to good commercial relations between nations as one of those special "win-win situations" that help all to prosper. By that most important standard, the history of the U.S.-Saudi commercial relationship has been exemplary.

But there is more. From inception, the U.S.-Saudi commercial relationship has also had important social and cultural dimensions. Commerce by definition involves people making contact with people -- for business and trading, investments, tourism, and all sorts of individual and cultural exchange -- from the serious (education or marriage) to the trivial (Bay Watch). There were and are frictions, but overall, good U.S.-Saudi commercial ties have both benefited from and helped to promote good cultural and political ties between these two important nations.

These cultural ties have shaped how the Saudis who are now leading the reforms in the Kingdom (and the region) formulate their goals and apply their efforts. Whether in regard to political responsibilities and representation, official accountability, rule of law, or individual rights, those who would transform Saudi Arabia take as their prime reference the cultural and educational experiences and ties they hold with the United States. The change they seek is evolutionary rather than revolutionary - and prudently so. Nonetheless, the present-day Saudi reformers seek to meld Saudi Arabia's deep and respected traditions with the strongest and best of America's ideals and methods.

Stakes in Play: Uncertainties in the Outlook

If past were prologue, the U.S.-Saudi relationship would appear veritably plump with potential and opportunities. But current facts are to the contrary. In the wakes of 9/11 and the Intifada-2 and on the eve of a possible war with Iraq, the U.S. Saudi commercial relationship has shrunk, and the outlook is uncertain.

The diplomats and ministries from both sides have begun to reveal more about the scope and substance of USA-KSA official cooperation. These efforts are producing good results as reflected in the many substantive anti-money laundering measures Saudi Arabia announced in December 2002, and in its most recent decisions to prosecute some 90 Saudis suspected of having ties to Al-Qaeda.

As for the long-term agenda, there is no lack of proposals aimed at strangling or killing the relationship - proposals aimed at disengagement, in a word. By these agenda the relationship would come under progressively more stringent rules, regulations, and investigations aimed at making commercial, financial, and cultural relations more difficult and costly.

The alternative agenda for the USA-KSA commercial relationship is no different than that for any of America's good commercial relationships. The formula is not rocket science. Good commercial relations involve arriving at and maintaining good working relations with the necessary modicums of confidence needed to support open and vigorous movements of goods, services, capital, and people.

Those two key phrases took on new meanings when 15 of the 19 9/11 hijackers were found to have been Saudis. Reflecting a new collaborative 9/11-awareness the good working relations between the U.S. and Saudi Arabia now go to many levels never before contemplated -- especially in the areas of regulatory oversight, investigations, prosecutions, and intelligence. Still undermining confidence, however, are the allegations raised in the courts and the media about Saudi individuals and institutions. Even the Saudis that have the closest ties to America are uncertain about how the U.S. and its various jurisdictions will eventually come to treat them.

It is clear that the U.S. and Saudi governments are working to protect the stakes in the relationship, as illustrated by the many steps Saudi Arabia announced in December 2002 toward supporting U.S. anti-money laundering aims, and in its recent Al-Qaeda prosecutions and ongoing investigations.

Through the Saudi-American Forum and other institutions and organizations, those who have firsthand knowledge and experience in the U.S.-Saudi relationship - call them the core stakeholders - are stepping forward in increasing numbers to give their ideas and lend their voices toward preserving the relationship. But there is still much to be said and much work to be done by way of protecting, mending, diversifying, or expanding the ties between U.S. and Saudi companies, institutions, organizations, and individuals.

The stakeholders in the relationship are much more than big oil, big defense, and big money. The stakeholders include diverse industries and numerous communities across America. They also include those million-plus Saudis who have strong ties to America, and are now trying to lead their country forward through unsettled times in order to arrive at a more secure and prosperous future.

Bilateral Trade in Merchandise and Services

In 2002, the United States' trade deficit averaged about $1.3 billion per day, totaling $484 billion for the year. The deficits with China, Japan and Germany reached $103 bil, $70 bil, and $35 bil, respectively. Besides Saudi Arabia -- Canada, Mexico, and Venezuela are major suppliers of oil to the United States. The U.S. deficits with them amounted to $86 billion, $49 billion, and $11 billion, respectively.

The commercial relationship between the United States and Saudi Arabia is much more evenly balanced.

In the ten years from 1993 to 2002 (inclusive), the U.S. ran merchandise trade deficits of $7-8 billion during only three years -- 2000, 2001, and 2002. By contrast, in 1998 the U.S. enjoyed a $4 billion surplus. In the other years the U.S. trade deficits were small.

