The GCC will benefit from a US-China chill

Michael Brochstein/Sipa USA via Reuters

A trade war between the US and China is intensifying.

Last month President Joe Biden, who is facing an uphill fight for re-election, imposed more tariffs on Chinese electric vehicles, advanced batteries, solar cells, steel, aluminium and medical equipment. 

Washington alleges that China is dumping products at less than cost while Beijing counters that the US is afraid of honest competition.

For investors, the feud’s spillover into Europe and China’s likely retaliation might lead to fragmentation and dislocation in global trade and investment. 

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Economic policies around the world are increasingly dominated by national security considerations which are negatively affecting capital flows and foreign direct investment (FDI). Trade restrictions have surged, trebling since 2019 to more than 3,000 last year, depressing trade growth. 

FDI is no longer aligned with trade and GDP. Globally, FDI growth has stagnated to near-zero since 2010, while trade and GDP have grown annually by an average 4.2 percent and 3.4 percent respectively, according to Unctad.

Consequently, the GCC and its Middle East hinterland are becoming an increasingly important strategic partner for China.

In contrast to the gloomy global landscape, Sheikh Mohamed Bin Zayed, president of the UAE, visited South Korea and China last week to deepen economic, tech, trade and strategic ties. 

The GCC’s growing strategic links with Asia and China reinforce three factors which support domestic growth: FDI, trade policy reform and liberalisation, and attraction of human capital.

These support the Gulf states’ ambition to diversify from oil and concentrate instead on tech, digital innovation, the green economy and services.

Data from fDi Intelligence shows that greenfield FDI in the Middle East and Africa, measured by number of projects, bucked the global trend last year. It grew by 19 percent year-on-year to 2,658 projects – roughly 16 percent of the global total. 

Recent official trips to China by both Saudi Arabia and the UAE herald a deepening of economic ties

While capital investment in the region fell by 6 percent to $250 billion in 2023 (due to a spike in green hydrogen projects in 2022), the number of projects and investments was up by 46 percent and 111 percent respectively compared to pre-pandemic 2019. 

State-owned investors in the GCC invested more than $2.3 billion in China in 2023 (versus $100 million in 2022). Recent official trips to China by both Saudi Arabia and the UAE herald a deepening of economic ties. 

China was the top source of FDI from outside the region. At $42 billion, the country’s share was around 16 percent of total inflows. 

Saudi Arabia was the largest recipient of Chinese FDI in 2023 ($17 billion), with a 10 percent share of total outbound capital investment. 

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The pattern is also changing. Investment into renewable energy accounted for just over 40 percent of total FDI capital investment in the region. 

FDI into Saudi Arabia surged by 111 percent year on year to $29 billion, with one-fifth going to the electric vehicle (EV) sector. China’s Human Horizons, for example, is investing a total of $5.6 billion in a joint venture which will develop, manufacture and sell EVs in Saudi Arabia. 

Such investment not only supports asset prices in both regions, but also facilitates adoption of technology and knowledge transfer into non-oil sectors. 

Not only has the Middle East been attracting investment, but companies from the region are increasing their global FDI footprint in line with their “middle power” status. 

The UAE’s Dubai World was among the top ten foreign investors in 2023 by project. Mubadala Investment Group was the top-ranked foreign investor in 2023 by capex. Saudi Aramco was fourth in this list. 

The recipients ranged from infrastructure to Asian investment and asset managers and family offices setting up operations in the region’s financial centres. Economic and financial ties are deepening and widening.

In the near-term, cooperation could range from industrial policy partnerships (given institutional and governance similarities in the role of special economic zones ones and State-owned entities) to linking Saudi and UAE financial markets to Shanghai and Hong Kong. 

The latter can fund the expansion of partnerships in Belt and Road Initiative projects. These financial markets can support funding for long-term projects and public private partnerships in energy, clean tech, and climate tech where China is dominant. 

In the medium to long term, Gulf states could adopt the yuan for trade, in addition to integrating with the Cross-Border Interbank Payment System or CIPS, as an alternative to SWIFT. Central bank digital currency transfers can also facilitate cross-border flows. 

The GCC will therefore benefit from global fragmentation and China’s disconnect and de-coupling from the EU and US. 

When supported by liberalisation, the Gulf’s investment deals with China (and more broadly Asia), especially inward FDI, mean higher growth at home.

Dr Nasser Saidi is the president of Nasser Saidi and Associates. He was formerly chief economist and head of external relations at the DIFC Authority, Lebanon’s economy minister and a vice-governor of the Central Bank of Lebanon