Trade relations between the GCC and Asian economies have been growing steadily for some time now. In 2014 Qatar’s sovereign wealth fund, the Qatar Investment Authority (QIA), announced it would invest between $15bn and $20bn over the next five years in Asia. While there are risks associated with Asian markets, the GCC as a bloc is deepening its commitment to the region. This is signalled by a number of potential trade agreements, increased diplomatic engagement, and the possibility of new political and security arrangements.

Free Trade Agreements

In September 2013 the free trade agreement (FTA) between the GCC and Singapore, the first between the bloc and a country outside the Middle East, became active. First signed in 2008, the agreement will initially allow tariff-free access for 95% of Singaporean import lines, while all GCC exports to the Asian city state will receive tariff-free access. While this could create price competition in fields such as petrochemicals, telecoms and electronics for Gulf producers and distributors, it will also give local firms unfettered access to a large market with an average monthly household expenditure of $4720.

There is already a noted presence of Qatari companies in Singapore, such as Qatar Petroleum International, Ooredoo and Tasweeq. Katara Hospitality owns the famed Raffles Hotels, while Doha Bank and Qatar National Bank also have investments in Singapore. The state also has established relationships with large Singaporean firms, such as offshore marine infrastructure and engineering conglomerate Keppel Corporation. The FTA is likely to cement what has already burgeoned into a significant trade relationship. The GCC is Singapore’s fifth-largest trading partner globally, accounting for 35% of its oil imports. There has been a rapid increase in trade between the two parties since negotiations for the agreement began in 2006. In 2012 bilateral trade increased by 3.8% year-on-year, reaching $8bn. Singapore-based companies have also been awarded more than $16bn worth of projects in the region in the last decade. Furthermore, in March 2013 Singapore received its first LNG delivery from Qatar at its new liquefied natural gas (LNG) terminal, which marks a significant milestone for Qatar in meeting the growing demand for energy in South-east Asia and for leveraging the diversity of its energy exports.

The FTA should open up significant opportunities to augment this growing relationship with the region. Singapore will have the potential to become a trading hub for GCC oil and gas supply into the region. This could create new opportunities in port and associated infrastructure investment for well-established GCC firms. More than specific growth opportunities, however, the activation of the FTA signals the growing importance of the strategic relationship between the two regions. For many years, Singapore had acted as an aspirational model for the cities of the Gulf, from Dubai and Abu Dhabi to Manama and Doha. Such an agreement therefore confirms a mutual recognition of the importance of the respective markets for access to lucrative hinterlands and global trading routes. The GCC could now begin to approach Singapore on an equal footing.

Silk Road

However, the GCC is unlikely to stop at Singapore, with the bloc currently in FTA negotiations with China. In November 2014 Qatar announced a strategic partnership with the Asian nation to promote bilateral cooperation. The meeting led to a number of deals and an expanded scope for the two countries’ relationship, such as the preliminary agreement between QIA and China’s Citic Group to set up a $10bn investment venture. This was shortly followed in March 2015 by the announcement that region’s first centre for clearing renminbi transactions was set to open in Doha and a declaration in April 2015 that the following year would be Qatar-China Cultural Year in Beijing.

Chinese President Xi Jinping has also confirmed the importance of the GCC as a whole to Chinese plans for the Silk Road Economic Belt as well as the 21st Century Maritime Silk Road, two economic strategies looking to re-establish trade routes between China and the Mediterranean. Trade volumes between the GCC and China have already been accelerating rapidly: bilateral trade topped the $100bn mark for the first time in 2011, and surpassed $150bn in 2012.

A New Dependence

These growing volumes and nascent deals are a clear illustration of the reorientation of GCC trade and investment towards the East. Asia is now the GCC’s biggest market for goods, with 57% of total export sales destined for the region. Much of this is driven by rapid economic growth in emerging markets and the consequent demand for oil. Indeed, GCC hydrocarbons exports account for nearly 80% of its total exports to the Asian region. This has led to concerns that the GCC might be exposed to external risks.

