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28 Oct 2018

Bottleneck at the Border in Middle East E-Commerce

While the future for cross-border e-commerce in the Middle East appears to hold much promise, the region, its governments, and retailers have some hurdles to surmount, as consumers increasingly seek convenient and affordable online shopping experiences.

To some extent, the problems mirror those experienced elsewhere as e-commerce growth changes the dynamics of international shipping. Nevertheless, when e-commerce expansion meets outmoded and inadequate border processes, the result can be discouraging for all but the largest, most resilient retail enterprises.

The GCC Under the World Bank’s Spotlight

The World Bank’s Doing Business report includes a measurement of the ease of cross-border trade with 190 countries. The report calculates the time and cost associated with border compliance for imported shipments.

The “Trading Across Borders” calculation assumes an inbound shipment of 15 metric tons and a value of $50,000, shipped from the country’s natural import partner for a given commodity.

The following comparison of results for GCC countries versus the USA illustrates why cross-border trade with the Gulf States needs some help if e-commerce is to be encouraged.

• In the United States, the border compliance time is 1.5 hours and the cost is $175

• In Bahrain, the border compliance time is more than 2 days and the cost is $397

• In Kuwait, the border compliance time is nearly 4 days and the cost is $491

• In Oman, the border compliance time is 3 days and the cost is $394

• In Qatar, the border compliance time is 2 days and the cost is $558

• In Saudi Arabia, the border compliance time is 9.5 days and the cost is $779

• In UAE, the border compliance time is about 2 days and the cost is $678

A Tough Market for Cross-Border E-commerce

The World Bank’s findings make it very apparent that the GCC can be a challenging collection of markets to trade with, and that despite aspirations for customs unity, the internal variance in border efficiencies and costs is significant.

For the e-commerce shipper then, the luxury of trading with the GCC as a single market is not yet within reach.

In fact, according to Unnikrishnan Kurup, General Manager at Serviceplan media agency, customs processes in the GCC are a “bureaucratic nightmare” for online retailers. E-commerce consulting firm Practicology warns that orders shipped from overseas retailers could literally take weeks to clear customs in the Middle East.

What exactly is the holdup?

A Range of Barriers at the Border

It’s not so much a single issue, as a broad range of physical and bureaucratic barriers that obstruct international shipments into the GCC. Three problems deserve special attention:

Differing documentation requirements within each state: On average, six different documents are required to clear a container through customs in the UAE, but on the Saudi Arabian border, that number increases to 12 documents.

Physical cargo inspections by customs: For example, at the ocean ports of Saudi Arabia, Customs officials physically inspect 100% of the cargo contained in up to 80% of containers shipped into the country. It is also possible that shipments crossing multiple land borders within the GCC will undergo customs inspection at each border crossing, even though the practice is contrary to the spirit of the GCC’s customs union.

No standardization of import licensing and permissions: A product that may be imported freely into one GCC customs union member state might require a permit or license in another.

The following issues and inefficiencies in border control further complicate e-commerce logistics, for both overseas shippers and those operating within the region:

• A lack of automation in customs procedures; • No fast-track processes for regular shippers of low-value, low-risk packages; • Stringent restrictions affecting road transport operators in relation to movements between GCC member states; • Carriers may not truck small B2C shipments across internal GCC borders but must instead ship them by air, which results in high costs for e-commerce shippers.

All these inefficiencies combine to make cross-border e-commerce challenging, especially for enterprises trying to penetrate GCC markets without help from proven partners with deep local knowledge and experience.

Steps in the Right Direction?

Although governments in the Gulf States have not yet implemented measures to solve problems for e-commerce importers specifically, they are acting to make cross-border shipping less burdensome.

For example, the full inauguration of the GCC customs union in 2015 eliminated tariffs on intra-regional trade and created a single entry point into the union for imports from overseas.

In theory, at least, this signaled the end of multiple border checks, making it easier, for example, for imports to cross from Dubai into Saudi Arabia.

While no new bilateral free trade agreements have been brokered since the e-commerce boom began, individual governments have been taking steps to streamline customs processes. Saudi Arabia recently declared that it made significant inroads into customs clearance improvement, stating that 80% of import declarations are now cleared within 24 hours.

All Eyes on the Gulf Region’s E-Commerce Future

In spite of border bottlenecks, e-commerce continues growing rapidly in the Middle East, where there is no slackening in the appetite for purchases from overseas. Retailers eyeing the region will be looking for signs of practical, rather than theoretical market unification.

Small, individual shipments continue to be the lifeblood of online retail, so a streamlined customs environment is a must for the sustained, healthy growth of e-commerce in the GCC.

The growth of e-commerce in the Middle East will, in part, be affected by the searing heat in the region. Many consumers still prefer shopping malls and bricks-and-mortar stores because they are cool, clean, pleasant places to be when the weather is intolerable outside – and because they typically stay open late (malls are open to midnight in the UAE, for example). Shopping centers aren’t just retail destinations but places offering a wide variety of services and food options that e-commerce can’t match. Family excursions to buy children new clothes and presents for major holidays such as Eid al-Adha are family affairs at major malls, where people socialize in a way they can’t if they are doing their shopping online.

E-commerce in the MENA region continues to enjoy double-digit growth despite the many obstacles. Amazon’s purchase of Souq.com in 2017 is further proof that the business world is keeping its eye on the potential of e-commerce in the Arab world. Like elsewhere, its success could ignite a cultural shift in the region.