Perhaps the biggest winner in the GCC trade arena in 2018 will be China – a quiet tiger quickly adapting to the Arabian climate”

Over the past year, the GCC witnessed both tumultuous political developments and challenging economic continuities, with new austerity measures, social reforms and a diplomatic crisis taking place against the familiar economic backdrop of depressed oil prices. Given these constraints, promoting trade and foreign direct investment (FDI) remained a critical component of GCC leaders’ agendas. However, politically motivated decisions are now increasingly shaping trade dynamics in the GCC, and this has served to reinforce Chinese influence in the region.

New challenges

In October, Saudi Arabia’s Crown Prince Mohammed bin Salman announced plans to build a new megacity, Neom, in the northwest corner of the country. While the $500bn project promises to attract substantial FDI and new trading partners, it also confronts domestic and international obstacles. Prior economic cities in Saudi Arabia have exhibited lacklustre results. Indeed, the country’s Vision 2030 recognises that existing economic cities “did not realise their potential” and require rehabilitation. Neom will also incorporate territory in Egypt and Jordan – consequently directing its sphere of economic cooperation outside the GCC.

The neighbouring UAE retained its position as the region’s de facto free zone during 2017. Dubai, which contains nearly half of the GCC’s special economic zones (SEZ), launched the region’s first e-commerce free zone, Dubai CommerCity, to exploit a commercial market estimated to reach $20bn by 2020.

Abu Dhabi’s planned expansion of the Khalifa Port Free Trade Zone will in turn make that the largest free zone in the region. Moreover, Sharjah launched Sharjah Publishing City and Sharjah Media City Free Zone (Shams), and a new research park and healthcare city are soon to follow.

The tax incentives offered by UAE free zones, however, have led the EU to place the country on a tax haven blacklist, prohibiting EU institutions from conducting financial operations with the UAE and subjecting other financial transactions within the country to additional scrutiny. This designation could potentially disrupt capital flows in 2018, as firms and individuals weigh the benefits of moving financial assets through the country.

VAT impact

The uncoordinated implementation of VAT likewise threatens to impact regional trade flows by creating a varied regulatory environment. Saudi Arabia and the UAE implemented VAT at the outset of 2018. The UAE, which hopes to accrue $3.3bn in tax revenue this year, simultaneously labelled 20 free zones as ‘designated zones’, thus protecting tax exemptions in key commercial hubs across the country. Oman postponed VAT implementation until 2019, and the remaining GCC members appear resolved to assess the tax’s impact in other states before introducing their own reforms domestically.

The recent diplomatic and economic row between Qatar and key GCC states is, meanwhile, expected to require economic policymakers to re-assess the individual SEZ sectors on their own merit and not as part of a broader network of free zones across GCC states.

Chinese wildcard

Viewed as a neutral economic partner, China’s influence as a trading partner in the GCC continues to grow. Between 2005 and 2015, China accounted for nearly half of the increase in the global demand for oil. Falling hydrocarbon prices have, meanwhile, encouraged GCC countries to court Chinese firms for fresh investment. China’s Belt and Road Initiative also aligns to some degree with the country strategies and national visions guiding economic policies across the GCC.

Saudi Arabia, the UAE and Oman serve as the region’s main commercial centres for Sino-GCC trade and investment. A visit by Chinese vice-premier Zhang Gaoli to Saudi Arabia in August 2017 resulted in 60 agreements worth a reported $70bn, while Chinese state-owned oil companies expressed interest in purchasing a stake in Saudi Aramco. The UAE accounts for an estimated 60 per cent of Chinese exports (including re-exports) to the region, and Abu Dhabi is keen to strengthen trade relations with China. In this context, the Jiangsu province of China signed a $300m agreement in July 2017 to build a manufacturing hub at Abu Dhabi’s Khalifa Port Free Trade Zone.

Duqm zone

The Chinese also signed a $10.7bn agreement to manage one third of Oman’s SEZ in Duqm through a joint venture of Wanfang Oman Company and the government. Wanfang Oman is a local subsidiary of Ningxia China-Arab Wanfang, a conglomerate backed by the regional government from China’s Ningxia region. Under the agreement, Chinese banks will provide the capital for the industrial city and individual companies will develop their respective industrial facilities. The value of this investment reflects more than half of Oman’s total inward FDI – about $18.5bn in 2016.

Political manoeuvring, rather than economic cooperation through GCC institutions, will continue to determine regional trade policies for the foreseeable future. Moreover, the politicisation of trade may complicate efforts by Oman and individual emirates of the UAE to deepen trade relationships with Iran. Growing economic links between the GCC and Iran will inevitably conflict with foreign policy agendas in Saudi Arabia and Abu Dhabi. Perhaps the biggest winner in the GCC trade arena in 2018 will therefore be China – a quiet tiger quickly adapting to the Arabian climate.

About the author

Robert Mogielnicki is a PhD candidate at Magdalen College, University of Oxford, where he specialises in the political economy of free zones in the GCC. He also serves as a senior analyst at the Siwa Group.

Professional timeline

2017: Siwa Group, Senior analyst

2013-17: Oxford Strategic Consulting, head of PR & senior analyst

2013-14: Egypt Oil and Gas Magazine, political contributor

Eamonn Gearon, managing director of the Siwa Group, contributed to this article