Exogenous Shocks

In a statement supporting a report on the GCC’s vulnerability to a slowdown, Sophie Tahiri, an economist at Standard & Poor’s (S&P), told Gulf Business that, “A sharp slowdown in major emerging economies and an intensification of capital outflows, although not our baseline scenario, would affect GCC countries mainly through falling oil market prices.” Indeed, the GCC is no stranger to exogenous shocks. Given that much of its growth is dependent on exports rather than domestic demand, the region was hit hard by the global financial crisis of 2008-09, which ravaged developed economies. In 2009 the region’s combined nominal GDP, measured in dollar terms, dropped by 19%, largely due to falling oil prices.

While the region’s trade patterns are shifting to the East, this does not necessarily insulate it from any commodity price volatility. For instance, the S&P report in March 2014 suggested that a slowdown in emerging Asian economies could lead to a softening in the oil price and a drop in GDP growth within the GCC. There has already been a shift back towards developed markets following the US Federal Reserve Bank’s decision in May 2013 to announce the tapering of asset purchases. This in turn led to a capital outflow from emerging markets. Consequently, S&P forecasts that the emerging market contribution to global growth will fall from 63% in 2013 to 56% in 2014 and 55% in 2015.

At the same time, a further emerging market sell-off would lead to a more pronounced slowdown and have a substantial impact on the GCC, according to the credit ratings agency. If private investment in the BRICS countries fell by 5-6% below S&P’s baseline, emerging market GDP would drop by 1.7% to 3.1% in 2015 and by 0.7% to 4.6% in 2016. This would lead to a $12 drop in the price of oil per barrel by 2016, as well as a 0.8% decline in the GCC’s real GDP below the baseline scenario in 2015, and a 1.2% fall in 2016, according to S&P.

To a considerable extent, this vulnerability is the consequence of the composition of Gulf economies rather than a product of their export markets. Not everybody is as concerned about the potential for exogenous shocks. “GCC countries have been clever in not shifting their trade and investment portfolios to one particular country or one region,” Narayanappa Janardhan, a political analyst based in the UAE and the author of Boom Amid Gloom: The Spirit of Possibility in the 21st Century Gulf, told OBG. “I don’t think there is any significant risk and I think they’re much better off than where they were in the past.”

A Maturing Relationship

With its long-term growth potential, Asia is likely to remain a key area for the foreign exchange earnings of GCC states. Furthermore, as this trade relationship deepens in the future, it will also raise the possibility of cooperation in other areas. “They are looking at moving from a transactional relationship to one based on strategic goals,” said Janardhan. “The more economic engagement forms between the two regions, the more they have to think about protecting their interests. So it cannot be a buyer-seller relationship in the longer term.”

It is thus clear that the GCC is taking its relationship with several Asian countries beyond purely economic ties. In diplomatic terms, for example, there have been several firsts in the past decade. In March 2015 Sheikh Tamim concluded his first visits to India, Pakistan and Sri Lank as the country’s new emir. This tour followed his first official trip to Japan in February 2015, as well as South Korea and China in between November 2014.

While GCC countries have not always seen eye-to-eye with China on issues such as trade access and the Syrian crisis, these diplomatic initiatives point to a deepening political relationship regardless of any such disagreements. “There is US fatigue when it comes to security matters in the region,” said Janardhan. As such, the GCC and Asian countries may look to multilateral solutions to ensure the security of their vital trade routes in and out of the region. “India and China currently rely on the US navy to protect their economic interests in the region. In the future, you might see some cooperation between major consumers and major producers,” Janardhan told OBG.

Several GCC leaders have alluded to the need to develop and nurture multilateral security arrangements rather than be in a position of dependence on the US to provide it. It remains unclear whether this will happen in the short to medium term. However, as economic and trade relations deepen, political and security considerations are likely to gain importance.