Eastern promise
Gulf News, 02/12/2006
Eastern promise
By Andrew Shouler, Business Analyst
Trade and investment. Not words which always set the pulse racing, the heart pounding. But definitely activities which stimulate growth and prosperity, with tangible results in the development of society. Therefore still potentially inspirational, and worth knowing about.
Right now the world economy is tilting in favour of Asia, a continent somehow synonymous with trade through the ages (think Silk Route). Japan built its regional dominance in the last century on its exporting prowess, and, though less successful in recent years at home, has established its investment model triumphantly overseas.
Now, as the economies of the developed world trundle along in a mature, even stately, perhaps slightly infirm manner, China and India, having woken from relative slumber, are blazing a trail, leaving even the productivity-driven, debt-fuelled United States in their wake.
The imbalance it has created in terms of respective Asian trade surpluses and foreign-exchange accumulation on the one side, and US deficits and dependency on the other, are causing systemic concern, particularly as to whether shoring up the dollar with higher interest rates may become recessionary, perhaps futile, or worse.
The brighter note is the greater integration which has developed globally, channelled not only through the WTO but through a generalised tendency towards freer trade, fast becoming the model for growth internationally. Bilateral arrangements may cause friction within blocs which are established as customs unions the GCC a case in point but at least aim in the same direction, even if at variable speeds.
So it is that the Gulf countries, all now members of the WTO, are looking out on a transformed horizon. They have money to spare, a newfound openness to trade and investment, and energy resources which Asia desires. Potential synergies abound. While bathing in that glow of possibility, a quick review of the relevant data is in order.
Chart 1 shows the rising tendencies of GDP (economic size) among the key blocs already mentioned, China’s especially starting to look like an exponential curve (though almost bound to soften). Naturally, the GCC’s numbers have been boosted dramatically by oil prices, which the consensus expects to stay high.
World trade data already show the Asian economies ahead of the US as an export market for Gulf products, predominantly in energy, of course. In fact, oil exports to Asia represent two-thirds of the GCC’s output.
Meanwhile, the GCC imports heavily from both Japan and China (in transport equipment, electronic appliances, etc).
Chart 2 shows the trends in regional economic growth. Whereas the US exhibits an astonishingly even path of around 5 per cent per annum in nominal terms, the GCC has climbed to match China’s 10 per cent rate, and India risen to a higher plateau as well.
Meanwhile, the EU struggles to match the US’s level, and Japan is making a very belated recovery from a decade in and out of recession.
The leader of the pack is clear enough. At a recent seminar at the Gulf Research Centre in Dubai, visiting speaker and secretary-general of Asean Ong Keng Yong made the same, stark observation: "What has happened in East Asia revolves around one word: China. With its current rate of growth, [it] has the potential to surpass the USA [in purchasing power terms] within the next ten years." Another world locomotive is thundering into view not before time.
It has been projected that China will require over 14 million barrels per day of oil by 2025. Its interest in the Gulf region is self-explanatory. Equally, at a time when the US announces to the world (via the President’s State of the Union address) its intention to curb its reliance on oil, the GCC’s eastward gaze becomes even more justified. Its chambers of commerce already have a ’look East’ policy in place.
Close alignment
In the past five years the value of trade between the GCC and China has grown from $10.1 billion to $33.8 billion (chart 3), rising by 46 per cent in 2004 and another 36 per cent in 2005. A close alignment of paths had developed until oil prices forced a divergence.
Following the signing of a framework agreement in 2004, an FTA is planned. The third round of negotiations was completed early this year, with substantial progress on issues of market entry and rules of origin, paving the way for a deal by year-end. China sees its electronic and textiles output, and oil service contracting, offsetting its energy bill, in a relationship which may take on a strategic connotation.
China’s overtaking of Japan in terms of total trade with the rest of the world in goods and services is shown in chart 4, which also brings India into the picture. At the GRC’s presentation, the same speaker noted that, with its late emergence, "India is fast catching up with Japan" in purchasing power per capita, and is likely to overtake it as the third-largest economy over the same ten-year period.
Energy diplomacy is involved here too. By 2010 India is projected to replace South Korea as the fourth-largest consumer after the US, China and Japan. Given factors of proximity, trade links, migrant workforce and remittances, the existing connections with the GCC are historic but undercooked. Aside of energy (doubling the total), bilateral trade reached $20 billion in 2004.
India is already committed to looking to West Asia (a UN categorisation including the Gulf) to complement its own ’look East’ policy. Indeed it has proposed an ’Asian community’ free-trade area, having already engaged in discussions with the Asean countries of south-east Asia.
Its FTA talks with the GCC have apparently now entered their final stages. A market for a billion consumers is in prospect.
The net of the GCC’s trading and FDI partnerships is spreading wider still. Japan too has caught the FTA bug, and wants to initiate talks with the GCC as well as China, India, Australia and South Africa, consultations with Asean already being under way. Security of natural resources is a key consideration in a drive to form economic partnerships with as many as 20 regions by 2010.
Trade with the GCC has grown remarkably, certain to have exceeded $80 billion in 2005 according to data from the Japan External Trade Organisation, though again oil-dominated (imports mainly from Saudi Arabia and UAE). Investment is following. Yoshio Minagi, Managing Director of JETRO, says "more and more Japanese companies are showing interest and setting up operations ... the scenario looks brighter".
Additionally, Pakistan has indicated that it prefers a GCC FTA deal soon. The GCC is also considering FTAs with Australia and Singapore. Meanwhile, its process with the EU remains stalled, 17 years on, held up by concerns such as government procurement practices among economies still effectively state-led.
Besides trade, UNCTAD already shows large and increasing investment flows into Asia. FDI flows into the West Asia region specifically more than doubled from $11.9 billion in 2003 to $26.5 billion in 2005. The writing is on the wall. Trade and investment are going to impact everyone’s lives across much of Asia in a very big way.
What is happening in the Gulf already can be replicated and amplified across the mega-region in a mutually reinforcing manner. A recent tour by Custodian of the Two Holy Mosques King Abdullah Bin Abdul Aziz of Saudi Arabia (to China, India, Malaysia and Pakistan) marked the importance of this realisation. Moreover, in contrast to the Western world, the pending demographics (though not inherently supportive) may further corroborate that growth potential.
So maybe it is the stuff of dreams after all, whether in rising city skylines or simply rising standards of living. It’s been slow in coming, but now that it’s on the move, the light approaching in the tunnel is looking like a juggernaut carrying a heavy load, travelling at speed, delivering the future.
