Staff writer

Japan and Saudi Arabia appear to be inching toward a basic deal regarding the oil-rich country's entry into the World Trade Organization, now that Riyadh has made a significant trade concession.

According to government sources, the concession would cut Saudi Arabia's maximum tariff rates for imported industrial products in half, from 30 percent to 15 percent on average.

Although Saudi Arabia's actual import tariffs for industrial goods currently average 12.5 percent, the recent offer means that the country will not raise the average import-tariff rate beyond the 15 percent level even in the event of a deterioration in the balance of trade, the sources said.

Almost all of Japan's exports to Saudi Arabia are industrial products, mainly transport machinery such as passenger cars and trucks and electric appliances.

"The recent Saudi Arabian tariff-reduction offer is still short of what we want," said a source at the Ministry of International Trade and Industry. "But it is not too bad an offer for us to settle for."

The 135-member WTO is a Geneva-based body that sets international trade rules. Any country aspiring to WTO membership must reach bilateral market-access deals with major trading partners before being admitted. If Japan strikes a basic bilateral deal with Saudi Arabia in the near future, it would likely become the first major industrialized country to do so.

In making the recent tariff-reduction offer to Tokyo, Riyadh has also proposed that the two countries hold another round of bilateral negotiations on the WTO issue as soon as possible to try and reach a basic deal, the sources said.

Meanwhile, the Japanese government is apparently weighing the pros and cons of meeting Saudi Arabia halfway and clinching a basic deal on the WTO issue.

While a basic bilateral deal on the WTO issue would give a boost to Japan's desperate efforts to secure the extension of a crucial oil interest in the Persian Gulf in stalled negotiations with Saudi Arabia, some trade officials fear it could tarnish Japan's credibility as a staunch promoter of freer global trade.

These trade officials remember hearing criticisms voiced privately by some within the U.S. administration of President Bill Clinton that Japan compromised too much, for political reasons, in bilateral negotiations with China on the communist country's WTO entry.

Japan and China reached a basic trade agreement when Prime Minister Keizo Obuchi made his first official visit to Beijing last month. Japan became the first among the Group of Seven major industrialized economies to strike such a deal with China.

The Sino-Japanese deal came despite bilateral ties that had soured due to disputes over Diet enactment of bills aimed at implementing new defense cooperation guidelines with the U.S., Japan's agreement with the U.S. to conduct a joint technical research on the theater missile defense system and other matters.

The political landscape has turned into a minefield of riddles.

A senior trade official asked: "Is it wise for Japan to stand out again (against the other major trading countries) by becoming the first major industrialized economy to clinch a bilateral deal with Saudi Arabia on the WTO issue?"

But the real question may be whether a WTO deal can help energy-addicted Japan renew its crucial oil-drilling rights off Saudi Arabia's Persian Gulf coast.

Japan has been grasping at straws, making one economic concession after another to retain the rights.

Arabian Oil Co., Japan's largest oil producer and a firm with strong government backing, holds exclusive rights to drill oil in the Khafji oil field off the former neutral zone between Saudi Arabia and Kuwait. Oil produced by the firm in the Khafji field accounts for 5 percent of Japan's total crude oil imports.

The current agreement giving Arabian Oil exclusive rights to the oil concession expires in February, and Riyadh has not yet pledged to renew the agreement.

Tokyo has made repeated requests that the pact be renewed, but Saudi Arabia, which is increasingly frustrated by what it views as insufficient Japanese investment in the Arab country, is widely believed to be using the Khafji question as a bargaining chip to press Japan to accelerate investment, especially in such manufacturing sectors as automobiles and electric appliances.

Saudi Arabia is courting foreign investment as part of efforts to diversify its oil-dependent economic structure and also to create jobs for its burgeoning population, which has skyrocketed from 7 million to 17 million over the past 25 years.

To win a Saudi commitment to renew Arabian Oil's drilling rights, Tokyo recently offered a package to encourage Japanese private investment in the country.

The package, which was presented to Saudi officials in Riyadh at the end of June by Toshimitsu Arai, a vice MITI minister for external affairs, contains an offer of nearly $4 billion in public funds, including loans from the Export-Import Bank of Japan, over the next 10 years, the government sources said.

The sources said that the package also includes an increase in crude oil imports from Saudi Arabia and active assistance for the country's WTO membership bid.