Commercial ties between the Gulf and Asia are deepening

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Commercial ties between the Gulf and Asia are deepening

The Economist | September 5, 2024

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Oil has long lubricated the Gulf’s relationships abroad. That is especially so in Asia, which takes in almost three-quarters of its exports of oil and gas. Cheap energy from the Gulf has helped fuel Asia’s rise as the global centre of manufacturing, and filled the sheikhs’ coffers in return.

Now, though, the Gulf’s rulers are eager to diversify their economies away from oil.   For support, the Gulf is turning east. Asian companies are flooding into the region to build infrastructure and set up factories. Meanwhile, the Gulf is investing heavily in Asia to secure access to technologies and profit from the growth of its fast-developing economies. The upshot is a deepening of commercial relationships between the two regions, at the expense of the Gulf’s ties to Western business.

A growing number of Asian companies are putting down roots in the Gulf, signalling long-term commitments. Greenfield foreign direct investment from Asia to the Gulf rocketed from $4bn in 2018 to $26bn last year. By contrast, investment from America went from around $4bn to just under $7bn in 2023.

Analysts at UNCTAD, an international agency, calculate that over three-quarters of Asia’s greenfield investment in the Gulf last year was for manufacturing facilities, which will produce goods ranging from basic metals to electronics and cars.  More than money, which the Gulf already has bucketfuls of, Asian companies are offering the region their technical know-how.  More than money, which the Gulf already has bucketfuls of, Asian companies are offering the region their technical know-how.  Investment is flowing in the other direction, too. The Gulf’s deep-pocketed funds are diversifying away from Western stockmarkets.  Governments on both sides are helping foster deeper commercial ties.

At the same time, the Gulf’s economic relationship with the West is shifting. Trade ties are loosening: America and the six largest economies in the EU last year consumed only 8% of its exports, down from 27% in 1990, according to Efstathios Polyzos of Zayed University and Emilie Rutledge of the Open University. Between 2018 and 2022 Gulf imports from America and the eu rose from $128bn to $130bn; imports from Asia soared from $169bn to $247bn.  Although recent flows have moderated, Western companies still retain a sizeable stock of investment in the Gulf.  Much of that investment is skewed towards hydrocarbons, although some spending from non-energy firms is trickling in. Earlier this year aws, Amazon’s cloud business, said it would invest $5bn in Saudi Arabia.

America is therefore keeping a keen eye on China’s rapidly growing commercial presence in the region.  Officials in the Gulf lament that, with American investment volatile, they have little choice but to look elsewhere. As the Gulf keeps diversifying, expect to see more geopolitical machinations playing out.

3 key takeaways from the article

1. Oil has long lubricated the Gulf’s relationships abroad. That is especially so in Asia, which takes in almost three-quarters of its exports of oil and gas. Cheap energy from the Gulf has helped fuel Asia’s rise as the global centre of manufacturing, and filled the sheikhs’ coffers in return.
2. Now, though, the Gulf’s rulers are eager to diversify their economies away from oil.  For support, the Gulf is turning east. Asian companies are flooding into the region to build infrastructure and set up factories. Meanwhile, the Gulf is investing heavily in Asia to secure access to technologies and profit from the growth of its fast-developing economies. The upshot is a deepening of commercial relationships between the two regions, at the expense of the Gulf’s ties to Western business.
3. America is therefore keeping a keen eye on China’s rapidly growing commercial presence in the region.  Officials in the Gulf lament that, with American investment volatile, they have little choice but to look elsewhere. As the Gulf keeps diversifying, expect to see more geopolitical machinations playing out.

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Topics:  Gulf Countries, Manufacturing, Foreign Direct Investment, Asia, USA, Europe, Diversification, Oil, Construction, Infrastructure