The prospects of other countries being pushed to take sides between the US and China could broaden the scale of the trade war, and the resultant spill-over eﬀects are unlikely to spare the Middle East region.
According to Moody’s, the US and China are the world’s two largest economies as well as major trading partners, a decline in their trade will hurt not only their own economies but also the global economy. While the Gulf countries have been steadily diversifying their economies, the primary income is still generated from oil revenues, therefore any volatility in oil could dampen conﬁdence among investors and aﬀect the regional markets.
Forbes in a recent report indicated that the Middle East could be aﬀected indirectly if the trade war escalates, the region accounts for 40 per cent of China’s oil imports and if industrial activity falls as a result of slow growth, demand for oil exports from the MENA could fall.
There are a few critical areas where the Middle East might have to choose between the US and China, especially if their bilateral economic relations continue to deteriorate. One such area is the broad domain of security-related trade and investment—whether in cybertechnology or sensitive raw materials.
The new tariffs are making imports more expensive, so consumers pay higher prices and buy less, and as a result, overall trade declines, and with-it economic growth in both countries. “Recent trade policy actions are weighing on global trade flows, investment and growth, they have had no discernible impact on external imbalances thus far,” said the IMF.
The inclusion in the MSCI EM and FTSE frontier markets indexes of the GCC have brought the regional markets closer to the global counterparts. Therefore, regional markets are now more responsive to global market movements.
China’s threats to retaliate by imposing additional tariffs on $75 billion of US goods in August 2019, sent stocks across the Middle East’s most liquid markets tumbling signalling the effects of the latest escalation in the US-China trade war and the deepening concerns about a possible global recession. China is the biggest trading partner to the six-member GCC bloc, all of which rely on income from oil exports to fund government spending, hence any negative impact on the country’s economy is likely to affect its trading partners across the region.
In a report, Markaz stated that GCC markets ended the month of August in negative territory, affected by the weakening of oil prices amidst growing concerns surrounding the US-China trade war. Similarly, oil prices are witnessing a downward pressure even after the Organisation of Petroleum Exporting Countries decided to extend production cuts into 2020 and the uncertainty stemming from a trade war as well as growing concerns of global economic slowdown.
In Kuwait, the fall in the number of projects awarded by government as a consequence of the decline in oil prices since 2014 and subsequent fiscal pressure has reduced the loans and advances towards real estate and construction activity as lenders are working on reducing their exposure to the real estate sector.
The total claim of local banks in Kuwait on the private sector stood at KWD 37.9 billion ($125.7 billion) and going forward, the credit growth is likely to remain modest when compared with the pre-oil slump years, says Markaz. Additionally, the UAE’s Emirates Steel’s exports to the US were also affected after the Trump administration imposed a 25 per cent tariff on steel.
The UAE is the third-largest exporter of aluminium to the United States, after China and Russia. The Gulf region is home to some of the world’s top air cargo hubs owing to its strategic location between Hong Kong in the East and Frankfurt as well as Charles de Gaulle in Europe.
According to International Air Transport report, the annual growth in air freight tonne-km remained in negative territory in July, down by 3.2 per cent compared to 2018, a ninth consecutive month of year-on-year decline in air freight volumes.
The weakness in air freight volumes remain broad-based across regions, however, the largest falls are currently being recorded in the Asia Pacific and the Middle East. Indeed, the escalation of the ongoing US-China trade dispute resulted in a weaker data in August and further tariff increases scheduled in October and December can lead to a more pronounced impact of the US-China trade war in the remainder of the year.
Reaping the benefits
Both the US and China have started to look elsewhere than towards each other for markets, economic inputs, and investment opportunities. The quest for trading partners to a certain extent has redirected some of the US and China’s foreign economic activity towards selected Gulf region destinations.
The UAE’s federal credit insurance company signed partnership agreements with three Chinese financial institutions to boost trade, investments and bilateral exports between the UAE and China. In addition, the Shanghai-based manufacturing giant East Hope Group is considering investing $10 billion in the Khalifa Industrial Zone Abu Dhabi (KIZAD), joining several Chinese firms seeking a slice of China’s Belt and Road Initiative in the region. In partnership with KIZAD, East Hope Group will develop industries over the next 15 years in a three-phase plan.
The Kuwaiti government is also in talks with China to create a $10 billion Kuwait-China Silk Road Fund that would invest in Kuwaiti projects related to the Silk City and islands development. The investment fund will also be used for strategic investments in China under the Asian country’s ‘One Belt, One Road’ initiative.
Similarly, Saudi Arabia’s National Housing Company and China’s State Construction Engineering Company signed a SAR 2.5 billion Riyadh housing deal to build more than 5000 housing units. Also, the Kingdom’s state-owned energy giant, Saudi Aramco, partnered with Norinco and Panjin Sincen— to form a company called Huajin Aramco Petrochemical Company—among other Chinese firms to construct refining and petrochemical centres as well as to establish fuels retail business across China.
China’s Belt and Road Initiative has increased its substantial construction, financial as well as manufacturing and other economic exposure in the UAE, Saudi Arabia as well as Oman and Kuwait. The US’ policies of protectionism are hurting foreign direct investment in the region; however, the UAE is coming up with a number of open market policies which are meant to invite investors to compete locally.