A deepening of GCC-Asia relations on the horizon

Trade relations between the GCC and Asian economies have been growing steadily for some time now. Recent developments suggest, moreover, that they are set to expand further over the next decade. While there are some risks associated with Asian markets, the GCC as a bloc is deepening its commitment to the region. This is signalled by a number of potential trade agreements, increased diplomatic engagement, and the possibility of new political and security arrangements.

FREE TRADE AGREEMENTS: In September 2013 the free trade agreement (FTA) between the GCC and Singapore, the first between the bloc and a country outside the Middle East, became active. First signed in 2008, the agreement will initially allow tariff-free access for 95% of Singaporean import lines, while all GCC exports to the Asian city state will receive tariff-free access. While this could create price competition in fields such as petrochemicals, telecoms and electronics for Gulf producers and distributors, it will also give local companies unfettered access to a large and wealthy market with an average monthly household expenditure of nearly $5000.

The FTA is likely to cement what is an already burgeoning and significant trade relationship. The GCC is Singapore’s fifth-largest trading partner globally, accounting for 35% of its oil imports. There has been a rapid increase in trade between the two parties since negotiations for the agreement began in 2006. In 2012 bilateral trade increased by 3.8% year-on-year, reaching $8bn. Singapore-based companies have also been awarded more than $16bn worth of projects in the region in the last decade.

The FTA should open up significant opportunities to augment this growing relationship. Singapore will have the potential to become a trading centre for GCC oil and gas supply into the region. This could create new opportunities in port and associated infrastructure investment for well-established GCC firms. More than specific growth opportunities, however, the activation of the FTA signals the growing importance of the strategic relationship between the two regions. For many years, Singapore had acted as an aspirational model for the cities of the Gulf, from Dubai and Abu Dhabi to Manama and Doha. Such an agreement therefore confirms a mutual recognition of the importance of the respective markets for access to attractive hinterlands and global trading routes. The GCC could now begin to approach Singapore on an equal footing.

SILK ROAD: However, the GCC is unlikely to stop at Singapore, with the regional bloc currently in FTA negotiations with China. While the discussions commenced back in 2004, there now appears to be the requisite political will to conclude a deal. Chinese President Xi Jinping has also confirmed the importance of the GCC as a whole to Chinese plans for the Silk Road Economic Belt as well as the 21st Century Maritime Silk Road, two economic strategies that are designed to re-establish trade routes between China and the Mediterranean.

Trade volumes between the GCC and China have already been accelerating rapidly: bilateral trade topped the $100bn mark for the first time in 2011, and then surpassed $150bn in 2012. According to a 2014 report by the Economist Intelligence Unit, China will be the GCC’s largest export market by 2020, taking in an estimated $160bn in exports from the bloc by that time and providing a projected $135bn worth of goods on the import side.

A NEW DEPENDENCE: These growing volumes and nascent deals are a clear illustration of the reorientation of GCC trade and investment towards the East. Asia is now the GCC’s biggest export market, accounting for 67% of its total exports in 2013. Much of this is driven by rapid economic growth in emerging markets and the consequent demand for oil. Indeed, GCC hydrocarbons exports account for nearly 80% of its total exports to the Asian region. This has led to concerns that the GCC might be exposed to external risks. In a statement supporting a report on the GCC’s vulnerability to a slowdown, Sophie Tahiri, an economist at Standard & Poor’s (S&P), told Gulf Business, “A sharp slowdown in major emerging economies and an intensification of capital outflows, although not our baseline scenario, would affect GCC countries mainly through falling oil market prices.” Indeed, the Gulf region is no stranger to exogenous shocks. Given that much of its growth is dependent on exports rather than domestic demand, the region was hit hard by the financial crisis of 2008-09, which ravaged developed economies. In 2009 the region’s combined nominal GDP dropped by 19% in dollar terms, largely due to falling oil prices.

While the region’s trade patterns are shifting to the East, this does not necessarily insulate it from commodity price volatility. For instance, the S&P report in March 2014 suggested that a slowdown in emerging Asian economies could lead to a reduction in GDP growth in the GCC. There has already been a shift back towards developed markets following the US Federal Reserve Bank’s decision in May 2013 to announce the tapering of asset purchases. This in turn led to a capital outflow from emerging markets. S&P forecasts that emerging markets’ contribution to global growth will fall from 63% in 2013 to 56% in 2014 and 55% in 2015.

Not everybody is as concerned about the potential for exogenous shocks to affect the region though. “GCC countries have been clever in not shifting their trade and investment portfolios to one particular country or one region,” Narayanappa Janardhan, a political analyst based in the UAE and the author of Boom Amid Gloom: The Spirit of Possibility in the 21st Century Gulf, told OBG. “I don’t think there is any significant risk and I think they’re much better off than where they were in the past.”

A MATURING RELATIONSHIP: With its long-term growth potential, Asia is likely to remain a key source of foreign exchange earnings for the GCC states going forward. Furthermore, as this trade relationship deepens in the future, it will also raise the possibility of cooperation in other areas. “They are looking at moving from a transactional relationship to one based on strategic goals,” said Janardhan. “The more economic engagement forms between the two regions, the more they have to think about protecting their interests. So it cannot be a buyer-seller relationship in the longer term.”

DIPLOMATIC TIES: It is thus clear that the GCC is taking its relationship with several Asian countries beyond purely economic ties. In diplomatic terms, for example, there have been several firsts in the past decade. In 2006 the visit of the late King Abdullah bin Abdulaziz to India was the first by a Saudi head of state for 60 years. Similarly, King Hamad bin Isa Al Khalifa’s visit to Beijing in his role as president of the GCC was the first by a Bahraini head of state to China since diplomatic representations were established between the states 24 years ago.

While GCC countries have not always seen eye-to-eye with China on issues such as trade access and the Syrian crisis, these diplomatic initiatives point to a deepening political relationship regardless of any such disagreements.

“There is US fatigue when it comes to security matters in the region,” said Janardhan. As such, the GCC and Asian countries may look to multilateral solutions to ensure the security of their vital trade routes in and out of the region. “India and China currently rely on the US navy to protect their economic interests in the region. In the future, you might see some cooperation between major consumers and major producers,” Janardhan told OBG.

Several GCC leaders have alluded to the need to develop and nurture multilateral security arrangements rather than be in a position of dependence on the US to provide it. It remains unclear whether this will happen in the short to medium term. However, as economic and trade relations between the region and Asia deepen, political and security considerations are likely to take on growing importance.