These figures do not take into account trade in services and military sales, where the United States consistently enjoys surpluses estimated over the period at upwards $2 billion per year on average in each category.

Insofar as reflected in the U.S. balance of payments, the U.S. commercial relationship with Saudi Arabia has been remarkably favorable for the United States - giving average net benefits of upwards of $1 billion per year - possibly much more.

Oil and U.S.-Saudi Trade

Canada and Venezuela have moved up lately, but on average over the last 20 years Saudi Arabia has been the United States' largest supplier of imported oil. Saudi supplies to the United States averaged around 1.5 million barrels per day (mmb/d), compared to domestic supplies from Texas or Alaska of about 1.2 or 1.0 mmb/d, respectively. Saudi Arabia is also the leading supplier of oil to America's major trading partners and allies in Asia and the Pacific, on the Indian subcontinent, and in Eastern and Southern Africa. This leading position is a direct reflection of the reliability and attractiveness of Saudi oil.

Since the 1970's, Saudi surplus production capacity has been the key factor for maintaining global oil market stability. On numerous occasions, Saudi Arabia used its surge capacity to compensate for serious supply disruptions affecting other producers: e.g, from the Iranian revolution, Gulf War, oil workers strikes in Mexico, Venezuela, and Nigeria, and for weather-, labor- or technology-related disruptions in the North Sea.

Saudi oil effectively represents a major insurance policy that protects the American and global economies. Saudi actions to stabilize oil markets have saved hundreds of billions of dollars of economic costs that would have resulted had they not intervened to compensate for oil supply shortfalls caused by others.

The fact remains that in all the time since the Iranian revolution and for the foreseeable future Saudi Arabia's oil will be vital to the United States and its major trading partners in order to fill the inevitable oil supply gaps caused by others.

Non-Oil Saudi Exports

Saudi non-oil exports to the United States are small but growing, averaging in the range of $0.5-1.0 billion per year. To Saudi Arabia, however, these non-oil exports are very important and there is a great desire to see American companies and investors take an interest in making them grow.

Saudi Arabia's Imports from the United States

The United States is the largest supplier of imports to Saudi Arabia, and until 2002 had maintained this preferred status for decades. Year after year, consistently, Saudi imports from the United States ranged between $6-7 billion, peaking above $10.5 billion in 1998.

During 2002, however, Saudi imports from America dropped below $5 billion. That drop is surprising because the value of the dollar was in decline, making American goods more attractive relative to those from Europe and Japan. Rather, imports from the U.S. fell in reflection of a spontaneous boycott by Saudi individuals (not the government) of America goods in protest over American policies toward Palestine and Iraq.

While a $5 billion swing in U.S. exports may seem small in relation to total U.S. exports of over $700 billion, these numbers make a great deal of difference to certain American industries, and to the localities where those industries reside. During the five years from 1997 to 2001, U.S. exports to Saudi Arabia totaled about $39 billion.

Three-fourths of these exports were manufactured items: half ($19 billion) were "transportation equipment," which includes airplanes, trucks, and automobiles. Exports of other machinery, computers, and electrical equipment approached $10 billion.

Saudi Arabia was one of the largest export markets for several of the U.S. states, most notably Washington State ($6 bil), Texas, New York, California, and Michigan ($3-4 bil), and DC, New Jersey, Virginia, and Illinois ($1-2 bil) with more than $12 bil coming from the other U.S. states. The experience of Washington State provides a good case study on the importance of exports to Saudi Arabia for local employment. In 1998, the state's exports to the Kingdom peaked at $2.2 billion (reflecting commercial aircraft sales by Boeing to the Saudi Arabian Airlines). By 2000, exports had dropped by $1.4 bil to only $0.8 billion. From 1998-2000, total Washington exports fell from $37.9 bil to $33.3 bil, or by $4.6 billion. The drop in exports to Saudi Arabia accounted for one third of the overall decline.

During the same timeframe, according to Washington State Staff Economist, David Wallace, the state lost a total of 36,600 industrial sector jobs, of which more than 28,000 were in the transportation sector. Not all of those jobs related directly to Saudi Arabia, but many did - on the order of 12,000 (i.e., about 1/3 of jobs lost to the sector).

This result broadly confirms an economists' rule of thumb that would find 10-15,000 jobs associated with every $1 billion per year of U.S. manufacturing exports. Thus, the nearly $5 billion decline since 1998 in annual U.S. exports to Saudi Arabia points to potential job losses in the range of 50,000-75,000 - adding about 1 percent to the ranks of America's 8 million unemployed.

