The GCC turns East
While the United States has remained the main strategic partner for GCC countries, Asia has emerged as the key economic partner. Over the past two decades, the GCC has decisively moved East for its trade. Today, the majority of GCC trade is with Asia, not the West. China and India, in particular, have gradually chipped away at the prominence of the US and European Union as the main trade partners.
Twenty years ago, the US and EU accounted for 40 percent of GCC trade; today just over 20 percent. By contrast, China's share rose from less than 2 percent in 1992 to over 10 percent in 2011. India's share rose from 3 percent to 11 percent during the same period.
Until recently, the US was the GCC's number 2 trading partner after the EU, and the number one single country trading partner. Today it is sixth, after the EU, Japan, India, China and South Korea.
Compare GCC trade figures with China and the US over the past 20 years. In 1992, GCC trade with the US accounted for 15 percent of overall trade, China less than 2 percent. In 2002, trade with the US was down to 11 percent, while it doubled with China to 4 percent. Last year, trade with the US was down again to less than 8 percent, with China doubled again to over 10 percent of overall GCC trade.
While the EU remains as the GCC Number One trading partner. Trade with its 27 members accounted for 13 percent of total GCC trade, down from 24 percent in 1992. Considering the concurrent trends in trade with India and China either one of these two countries could overtake the EU as the GCC main trading partner.
Proximity has something to do with this shift, but there is more to it than that. Proximity reduces transportation costs, making Asian products less expensive, and GCC products more competitive everything else being equal. However, proximity is only one factor; complementarity between GCC and Asian economies has become a more decisive factor, together with the improved quality and diversity of Asian products.
A major threat to this growing trade is protectionism, which could curtail trade with China and India, both long known for old-fashioned protectionist policies. Those tendencies had in the past made it difficult to conclude free trade agreements with either country. If they succeed in shedding those policies, prospects for trade with the GCC will continue to grow. However, those prospects would dim if they chose to limit GCC exporters' access to their markets, especially in the petrochemical area.
In September 2012, the Indian government approved several changes intended to increase foreign investment. However, the debate that took place in India's Parliament around those new changes was indicative of its resistance to foreign competition. It appeared from that debate that, after decades of paternalistic and protectionist economic policies, freeing India's markets still faced stiff resistance. The policies finally won the Parliament's vote, albeit quite closely 253 to 218.
The nationalistic Bharatiya Janata Party, which is the main opposition party, was strongly opposed to the new measures. However, considering the cyclical nature of Indian politics, it would not be out of the ordinary if nationalistic sentiments in the future were to tighten controls of the Indian economy and limit foreign completion, leading to a decline in trade with the GCC and other partners.
In China, too, some protectionist policies linger. China, one of the world's largest exporters, frequently criticizes other countries' protectionist policies. Last month, the Chinese Minister of Commerce Chen Deming warned of lingering pressure on the country's foreign trade from weak global demand, rising domestic costs and growing trade protectionism. "The trade situation will be relatively grim in the next few months and there will be many difficulties next year," Chen said on Nov.10, during the 18th National Congress of the Communist Party of China. He added that because of those factors it would be difficult to achieve the annual trade growth target of 10 percent.
While China complains about protectionism abroad, it still keeps in place policies that limit foreign competition inside China. Case in point is the petrochemical industry.
For GCC-Asian trade to continue, old fashioned protectionist policies will have to change.
The US still maintains an edge in services and investment, and it is still the first destination for GCC students seeking higher education. While it is not conceivable in the near future that students in GCC students would head to Asian countries in comparable numbers to those studying in the US, the service market is wide open. As is investment.
To provide a framework for a discussion of all avenues of cooperation between the GCC and its partners, the GCC has recently engaged in "strategic dialogues" with key partners. In these dialogues, the two sides explore all potential avenues for achieving common interests. Those interests could include trade, investment, security, political coordination, as well as business-to-business and people-to-people contacts. It is only through such a holistic approach can we anchor trade relations on permanent interest, instead of the ebbs and flows of trade. Already, the GCC has embarked on strategic dialogues with China and is starting one with Japan, among other Asian partners.