Trade threatens to become the latest flashpoint in the economic and strategic rivalry between Riyadh and Abu Dhabi and risks adding to tensions in the six-nation Gulf Co-operation Council after Saudi Arabia imposed new tariffs on imports from its neighbours.

The levies, which came into force this month, range from 3 to 15 per cent and apply to products made by any company based in its Gulf neighbours whose workforce does not include 10-25 per cent of that country’s nationals. Riyadh said the move was aimed at stopping its industries from being undercut by cheap foreign labour.

But it rides roughshod over the GCC’s customs union, under which most products from non-GCC nations are subject to a 5 per cent tariff and trade between GCC members — Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain and Oman — is mainly tariff free.

Lines of trucks have been backed up at the Saudi-UAE border as logistics operators struggle with new paperwork, including a form requiring importers to the kingdom to provide proof of their location and labour force composition.

“This has blindsided us; the requirements are impossible,” said one executive with a Dubai-based family-owned conglomerate. “This is the end of the GCC — what’s the point?”

The tariffs form the latest front in the competition between Saudi Arabia and the UAE. Riyadh and Abu Dhabi have for years shared regional goals, co-operating on attempts to contain Islamism, jointly intervening in the Yemen conflict in 2015 and launching the 2017 embargo of Qatar after claiming it supported Islamist extremism.

But tensions have increased since the UAE’s withdrawal of armed forces from Yemen in 2019 and Abu Dhabi’s refusal at an Opec meeting this month to agree an oil output increase sought by Riyadh and Moscow and accepted by the other cartel members.

Economic rivalry has also intensified as Saudi Arabia, under ambitious plans led by Crown Prince Mohammed bin Salman, ramps up measures to boost its economy and diversify away from oil, bringing its manufacturing sector into competition with those of its neighbours.

The kingdom’s new tariff regime was “purely a codification” of current practices used to encourage more “local content”, a finance ministry spokesperson told the Financial Times.

“This applies to Saudi products and we expect other GCC products to be certified on the same basis to receive GCC product status and exemption,” the spokesperson said.

“The UAE cannot benefit from the single market like this,” said Mohammed al-Suwayed, chief executive of Razeen Capital, a Riyadh-based investment advisory firm. “No more profiting at the expense of other members.”

In the UAE, where only about 10 per cent in a population of 9m-10m are nationals, companies say they are facing a big hit. The Dubai-based executive said fewer than 1 per cent of those employed across his manufacturing businesses were Emirati. “These [conditions] are impossible to comply with: no manufacturer has that level of local manpower,” he said.

The Saudi market accounted for about 40 per cent of sales at one of his conglomerate’s manufacturing units over the past year, he said. Already in competition with Saudi manufacturers, which benefit from lower freight costs, the unit operates on profit margins of less than 10 per cent. “That just doesn’t compute — we will need to switch to other markets,” the executive said.

The 15 per cent tariffs imposed on his company’s metals business, which supplies the construction industry, are likely to give international rivals in countries such as China and India a competitive advantage over regional producers, he added.

“This customs issue is a disaster,” said a consultant to a food manufacturer that relies on the kingdom for 75 per cent of its business. “It’s caused chaos and panic.”

Like Saudi Arabia, the UAE has turned to manufacturing to help diversify its economy. The kingdom, with its population of 35m, is its largest export market, with trade worth around $20bn in the first three quarters of 2020.

In Dubai, the most economically diversified emirate, the lure for foreign investors of some 30 free zones has been access to large neighbouring markets such as Saudi Arabia.

Jebel Ali Free Zone, a vast manufacturing and re-export hub, accounts for around a quarter of Dubai’s economy. In 2019, it handled trade valued at $95bn, equivalent to the entirety of intra-GCC trade.

Economists say co-operation under the auspices of the GCC, rather than competition between members, would be a better route to a prosperous and diverse regional economy.

“This is a moment of opportunity to rewrite the rules and come up with a new customs union agreement and look forward to the future,” said Nasser Saidi, a Dubai-based economist.

Building a comprehensive agreement to include services as well as goods would turn the Gulf’s Arab states into a global bloc that could negotiate more effectively with other power centres, he said.

“It’s in the interest of everyone to move to a proper common market, leaving out the politics,” he said. “It took the EU years to get it right, and there were disputes along the way — so it could take some time.”