The emergence of China and India as global powers may become inevitable and may have significant implications for the Gulf region and beyond. The U.S. National Intelligence Council in its latest report ‘Global Trends 2030: Alternative Worlds,’ describes a world that will be radically transformed from what we know today. In a tectonic shift, by 2030, the reports says ‘Asia will have surpassed North America and Europe combined in terms of global power, based upon GDP, population size, military spending, and technological investment.’ China is projected to overtake the U.S. as the largest economy by 2017 in purchasing power parity (PPP) terms and by 2027 in market exchange rate terms. India should become the third ‘global economic giant’ by 2030 according to PwC forecasts.
Meanwhile the latest IMF data shows that the GCC is rapidly becoming a global trading bloc with total merchandise trade of more than $1.4 trillion in end-2012. The gross domestic product (GDP) in the GCC states rose by around 6 percent in 2012, reaching over $1.5 trillion, making the GCC countries rank 12 globally. Last year The GCC exports have reached over $934 billion to overtake Japan, ranking the fourth in the world after China, U.S., and Germany. Further highlighting the importance of the GCC countries, the Washington-based Institute of International Finance data show that the combined foreign assets of GCC governments, state institutions, and banking systems (i.e. excluding non-financial corporate sector), estimated over $2.2 trillion by the end-2012 and projected to rise to $2.5 trillion end-2013.
The Heart of Relations
Trade is at the heart of the growing links between the countries of GCC and Asia, which centre mostly on the crude oil, petrochemicals industries. Both the GCC and Asia have become vital to the world economy as big exporters. Asia has successfully positioned itself as the centre for the manufacture of goods for export and the GCC remains the top region for energy exports. GCC-Asia trade relations have grown substantially over the past few years and have largely substituted for trade between the GCC and western countries. In the process, Asia has become the GCC’s most important trading partner accounting for over 57 percent of its total trade. In the last five years alone, GCC-Asia trade almost doubled from $480 billion in 2008 to a staggering $814 billion last year.
The Arab Gulf oil-producers will face growing competition in what they considered their ‘own marketing backyard’.Naser Al-Tamimi
The GCC oil producers export more oil to Asia than to Europe and North America combined. In fact, about two-thirds of GCC oil exports are channelled to the Asian continent. The Asian countries, individually and collectively, are heavily dependent on oil from the Gulf. According to OPEC’s statistics, the Gulf Arab states produced about 13 million barrels per day of crude oil in 2012, about two-thirds of this amount has been exported to the countries of Asia and the Pacific. The GCC countries provided China with more than a third (over 36%) of its oil imports (almost 20 percent from Beijing’s top supplier Saudi Arabia) in 2012. India imports as much as 45% of its oil from the Gulf States (19% from Saudi Arabia). As much as 70% of South Korea’s oil imports originate in the Arab Gulf states while Japan meets almost 80% of it is oil imports from GCC.
Asian contractors have also been prominent in the Gulf construction projects which typically use labour imported from countries such as India, Pakistan, Bangladesh and Nepal. Currently, there is $157.4 billion-worth of schemes under way in GCC according to MEED, Top 100 Middle East Projects. South Korean companies have won the lion’s share of the Gulf’s engineering, procurement and construction (EPC) awards. The companies from South Korea, China, Japan and Singapore won projects at almost $58.3 billion, with approximately $45.8billion; $7.2billion and $3.8billion and 1.5 billion-worth of work respectively. Looking forward, between 2013 and the end of 2015, there are $1,458 billion-worth of projects planned or under way. These projects will certainly provide the Asian companies with great opportunities.
Labour and remittance flows also play an important part of GCC-Asia relations. As many as 15 millions Asian expatriates could be living (legally and illegally) in the GCC States these days, and they sent to their home countries around 12 percent of global remittance a total of over $ 61billion which came from the six Gulf countries last year, with nearly half of this going to India, according to the latest official data from the World Bank. A total of $ 29.69 billion was sent home by Indian expat workers in the GCC last year, accounting for a total of 49% of remittances from the Gulf. The Pakistanis workers sent $ 5.98 billion or 9.8%, Philippines ($ 4.98 billion or 8.2%), Sri Lanka ($ 2.66 billion) and Bangladesh ($ 1.32 billion).
Security Partnerships: The Weakest Link
Although the GCC countries believe that the emerging Asian countries, especially China, are not an alternative to the U.S. in the short and medium terms, the GCC countries (the Saudis in particular) are seeking to leave most of their options open. There are several other strategic and political factors that are pushing the countries of GCC to develop closer relations with Asia - in particular China and India.