Of course, in the localities and industries mentioned above, such numbers make an even bigger difference. And these estimates do not take into account the indirect job losses in the services and other industries that are impacted by industry job cuts. But recall that Washington State accounts for only a small fraction (1/8) of the exports to Saudi Arabia from all the states. The impacts of declines in U.S.-Saudi trade are felt in communities all around the nation.

The Very Real Intangibles

Merchandise trade represents only one component of the U.S.-Saudi commercial relationship. The intangibles - services, technology, knowledge, indeed culture -- represent a component of equal or greater value. This value is counted not only in money (e.g., the returns on a major services contract or franchise, the receipts from Saudi tourists, or the spending of resident professionals and students). It also registers in the broader decisions for how Saudi Arabia has oriented its whole economy toward America, and more broadly in how Saudi society holds a special place for America and American values in its social and political views. The Saudis do not desire to copy American society, but then emulation is not the only form of flattery. Still, throughout the Saudi economy and Saudi culture, there is ample evidence of Saudi admiration for America.

Stakeholder Enterprises, Institutions, and Organizations

The history of American services exports to Saudi Arabia begins with oil (ARAMCO began as the Arabian-American Oil Company); with infrastructure (virtually all of the Kingdom's major infrastructure systems are American design, and much was built by American contractors); and with banking (both the official and private sides of the Saudi financial system reflect strong American influences). Saudi companies with American partners have strong and competitive footings in many other areas of the economy, such as healthcare, IT-telecommunications, and food services.

The pro-American orientation seen across the Saudi economy happened by design, not by chance. For 25 years from 1975-2000, the U.S.-Saudi Arabian Joint Commission for Economic Cooperation (called 'JECOR') was one of America's largest technical cooperation programs. Paid for entirely by the Saudis, this program brought thousands of American experts and advisers to the Kingdom to help plan, guide and support the Kingdom's efforts to build its basic institutions and infrastructure.

Other programs also contributed to forging U.S.-Saudi ties. For example, the U.S.-Saudi Economic Offset Program with the participation of the major American defense contractors worked to build-up the skill levels of tens of thousands of young Saudis, and established the diverse and competitive private sector capabilities of Saudi Arabia's air transportation sector -- positioning it for full-scale privatization.

A number of well-managed and dedicated organizations work to support and build the U.S.-Saudi commercial relationship. Most prominently, these include the U.S.-Saudi Business Council (supported by American and Saudi corporations), the National U.S.-Arab Chamber of Commerce and its Saudi sister institution, the Saudi Council of Chambers of Commerce and Industry, the National Council on U.S.-Arab Relations which houses the U.S.-GCC Corporate Cooperation Committee (the sponsor of GulfWire and the Saudi-American Forum, both hosted on ArabiaLink), and the more broadly focused Middle East Policy Council and Middle East Institute. These organizations have large and diverse memberships from around the United States and the Middle East.

American Legacies

For 20 years until the early-1990's, the Saudi government oversaw a large scale program aimed at bringing Saudi students to the United States for education. The Saudi universities are now much more capable, and the Saudis who come to study today do so mainly with family support. The results of the early and ongoing educational contacts are evident throughout the Saudi government, education system, and private sector where the American-educated Saudis are prominent in all the most important areas.

In the Saudi private sector, generational change is sweeping family groups, partnerships, and closed joint stock businesses. The sons and daughters who were sent for American educations in the 70's and 80's are taking over. And in the big public companies (the wholly-Saudi and the joint ventures), it is the young American-educated Saudi executives who are moving into the ranks of top management.

In sum, for Saudi Arabia's elite and its middle class, having an American education and other ties to America remain the gold standard among educational and professional credentials. Although intangible, over the long-term such American-oriented links, leanings, and legacies have paid reliable dividends through the U.S.-Saudi commercial and political relationships.

Regional Dimensions

Another real but intangible dimension of the U.S.-Saudi commercial relationship has to do with Arab and Islamic affairs. For reasons laid down in the Koran and the life of Prophet Mohammed, Saudi Arabia is the geographic center of Islam and has been for a very long time. For even longer, dating to when the sons and daughters of evolution's first Eve came out of Africa, it has been home to the Arabs and, since earliest biblical times, to peoples and prophets of the Book.

For regional economic and political affairs, this makes a big difference. Saudi business families have become exceptionally far-reaching and multi-dimensional in their interests. These days, they are best known for their affiliations with major Western companies - Bechtel, Seimens, etc. In days earlier they were known for their orientations to the businesses that serve the Hajj and the near- and far-flung communities of Muslims from around the world.

