Pacific Money | Economy

Gulf-Asia Connectivity After the COVID-19 Crisis

Economic and security links have been growing for decades. That will continue, even if at a slower pace.

By Guy Burton for
Gulf-Asia Connectivity After the COVID-19 Crisis
Credit: Indian Ministry of External Affairs

What are the prospects for connectivity between the Arab Gulf monarchies and Asia, especially as the impact of COVID-19 recedes on the global economy? The short answer is that despite the slowdown of the past few months, there will be a recovery. Trade and investment will continue, albeit at a slower pace than before.

While trade and investment may require a longer period to recover similar levels or more, there may be a more immediate reckoning in the security sector. With several of the Arab Gulf and Asian states allies or partners of the United States, they may face pressure to take a position in the emerging Cold War between it and China.

The revitalization of economic ties between the Gulf and Asia will be welcomed, although the degree to which that happens will depend greatly on the wider global outlook. The WTO reported that trade was already slowing from last year, owing in large part to the trade war between the United States and China. It predicts that world trade will fall between 13 and 32 percent this year, but should recover next year.

That said, some sectors will be more adversely affected than others. The WTO believes that services will recover more slowly, owing to likely travel restrictions. By contrast, manufacturing may rise, which may also stimulate energy demand.

While the Gulf’s oil and gas exports fell during the COVID-19 lockdown, demand from Asia was not as badly affected. Although energy demand fell during the year’s first quarter, including by 4 percent in China and India, 7 percent in South Korea, and 8 percent in Japan, this was not as bad as drops seen in the EU and the U.S., where demand fell by 11 and 9 percent, respectively.

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Additionally, Gulf hydrocarbon exports were not as affected as the coal sector. Demand for oil and gas fell by 5 and 2 percent, which was less than for coal (8 percent). Meanwhile demand for renewables grew by 1.5 percent, which will be welcomed by Gulf governments investing in this sector as a way to diversify their economies.

Trade in hydrocarbons is not the sole feature of the Gulf-Asia relationship, however. Back in February I wrote an article for The Diplomat summarizing a report I drafted for the Bussola Institute in Brussels looking at the broader relationship between the two.

Investment in both directions has become an increasingly important aspect of the relationship. Past Korean and Japanese construction in the Gulf states is being superseded by China’s Belt and Road Initiative, which aims to build and upgrade transport and communication infrastructure across the Eurasian landmass, including in the Gulf. Meanwhile, Gulf sovereign wealth funds increased their exposure in Asian markets after the 2008-09 financial crisis, having been attracted by faster rates of growth offered in the region’s property, healthcare, and high-tech sectors.

Those returns will not be as rapid in the near future. The OECD expects global FDI to fall by at least 30 percent this year, which is on top of slowing investment over the past five years. Looking ahead, it sees three possible scenarios. The most pessimistic sees global FDI falling by 40 percent over 2020 and remaining flat until the end of next year, while the most optimistic would involve a recovery by the end of 2020 and a return to pre-COVID-19 levels of FDI by the end of 2021.

Perhaps because of this, some Gulf countries are focusing more on investments at home. In May the Saudi Central Bank transferred $40 billion to the Public Investment Fund to identify local assets and stimulate domestic growth. They are also liquidating some of their assets to maintain public spending.

As in other regions of the world, both the Gulf states and Asian countries experienced economic slowdown as a result of the lockdown and quarantine measures that were imposed to prevent the transmission of COVID-19.

Some of the Gulf governments have seen the impact of COVID-19 as an opportunity to advance economic diversification. That has included cutting back on the use and payment of foreign workers. Among those most affected are the workers in the lower-skilled, lower income sectors like construction, many of whom come from South Asia, including India. Around half of the 8 million Indian nationals in the Gulf countries were expected to lose their jobs, reducing remittances home.

To compound their misery, many Asian workers have been confined to the overcrowded labor camps, which enabled COVID-19 to spread. Currently, the Gulf countries account for more than half of all COVID-19 cases in the Middle East.

Following pressure from Gulf states to repatriate its citizens, India began doing so in May. But although they may be leaving now, they will likely return. Migration from South Asia has ebbed and flowed in line with the fortunes of Gulf economies, expanding rapidly in the wake of the 1970s oil booms before retrenching after the 2008 financial crisis.

Beyond economic considerations, Gulf and Asian countries also face challenges in the security sector. Growing security cooperation between them has been a feature in recent years, including shared naval exercises.

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A key motivation for both sides has been to widen their security ties, as a way of hedging against risks. For most Gulf states that has meant containing against the Iran threat and the relative retreat of the U.S. security umbrella. For India, Japan, and South Korea, it is a way to balance against China.

In recent months though, the United States has made greater demands on its partners. For one, Washington has put pressure on Israel to avoid cooperation with China in sensitive areas, including in the construction and management of ports (which can be used by the Chinese navy) as well as 5G technologies. Washington has also signaled similar concerns toward the UAE.

Ideally, Gulf countries would prefer to keep economic and security matters separate. The problem for them, however, is that the United States under Trump is increasingly conflating the two and seeing trade differences as part of its wider strategic rivalry with China.

If forced to choose, the Gulf countries will align with the U.S. as their principal security partner – just as its Asian allies would likely do. But if it happens it will be done grudgingly, especially if there is no assurance that the United States will not subsequently retreat from the region once again.

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 (2018) and China and Middle East Conflicts (forthcoming). The Bussola research paper on Gulf-Asian connectivity that he authored is available here