The Growing Connectivity Between the Gulf and East Asia

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The Growing Connectivity Between the Gulf and East Asia

Links between the two regions are mainly economic, but there are emerging signs of security cooperation.

The Growing Connectivity Between the Gulf and East Asia

Chinese President Xi Jinping, right, looks over at Saudi Arabia’s King Salman, second from left during a welcome ceremony at the Great Hall of the People in Beijing, China, March 16, 2017.

Credit: AP Photo/Ng Han Guan

The past two decades have seen growing and substantive ties between the Arab Gulf states of the Gulf Cooperation Council (GCC) and Asia. Those ties have been mainly economic and include significant two-way investment as well as trade. More recently there are emerging signs of security cooperation, although what the eventual outline will be is unclear.

In the Gulf, Saudi Arabia and the UAE take the lead in these exchanges, followed some way behind by Qatar. The first two account for the majority of GCC exports to Asia. But while oil and gas make up three-quarters of Saudi exports and 87 percent of Qatar’s exports, these products amount to just under half of the UAE’s exports.

Advanced economies like North America and Europe have long been the largest markets in absolute dollar terms for the GCC. But in relative terms that has been in decline, dropping from 60 percent to 41 percent of GCC exports between 2000 and 2018, compared to a relative rise in emerging and developing Asian markets, from 19 percent to 28 percent. GCC trade with China and India has grown by five and four times respectively over the same period, to $139 billion and $77 billion, followed by Japan with $65 billion.

Gulf trade with Asia is largely state-based. Founded in 1981 and one of the oldest surviving regional organizations in the Middle East, the GCC has struggled to integrate along the lines of the European Union.

A major stumbling block has been the rivalries between its members, especially between Saudi Arabia and the UAE on one side and Qatar on the other. The Saudis assume a regional leadership role, which Qatar’s leaders contest. That has led to spats over many years. In most recent (and still ongoing) example, in 2017 Saudi Arabia and the UAE accused Qatar of supporting proscribed Islamists like the Muslim Brotherhood, being too close to Iran, and hosting the critical Al Jazeera news network. Since then, the Saudis and Emiratis have carried out a diplomatic and economic blockade of Qatar and put pressure on their regional and extraregional partners to joint them.

Such a climate makes the likelihood of a free trade agreement between Asian countries and the GCC all but dead. The exception to this is Singapore, which along with the European Free Trade Area (Iceland, Lichtenstein, Norway, and Switzerland), account for the only two FTAs with the GCC. Although talks took place between the GCC and China and India before 2017, they broke down because the Asian giants want to maintain tariffs on petrochemical products.

Besides trade, investment has been a growing feature of Gulf-Asian connectivity. The Gulf is home to some of the world’s oldest sovereign wealth trusts. They previously focused more on mature markets like North America and Europe, but have recently shown interest in East Asia. The Saudi Public Investment Fund has broadened its domestic investments to include overseas ones, including a $45 billion investment in a high-tech fund managed by Japan’s SoftBank. Abu Dhabi Investment Authority has invested in property in Singapore and Shanghai as well as India’s agrochemicals company, UPL Corp. Meanwhile, the Qatar Investment Authority has provided liquidity to finance construction ahead of the 2022 World Cup as well as countering the costs of the Saudi/Emirati blockade.

In the other direction, China’s Belt and Road Initiative has received substantial political and media attention since it was launched in 2013. Saudi Arabia and the UAE are already among the largest recipients of Chinese finance and credit (along with Egypt, Algeria, Iran, and Iraq) before its launch and look likely to continue to be so. Much of those funds are directed toward energy and infrastructure-related projects.

China is not the only Asian state investing in the Gulf. Both Japan and South Korean have also been active since 2000, including in the construction sector. While private sector activity accounts for much of the Japanese and South Korean involvement, the portfolios of its state banks provide some indication of the Gulf’s rising importance. By 2014 South Korea’s Exim Bank had invested $1.6 billion or 5 percent of its portfolio in the Gulf, most of it in Saudi Arabia. In the case of Japan’s Bank of International Cooperation, half of its portfolio in 2007 was based in the Gulf states. Today it accounts for around a quarter, or $3 billion in total.

Security-Related Connectivity

Beyond economic exchange, the Gulf and Asia are also becoming more connected on security matters. But in this area the presence of the United States, as the regional hegemon, remains an important consideration.

The Middle East as a whole is becoming an increasingly contested space. Previously unchallenged American supremacy has begun to be questioned by the rise of other powers, like Russia; regional rivalries, like that between Saudi Arabia and Iran; as well as fractured states and societies, as seen in Syria, Libya and Yemen.

The uncertain situation has encouraged American partners like the Saudis and Emiratis to hedge and cultivate other powers besides Washington. China has established comprehensive strategic partnerships with both, the highest form of cooperation it can offer. Saudi Arabia and India have also institutionalized their interaction through a Strategic Partnership Council in early 2019.

Saudi and Emirati hedging reflects some uncertainty what the United States will eventually do. But although the U.S. is no longer an energy importer, it remains tied to the region and its security through its partners. The energy market is a global one, so any fluctuation in price in one place will have consequences elsewhere.

The U.S. presence has been useful for the Asian countries, whether or not they are U.S. allies. It provided a security umbrella under which the growth in Gulf-Asian connectivity has taken place. But that does not mean that the Asian powers are fully in agreement with the U.S. approach. Few are comfortable with the American decision to withdraw from the nuclear deal with Iran in 2018, since it meant the re-imposition of sanctions on that country and any other third party that does business with it.

So what does the future for Gulf and Asian relations look like? Looking ahead, the nature of the economic interactions between the Gulf states and Asia is likely to grow, although it may change in terms of content. Asian states like Japan and South Korea are keen to reduce their dependency on Gulf oil and gas while the Gulf states themselves are keen to diversify their economies beyond the energy sector. This may offer new opportunities for economic exchange between Gulf governments and societies and Asian state and private firms.

As for security, while the United States remains the principal actor, should the current presidency of Donald Trump continue beyond this year and its more nativist tendencies come to the fore, that could have significant repercussions in the form of American retrenchment and retreat. Were that to happen, then Gulf states may be forced to move away from hedging to placing more active bets on some of their potential Asian partners. In addition, Asian powers may find themselves reluctantly forced to take on a greater share of the security burden.

Guy Burton is Adjunct Professor of International Affairs at Vesalius College, Brussels. His research interests focus on rising powers and the politics and international relations of the Middle East. He is author of Rising Powers and the Arab-Israeli Conflict since 1947 (Lexington, 2018) and China and Middle East Conflicts (Routledge, forthcoming). This article is based on a Bussola research paper on Gulf-Asian connectivity, which is available here.