Aims Arbuscular mycorrhizal fungi can have a substantial effect on the water and nutrient uptake by plants and the competition between plants in harsh environments where resource availability comes in pulses. In this study we focus on interspecific competition between Acaia etbaica and Boswellia papyrifera that have distinctive resource acquisition strategies. We compared the extent of interspecific competition with that of intraspecific competition. Methods In a greenhouse study we examined the influence of Arbuscular Mycorrhiza (AM) and pulsed water availability on competitive interactions between seedlings of the rapidly growing species A. etbaica and the slowly growing species B. papyrifera. A factorial experimental design was used. The factors were AM, two water levels and five species combinations Important Findings Seedlings of both species benefitted from AM when grown alone, and the positive growth response to pulsed water availability in B. papyrifera seedlings was in contrast with the negative growth response for A. etbaica seedlings. AM also affected the competitive performance of both species. B. papyrifera was not affected by intraspecific competition, whereas A. etbaica was negatively affected compared to the seedlings grown alone. This effect was stronger in the presence of AM. In interspecific competition, A. etbaica outcompeted B. papyrifera. Mycorrhiza and pulsed water availability did not affect the outcome of interspecific competition, and the aggressivity index of A. etbaica remained unchanged. The extent to which AM influences plant competition in a drought-stressed environment may depend on belowground functional traits of the species. AM and pulsed water availability could modify the balance between intraspecific and interspecific competition. By affecting the balance between intraspecific and interspecific competition, both factors could impact the establishment and survival of seedlings.