Adding mass to this great cultural and religious center of gravity is the fact that Saudi Arabia has by far the largest economy in the Arab world, and its capital markets are also the largest. For many reasons, good business gravitates in the direction of Saudi Arabia, and much of the world looks to the Kingdom for direction. Thus, the recent Saudi initiative urging greater political and economic reform throughout the Arab region has great importance. From the perspective of global businesses, this Saudi initiative presages the opening not just of the Kingdom's markets, but also the billion-soul markets of the broader Arab and Islamic regions. The Saudi-American commercial relationship stands to benefit, as well, from all the good standing and access that Saudis enjoy in all those markets.

What Can Be Said about the Future?

The economic outlook for Saudi Arabia is dominated by several very strong and deep trends. The most important of these relate to Saudi demographics, and to the steps Saudi Arabia is taking to privatize its economy and open-up its energy and other economic sectors. Both international and national private sector companies and investors can participate on footings that are becoming increasingly equal.

One of the strongest indicators anywhere for economic growth is consumer demand. That would be demand for all manners of durables, consumables and services. In Saudi Arabia, consumer demand is growing at least as fast as the rate of new household formations. Saudi Arabia's high birthrates began in the 1970's, resulting in the very high new household formation rates seen today, which are trending upward from an estimated 6-8% in 2000. New families need just about everything. This alone points to sustained robust commercial and services markets for the next two decades, at least.

Adding to overall domestic demand, the reforms to privatize and liberalize the economy are opening the way for a broad array of new capital investments. Such new investment could easily come to range between $10-25 billion per year (growing into the future) - raising the Kingdom's gross fixed capital formation rate into the range of 20-30% of GDP. Very big investments are associated with opening-up the natural gas and non-oil minerals sectors, and the privatizing of telecoms, power generation, water desalinization, air- and sea- ports, railroads and the national airlines.

Taken altogether, over the next five years the Saudi economy could easily generate some $115 billion of new economic demand in aggregate (more than $20 billion per year on average). American suppliers and partners could see demand for their exports and locally made and delivered products and services grow from $5-6 billion (currently) by as much as $2-5 billion per year -- on a sustained basis --- for the long-term.

Over the coming decade, a robust U.S.-Saudi commercial relationship has the potential to add several hundreds of thousands of jobs to the American economy, while at the same time providing a growing array of rewarding opportunities for the American global businesses and investors who wish to participate in Saudi Arabia's economic transformation.

Working Relationships and Confidence

All this, of course, would assume good working relations and the necessary modicums of confidence that make for growing commerce between countries. It seems difficult to expect great new American interest in doing business or investing in Saudi Arabia until the geo-political uncertainties now looming over the region are resolved. While American and Saudi officials continue to speak well of the bilateral relationship, a number of stress-points are evident affecting U.S.-Saudi commercial, cultural, and individual relationships.

On the Saudi side, the stress is reflected in the spontaneous popular boycott against American brands, which contributed to deep reductions in U.S. exports to the Kingdom in 2001 and 2002. Other stress points are evident as regards current practices for the differential taxation of foreign companies, and in those areas where Saudi nationals continue to enjoy prerogatives and privileges -- as in the judicial system, the new Investment Law's 'negative list,' and in how ministries pay their bills or deliver mandated services and support (e.g., for processing commercial registrations).

On the American side, the stress is evident in the new post-9/11 security-oriented policies and procedures for immigration, education, transportation, communications, and finance - all areas where Saudi companies and individuals receive special (but not more favorable) attention. More than 100 prominent Saudi individuals, companies, and institutions are being sued in a number of aggressive class action lawsuits raised on behalf of victims of terrorism. The mainstream American media provide a steady flow of reports and "exposés" raising questions about Saudi money, charities, education, politics, religion and culture.

Long-Term view from February 2003

At this juncture it is difficult to define more than the outlines of what will constitute 'good working relations with the necessary modicums of confidence' for the long-term. Both sides have basic issues to be resolved and work to do in the areas of transparency, accountability, due process, and fairness.

Looking long-term at the U.S.-Saudi commercial relationship, the path for greatest gains is the one that leads toward increasing engagement - economic, cultural, and political. By contrast, the path toward disengagement is fraught with pitfalls reflected as difficulties and costs - both the opportunity costs of future business forgone, and the more immediate real costs associated with diminishing or devaluing the existing relationships, and their sizeable tangible and intangible assets.

This said, steps made today to focus openly on the core working relationship issues and to set plans for addressing the confidence issues would help.

Coming part and parcel with the long-term war on terrorism are mutual needs to instill a collaborative September 11 awareness into all future dealings. Along with Israel and America, Saudi Arabia bears the distinction of being one of Al-Qaeda's main identified targets. This 9-11 awareness is not to fix blame but rather to acknowledge common threats and to affirm a common purpose.

