How Bahrain is laying the groundwork for economic diversification

Bahrain has long taken a liberal approach to international trade and investment policy, which it conducts largely in line with its partners in the GCC, especially neighbouring Saudi Arabia. Historically, its closest foreign relations beyond the region have been with the US and the UK. Initially built around the defence industry, over the years these relations have expanded to areas such as electrical machinery and agricultural goods. After a challenging couple of years as a result of the Covid-19 pandemic, several recent developments could open up new avenues of trade for the kingdom, along with the expansion of existing partnerships.

Long-term Partners

In February 2022 Bahrain laid the foundation stone for the construction of the new US Trade Zone (USTZ) in Salman Industrial City. This zone, which is expected to become operational by 2025, is key to plans to build on the free trade agreement (FTA) signed in 2006. Goods trade between the two countries had reached $2.45bn as of 2019, with an additional $1.5bn of trade in services.

The trade zone, spread across 1.1m sq metres, is planned as a regional manufacturing, logistics and distribution centre for US companies with an existing or planned presence in the kingdom. Its position will enable the rapid export of goods across the King Fahd Causeway into Saudi Arabia, an incentive for companies on top of the tariff-free trade rules that have been in place since the signing of the FTA. From the Bahraini perspective, the trade zone is key to the country’s new industrial strategy, designed to boost the sector’s contribution to GDP to 14.5% by 2026.

At a speech marking the laying of the foundation stone, Don Graves, US deputy commerce secretary, stressed that the establishment of the zone was just one area in which the two countries were looking to develop their trade relations. For example, he highlighted the US Commercial Law Development Programme, a government initiative that helps countries enact commercial legal reforms to attract investment. He also announced that the US would lead an aerospace and defence mission to Bahrain and Saudi Arabia at the end of 2022. These sectors are important to the US-Bahrain trade relationship, with aircraft the top US export to the Gulf country in 2019.

Strengthening Ties

Bahrain also looks set to benefit from the UK’s departure from the EU, which has seen the latter seek to strengthen bilateral trade ties with a host of countries around the world. An FTA with the GCC is currently under negotiation. In January 2022 Zayed bin Rashid Al Zayani, the minister of industry and commerce, said that a free trade deal could be in place by the end of the year at the earliest.

As of 2021 Bahrain ranked 85th on the UK’s list of trading partners, with combined imports and exports totalling £779m. Currently, the top-five export items from the UK to the kingdom are jewellery, cars, aircraft, electrical items and power generators, but the Confederation of British Industry (CBI) has argued that the GCC could become a new export market for the UK in two key areas: agriculture, which is central to Gulf imports in line with food security programmes, and renewable energy. As GCC countries work to diversify their economies in the coming years, this second category – one in which the UK is a world leader – could potentially open up many opportunities.

Another development in Bahrain-UK relations is the imminent introduction of electronic visa waiver status for Bahraini citizens travelling to the UK. From June 1, 2022, for a fee of £30, travellers will be able to avoid applying for a visa by filling in a form online. According to UK home secretary Priti Patel, the visa waiver will “better connect the people of our countries and boost economic prosperity”, yet another indication of the UK’s desire to increase its economic ties with Bahrain.

New Partners

Alongside closer ties with old friends, other countries are beginning to play an increasingly important role in Bahrain’s trade affairs. Principal among these is China, which is looking to expand ties across the whole of the Middle East as a part of its Belt and Road Initiative – a transnational plan to boost economic connectivity through infrastructure development. Such ties, especially with countries that have historically had a pro-US tilt – like Bahrain – have the potential to be geopolitically sensitive, but at this stage China’s focus will likely remain on commercial transactions. Given Bahrain’s position as a gateway to the rest of the Gulf and its proximity to key oil fields and shipping lanes, the kingdom is of some geostrategic value to China, a role that is expected to increase in the coming years if energy and transport infrastructure development plans come to fruition. Moreover, Bahrain’s liberalised business environment and status as a financial centre make it a potential launchpad for Chinese firms looking to expand in the region.

Efforts to improve bilateral relations are well under way. In a January 2022 meeting, the foreign ministers of the two countries called for cooperation to be expanded on all fronts. China expressed readiness to be a reliable long-term strategic partner for Bahrain, and to strengthen bilateral cooperation on 5G communications, e-commerce, the digital economy and big data, as well as for infrastructure and solar photovoltaic projects. Likewise, building on the trust established by the supply of China-manufactured vaccines in Bahrain during the pandemic, the world’s second-largest economy is encouraging more enterprises to invest in Bahrain’s open and dynamic business environment.

Gateway to the Gulf

Another new – and still quite unknown – factor for Bahrain in terms of foreign and trade policy is Israel, with whom the country normalised relations in 2020 under the so-called Abraham Accords sponsored by the Trump administration in the US. Economic ties between the two countries are still in the early stages, with the text of a bilateral cooperation agreement shared in July 2021, but signs have been positive. The agreement envisages the free movement of goods and services between the countries, as well as the intention of both parties to promote cooperation in several other areas, including the establishment of a joint economic committee for the countries. Estimates from the Israeli Foreign Trade Administration suggest that trade between the countries could reach hundreds of millions of dollars in the coming years.

Bahrain’s potential as an economic gateway to the rest of the Gulf makes it even more attractive to Israel, especially considering the former’s close ties to Saudi Arabia, with which Israel has yet to establish formal relations. According to the US-based Washington Institute think tank, the causeway connecting Bahrain to Saudi Arabia has made Bahrain an integral part of the Saudi economic ecosystem, a link that Israel may be keen to capitalise on in the future.

Such a change of circumstances may have seemed unlikely a few years ago, but Bahrain has shown the world it is open to more possibilities to expand its already growing status in the region’s economic affairs.