Firstly, the main catalyst for any Saudi decision to proliferate nuclear weapons is likely to be the concern raised over Iran’s nuclear ambitions. If Saudi Arabia decided in the future to pursue the nuclear route, the two Asian countries which would be vital to the kingdom ambitions would be Pakistan and China
Secondly, the GCC Countries, already the largest suppliers of oil to China, Japan, South Korea and India, are building new refineries in Asia and increasing exports with the aim of strengthening political and economic ties with Asia’s growing economic giants. These partnerships are not only a key to GCC’s efforts to protect its market shares in Asia, but also to contain Iran’s political influence and military power.
Lastly, through GCC’s lens, China and India could be regarded as a valuable source of support as Arab Gulf states continues on a path of selective economic liberalization whilst also seeking to deflect the western pressure in the area of political reform. As current popular pressure mounts in the Gulf for democratic changes, Asia’s silence on GCC domestic affairs and the GCC’s intervention in Bahrain makes it seem a more agreeable partner to Gulf leaders than the west.
Looking Ahead: Gains and Challenges
The International Energy Agency (IEA) expects energy trade between the Middle East and Asia to grow rapidly in years to come as the U.S. moves towards energy self-sufficiency. Asia could account for up to 90 per cent of oil exports from the Middle East in the future. Additionally, a recent joint report by Lloyd’s Register, defence firm QinetiQ and Strathclyde University found that the Middle East looks set to remain the world’s dominant oil exporter, with China more than making up for declining US sales.
Yet despite this optimistic outlook, there are significant challenges awaiting the development of Asian GCC relations in the medium and long term. Protectionist measures in Asia represent a problem for Gulf States as it could curtail trade with China and India. The labour issue could be another source of political tension between the GCC and Asian countries. With the Gulf States focusing domestic economic policies in creating jobs for the indigenous population, this situation will lead eventually to large numbers of foreign workers becoming unemployed.
In the medium term, OPEC production growth also faces new challenges. North American oil production will dominate world-wide supply between now and 2018. The IEA anticipates 8.4 mb/d increase in global liquids production, which includes bio-fuels and processing gains at refineries, over the next five years. The ongoing dynamic as some experts are predicting could be ‘a recipe for crashing prices unless OPEC countries can coordinate in restricting their production in a way they haven’t in a long time.’ On the other hand, the Arab Gulf oil- producers are building strings of big refineries both at home and across Asia challenging long-established Asian refiners in local and global fuel markets thanks to their guaranteed and relatively cheap crude-oil supplies and to geographical advantage.
Another challenge is the uncertainty over China’s oil demand. For OPEC producers the impact of any major Chinese slowdown will be especially severe. On other side, there is concern over the unstable situation in the Middle East. The Asian Development Bank warn in its latest report “Asia’s Energy Challenge” that one of the biggest risks that could hit GCC-Asia relations is the disrupted flow of crude oil from the Middle East for an extended period which would hit Asia hard.
In the long term, North American producers are competing to develop liquefied natural gas exports to Asia. Qatar is likely to face growing competition following the widening of the Panama Canal, which will be completed in 2015. This will allow North American competitors easier access to the Asia Pacific market and increase competition in Asia Pacific with Doha’s transported LNG. Australia also has several LNG export projects under development and the country is tipped to surpass Qatar by 2020.
Consequently, the Middle East could lose its status as the pre-eminent gas exporter of the world, as East and South Asia diversify to North America, Australia and East Africa. Additionally, the growing availability in the US of low-cost unconventional gas, signs that China could step up investment in coal-to-olefin technology, and the possibility of Iraq using gas in additional petrochemicals capacity constitute major challenges to the future of the GCC (Saudi Arabia in particular) petrochemicals industry.
Yet Asia will remain dependent on GCC supply for the foreseeable future, but does not have to be a captive buyer by any means. The Arab Gulf oil-producers will face growing competition in what they considered their ‘own marketing backyard’. More broadly OPEC’s geopolitical influence will be somewhat curtailed by North America and its large-scale, relatively low-cost NGL, gas and oil production.
[An extended version of this article was first published by Italian institute for international political Studies - Milan]
Dr. Naser AL-Tamimi is a UK-based Middle East analyst and the author of the forthcoming book "China-Saudi Arabia Relations, 1990-2012: Marriage of Convenience or Strategic Alliance?" He is also Al Arabiya's regular contributor with particular research interest in energy politics and political economy of Saudi Arabia, the Gulf and Middle East-Asia relations. The writer can be reached on Twitter: @ nasertamimi or Email: firstname.lastname@example.org