In Conclusion: the Stakeholders and the Stakes

Who are the stakeholders? As discussed earlier, America's trade with Saudi Arabia matters to many American industries. Many American communities have benefited from Saudi-related purchases, investments, and jobs. Also holding stakes are those American entities that work to carry norms practiced elsewhere in the world into the Kingdom, for example for pharmaceuticals pricing or the protection of intellectual property. Recall also that commerce is cross-cutting to culture; and axiomatically, that commerce benefits from good cultural understanding and ties. Thus, among the stakeholders are the Americans and Saudis who are concerned about and want to expand dialogue on the cultural issues (ranging from women's rights in Saudi Arabia to the exploitation of women as objects by the media and other companies in the West).

What are the stakes? Not just because of its petroleum but also because of its location, privatizations, reforms and demographics, Saudi Arabia has the potential to become one of America's most stable and rewarding partners in regional, bilateral, and global economic growth for the long-term. And because of its importance in the Arab world, it can help to bring many of its neighbors along with it - starting with Iraq.

Thinking beyond the current crisis to the challenges involved with restructuring the Iraqi economy, the Saudis have much to contribute to, and much to gain from collaborating with American-led and other coalition efforts. A central challenge for reconstructing the Iraqi economy will be arriving at good working relations with the necessary modicums of confidence among the Iraqi local business community and the foreign communities that have stakes in making the reconstruction successful. In the Saddam era, Iraq's international commercial affairs were subservient to his aims which only by chance aligned with the aims of free market economics.

Although these phrases about working relations and confidence have different meanings in important areas for Iraq or Saudi Arabia, the points of commonality are greater especially in the normative areas that are so important for the long-term.

The pace and scope of success for Iraq's reconstruction depends to a great degree on finding strong and forthcoming commercial partners in the region. The merchants, industrialists, service providers, and investors of Saudi Arabia fit that bill to a tune -- particularly those having strong American ties, and the capabilities to help American companies expand their interests in Iraq as well as in Saudi Arabia.

Saudi Arabia brings a unique combination of attributes to this situation, as seen in terms of its geographic position, large and increasingly diverse economy, and wealth of both intangible or tangible assets -- such as its centuries of pre-Saddam commercial ties to Iraq, or its impressive present-day natural, industrial, financial, and human resources. Indeed, it is hard to think how the Iraqi reconstruction would succeed except with the constructive engagement and whole-hearted participation of Saudi Arabia.

It is beyond the scope of this analysis to define the agenda for reexamining the U.S.-Saudi commercial relationship in the short-term, except to say that for greatest economic gains in the long-term it should focus on prosecuting the evil-doers, resolving the disputes, mending the wounds, and making for future confidence and growth.

To be frank, the agenda for the U.S.-Saudi relationship is currently largely in the hands of others - those adversaries who are pressing lawsuits or lobbying for restrictive rules or legislation. Regaining control over the agenda for the U.S.-Saudi commercial relationship is up to the stakeholders in this relationship. They share interests in preserving the good works of the past. Some want to establish their ground-floor positions in building for a better future. Others are concerned about the cultural aspects - in search of good answers to the questions about charity and education, for example.

As with all good commercial relationships, success lies in effective and mutually beneficial private sector-to-private sector and people-to-people contacts. The governments can facilitate, and media in any case will commentate, but when it comes to making for good commercial relations it is up to the private sector stakeholders to take the lead and to perform.

Gratefully, the institutional and organizational structures needed by these stakeholders to contact and work with one another, and then to reach out to others, already exist. But these organizations are only as powerful as those who make up their memberships are committed -- and involved. Speaking from experience and putting their knowledge to work, the stakeholders (through forums such as this, and their actions in the market place and in public) can regain the agenda for the U.S.-Saudi commercial relationship, not because of what this relationship gave in the now distant past before 9/11 -- but because of what it has to offer to the future prosperity and good relations of these two important nations.

From 1990-1999, he worked at the Saudi American Bank (SAMBA) in Riyadh, for 4 years heading SAMBA's Treasury Customers Division which provided foreign exchange and money market products and services to Saudi Arabia's 300 leading companies and private investors. He headed SAMBA's initiatives to develop Saudi Arabia's financial and capital markets, contributing to the normalize, diversification and deepening of the government securities market, and launching the London-listed Saudi Arabia Investment Fund (SAIF - the Kingdom's first offering to global portfolio investors). From 1995-99, he served as SAMBA's Chief Economist, and is well known among stakeholders in the U.S.-Saudi commercial relationship for