The United States has not developed adequate responses for dealing with hybrid groups like the Houthis.
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Chinese President Xi Jinping met with Abu Dhabi Crown Prince Mohammed bin Zayed al-Nahyan and Qatari Emir Tamim bin Hamad al-Thani alongside the Beijing 2022 Winter Olympics to discuss enhancing cooperation. In January, the foreign ministers of Saudi Arabia, Kuwait, Oman, and Bahrain as well as the secretary general of the Gulf Cooperation Council traveled to China for what has been described as an “unprecedented visit.” Chinese media portrayed the January visit as a “positive” step in strengthening China-Gulf economic ties. Even the China-GCC Free Trade Agreement, which has languished in trade deal purgatory since negotiations began in 2004, is a serious topic for discussion once again. The foreign ministers of Iran and Turkey also arrived in China for overlapping visits in January, reflecting a substantial presence of broader Middle Eastern powers.
While the visits reflect the growing and multifaceted nature of China’s engagement with the region, they shouldn’t be confused for an inflection point in China-Gulf ties. There are boundaries and limits to this growth trajectory and longer-term alignment in economic development aims.
Chinese energy demand continues to constitute the core of China-Gulf partnerships. Saudi Arabia was China’s top supplier of crude oil in 2021, accounting for 17% of Chinese oil imports. Qatar, a top natural gas supplier to China, secured multiple long-term natural gas deals with Chinese companies in December 2021 and ordered $762 million worth of Chinese liquefied natural gas tankers for the first time in October. China remains a central market for Omani, Iraqi, Emirati, and Kuwaiti exports of oil.
The chronic lack of economic diversification progress in the Gulf, where the oil and gas sector continues to account for a majority of public sector revenue, creates an indirect fiscal dependency upon major energy consumers such as China. This indirect dependency, however, is not evenly distributed across the region. China purchased approximately 83% of Oman’s total oil shipments in the first half of 2021, but most Gulf countries rely on a more diversified mix of trading partners for crude oil exports.
In other words, China is not the only game in town – though much of the demand for the Gulf’s crude oil comes from Asia. The United Arab Emirates, which is the third-largest Middle Eastern crude oil exporter after Saudi Arabia and Iraq, has shipped more oil to Japan than any other country in recent years. According to the International Energy Agency, India will be responsible for the largest share of energy demand growth over the next two decades. India relies on imports to meet roughly 85% of its oil needs and 50% of its natural gas needs, and Indian officials acknowledge that “oil and gas will continue to meet the baseload of our energy demand for the foreseeable future,” according to India’s minister of petroleum and natural gas.
No Oil, No Problem
China likewise seems destined to play a pivotal role in the ongoing development of the region’s non-oil sectors. There are strong complementarities between China and the Gulf Arab states across proposed growth sectors in the Gulf: tourism, telecommunications, renewables, smart cities, artificial intelligence, and other technology-oriented industries. Chinese technological influence – from social media apps to digital payment platforms – will be intensified by the Gulf’s young and fast-growing population and user base.
The Gulf’s educational and finance spheres also reveal growing Chinese influence. In December 2021, the Iraqi government signed agreements with two Chinese companies to build 1,000 schools over two years. Chinese efforts to address gaps in the Iraqi education system – in return for compensation in oil products – have the potential to further shape regional socioeconomic trends. Even sovereign wealth funds are advancing China-Gulf linkages: Abu Dhabi’s Mubadala, China Development Bank Capital, and China’s State Administration of Foreign Exchange set up a $10 billion UAE-China Joint Investment Fund in 2015. Gulf sovereign wealth fund officials have sought to allocate more of their portfolios toward Asian economies, including China’s, in recent years.
But it is not all smooth sailing. China’s demonstrated propensity for tight border controls and lockdowns related to the coronavirus pandemic may restrict the supply of Chinese tourists destined for the Gulf over coming years. Continued U.S. pressure on Gulf Arab allies to slow the proliferation of Chinese technologies complicates the commercial environment for Chinese firms operating in the region. Gulf sovereign wealth funds tend to deploy a larger share of their investment capital in the United States and Europe than in China. Beijing’s willingness to crack down on domestic firms heightens political risks associated with Chinese investments, while slowing economic growth rates have exposed cracks in China’s development model.
Investment Flows and Trade Ties
The American Enterprise Institute’s China Global Investment Tracker highlights sustained Chinese investment interest in Gulf economies. Between 2005 and 2021, the value of cumulative Chinese investments and construction projects in Gulf Arab countries reached $43.47 billion in Saudi Arabia, $36.16 billion in the UAE, $30.05 billion in Iraq, $11.75 billion in Kuwait, $7.8 billion in Qatar, $6.62 billion in Oman, and $1.42 billion in Bahrain. The distribution of Chinese investments across the region is roughly proportional to the gross domestic product of each country.
