In antiquity, the overland route known as the Silk Road spanned impossible distances, connecting China and the rest of Asia with far flung markets in Africa and Western Europe through the trading hubs of the Middle East. Yet, as Western power rose and Chinese influence waned, this great trade route slowly fell into a state of deep disrepair.
Today, however, Chinese President Xi Jinping is attempting to resurrect the economic artery with a series of trade facilitation and infrastructure projects loosely termed the New Silk Road Initiative – or One Belt, One Road (OBOR). Bolstered by a $40 billion “Silk Road Fund,” as well as funds from the newly minted Asian Infrastructure Investment Bank (AIIB), the OBOR is purported to spend nearly $1 trillion on trade and infrastructure investments throughout Asia, Central Asia, and the Middle East.
Yet, according to Managing Partner of the Lafayette Group and Cipher Brief expert Jean-Francois Seznec, “there has already been a silk road in place between the Far East and the Gulf Cooperation Council (GCC) region – Saudi Arabia, Kuwait, United Arab Emirates (UAE), Qatar, Bahrain, and Oman – for some time.” That route, paved with oil and gas, stretches beyond China to the rest of Asia. Now, as the countries of the Gulf desperately try to reform their economies and diversify beyond hydrocarbon exports in a low-oil price environment, are these new Chinese-initiated routes to Asia the path to future prosperity?
Gulf leaders certainly seem to think so. Prodded in part by America’s gradual shift toward energy independence and the opportunity offered by booming Asian markets, the GCC has been turning East for over a decade. Between 2000 and 2010 alone, trade between Asia and the Middle East ballooned by 700 percent. This process has only accelerated since oil prices plummeted by nearly 50 percent in 2014. With hydrocarbon revenues squeezed, countries are rushing to build a more diverse private sector through massive economic reform, trade facilitation, and infrastructure investment projects like Saudi Arabia’s “Vision 2030” plan.
This is not to say that oil and gas does not drive a major portion of the new “Silk Road” trade between Asia and the Middle East. Asia is the world’s fastest growing energy market and GCC countries are competing vigorously to secure their share. In fact, many consider OPEC’s decision to maintain production and weather low oil prices to be partly an effort to outcompete new producers active in the Asian market, specifically Iranian oil and U.S. shale.
This market for energy goes two ways. In Qatar for instance, which contains 14 percent of the world’s known natural gas reserves, Chinese Foreign Minister Wang Yi expressed Beijing’s eagerness to intertwine Silk Road investment with Qatar’s own “Vision 2030” plan during a visit this May. The country is already the largest exporter of natural gas to China, and Beijing’s decision to open a Renminbi (RMB) clearing house in Doha clearly signals a desire to secure and invest in this key source of energy imports.
However, the ambitions of GCC policymakers go far beyond fighting for market share in Asian energy markets. Perhaps more important to transitioning GCC economies is the opportunity that large Asian markets present for GCC exports of newly cultivated, non-oil manufactured goods and downstream petroleum products like chemicals and plastics. Centrally located at the nexus of sea routes between Europe and Asia, Gulf countries are also working to establish themselves as global import-export hubs by building ports and air infrastructure at breakneck speed.
The United Arab Emirates (UAE) and the Jebel Ali super port outside of Dubai is perhaps the most successful example of this trend. Jebel Ali is the world’s largest manmade deep water port and, under the current expansion plan, is on track to become the world’s largest port by 2030. Directly linked to Dubai’s expressway system and the Dubai International Airport Cargo Village, “large Chinese, Japanese, and Korean companies use Dubai as a distribution center for their products and spare parts for the whole region including Africa,” according to Seznec.
Jebel Ali’s new role as a regional and global hub has provided a model for infrastructure and trade facilitation projects across region. By some estimates, the GCC’s combined road, rail, and maritime projects will be worth over $422 billion in the next five years.
It is here that China’s OBOR initiatives may find the most traction. According to Miner, plagued by overcapacity in the production of goods like steel and aluminum, as well as bloated State-Owned Enterprises (SOEs), “China is simply looking to build as many infrastructure projects as possible,” often regardless of their profitability. That could represent an opportunity for the infrastructure-hungry Gulf, where China may be happy to lend at near-zero interest rates for projects like nuclear power plants that can siphon off excess capacity and employ SOEs.
However, that excess capacity also poses a dilemma. As Miner notes, a major criticism of the Silk Road plan has been that trade will only be one way, basically that “trains and ships leaving China will be full, but coming back they will be empty.” Deals like the bilateral free trade area currently being negotiated between China and the GCC may not develop the strong export markets that Gulf countries are looking for.
Fortunately, China is hardly the only show in town. Japan is the GCC’s largest export partner in the region at roughly 15 percent, while China and India each receive approximately 10 percent. From India to South Korea and Japan, Gulf countries “do not necessarily see China as their most important strategic partner, or necessarily the main focus of their silk route.” For GCC countries, China’s initiative is an attractive proposition, but only insofar as it facilitates their goal of becoming the new hub of east-west trade.
Fritz Lodge is an international producer at The Cipher Brief.