China is a trading behemoth that brings substantial economic clout to its bilateral relations with Gulf states. In 2020, China replaced the European Union as the GCC’s largest trading partner. The UAE is a “key axis for the re-export of Chinese goods into the region and Africa,” and trade between China and Dubai in the first half of 2021 increased 30.7% year-on-year. Yet the value of total trade flows between the UAE and China largely plateaued from 2014 to 2020.
Total bilateral trade between Saudi Arabia and China grew from around $42.4 billion in 2010 to $76 billion in 2019, quickly making China the top trading partner for Saudi Arabia. China remained Saudi Arabia’s top import and export partner as of the third quarter of 2021; however, the value of imports and exports has not grown steadily over the past decade. Mineral, including crude petroleum and petroleum gas, accounted for approximately 80% of Saudi exports to China in 2019, demonstrating that energy prices are an important variable in fluctuating trade flow values.
Various policy mechanisms, such as special economic zones, support China-Gulf trade and investment flows. The Khalifa Industrial Zone Abu Dhabi, for example, hosts the China-UAE Industrial Capacity Cooperation Demonstration Zone, which is being developed by the Jiangsu Overseas Cooperation and Investment Company and overseen by the China National Development and Reform Commission. Not all of these zone initiatives have flourished: Chinese pledges for a $10 billion joint investment park in the Special Economic Zone at Duqm in Oman have materialized slowly.
Recalibrating China-Iran Relations
It is unclear whether other areas of collaboration pitched as holding tremendous economic potential, such as China-Iran cooperation, will materialize. Lofty expectations in this domain stem largely from a 25-year China-Iran Strategic Cooperation Agreement signed in March 2021 that is reportedly approaching the implementation stage. Analysts convincingly challenged vague comments about the strategic and economic partnership being worth up to $400 billion, but the reporting nevertheless increased the hype surrounding this controversial economic relationship.
The historical economic data reveals a different story. The total value of Chinese investments and construction projects in Iran between 2005 and 2021 reached just $26.56 billion. Bilateral trade between Iran and China rested at $21.71 billion in 2019, down significantly from $52.20 billion in 2014, according to the Observatory of Economic Complexity.
The 25-year China-Iran Strategic Cooperation Agreement also includes plans for Chinese investment in Iranian free zones. But sanctions-related concerns remain a major barrier to increased trade and investment. Meanwhile, Chinese firms already operate as established commercial partners within several Gulf Arab free zones, such as the Khalifa Industrial Zone and Jebel Ali in the UAE. Chinese firms and investors are likely to continue prioritizing economic relations with Gulf Arab actors over the riskier relations with Iranian counterparts.
A Tightening of the Belt and Road Initiative
Despite the hype, the Belt and Road Initiative doesn’t necessarily promise an economic windfall for the Gulf region. While the BRI is theoretically “open to all nations,” according to the Belt and Road Forum for International Cooperation, the primary partners for this amorphous global development initiative lie in China’s immediate geographic neighborhood. A series of overland economic corridors and maritime routes link Chinese firms to Southeast Asian, African, and European markets. Yet many of these trade and investment avenues bypass the Gulf region. Egypt’s Suez Canal and the China-Pakistan Economic Corridor are key components of the BRI; however, these economic nodes possess greater relevance for areas on the Gulf’s periphery.
The geographic position of the Gulf supports ongoing portrayals of the region as an integral link in China’s grand economic strategy, but this does not guarantee BRI-related commercial engagement. In private, Gulf officials have described the BRI’s manifestation in the region as a mirage. China’s global economic clout is undeniable, yet some Gulf officials and businesspeople express greater eagerness to develop newfound bilateral partnerships with countries possessing smaller economies, such as Israel.
The concomitant Digital Silk Road, however, is exceedingly relevant for the region, given the ongoing national digital strategies in Gulf Arab countries. For Chinese firms, digital infrastructure projects remain viable amid periods of constrained resources and delivery-related challenges, such as supply chain bottlenecks and lockdowns. Gulf Arab governments began viewing technology-based cooperation as a means to diversify their economies and create knowledge economies well before the outbreak of the coronavirus pandemic, and technology-oriented collaboration is likely to accelerate in the years ahead.
Beijing has been pushing Gulf governments to better promote the strategic nature of their relations. However, any momentum here will be framed largely in economic terms. Based on recent visits of Gulf officials to China, it appears that the outset of 2022 was as an opportune time for a partially coordinated response by GCC states as well as a similar push by Iran. The Chinese welcomed this opportunity to paint a glowing picture of ties. Nonetheless, the underlying diplomatic objectives should not cloud a nuanced understanding of China-Gulf relations – the economic dimensions of which continue to grow, but in a disjointed and uneven manner.
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