Led by China and India, a new ‘Silk Road’ is in the making, with growing trade between Asia and the Middle East, and also Asia and Africa. The basis of these deepening relationships is strong economic complementarity, with Asia supplying manufactured goods to the Middle East and Africa in return for fuel and mineral products from both regions. Increasingly, inter-regional investment is also boosting closer economic ties among Asia, Africa and the Middle East.
A New Silk Road in the Making
Ten years after the 1997 Asian financial crisis, Asia has re-established itself as the world’s growth magnet. Not only has it recharged its growth engine through intra-Asian trade, Asia is also fuelling its trade with other developing regions. Led by China and India, Asia’s trade with Africa and the Middle East has been growing at phenomenal rates, up 24.3% and 21.3% per annum respectively during 2002-2006, twice the 10% growth rate of world trade and even faster than the 14.5% annual expansion of intra-Asian trade.
While Africa and the Middle East are feeding Asia’s need for fuel and minerals, Asia is supplying the two regions with basic manufactured products. Currently, Asia absorbs half of the Middle East’s exports, and one-sixth of Africa’s. Conversely, Asia supplies about one-fifth of both regions’ imports. This complementary trade relationship is getting stronger and quickly spreading into investment and services, as seen from China’s active investment in Africa and the influx of Middle East petrodollars into Asia. A new Silk Road is in the making that is likely to tie the three regions more tightly together and create huge growth opportunities.
China and India Taking the Lead
During 2002-2006, China’s trade with Africa grew by 39% per annum, while its trade with the Middle East expanded by 34.4% annually. India’s exports to Africa and the Middle East grew by 20.9% annually during that period, although its imports from the two regions increased by a more modest 9.6% per annum. China has been particularly active in soliciting a closer relationship with Africa. In November 2006, Beijing hosted 48 African heads of state at the China-Africa Cooperation Forum, during which the Chinese government pledged to double its financial assistance to Africa in three years. In January 2007, Chinese President Hu Jintao visited eight African nations from Sudan to South Africa, his third visit to the continent in four years, having signed over 50 bilateral trade and economic agreements with his hosts. Similarly, high-level visits between China and the Middle East are becoming more frequent, along with booming trade and investment flows.
In comparison, India’s official interaction with Africa and the Middle East is less intense, but its economic presence in the two regions is more penetrating, given their strong historical and socio-economic ties. Trade between other parts of Asia (such as South Korea, ASEAN5 and Japan) and Africa and the Middle East are growing at various speeds of 11-23% per annum during 2002-2006. These are higher than their trade growth with the rest of the world.
Source: International Monetary Fund, Standard Chartered Bank Global Research
Asia-Africa Trade: Small but Beautiful
During 2002-2006, Asia’s exports to Africa rose by 24.3% a year, while Africa’s exports to Asia grew by 24.4%. Around 70% of Africa’s exports to Asia are fuel and minerals, and 80% of Asia’s exports to Africa are manufactured products. Despite rapid trade growth, Africa is still a relatively minor trade partner for Asia, accounting for less than 2% of Asia’s total trade in 2005. However, its share in Asia’s fuel and minerals trade is relatively more significant. For example, China sourced 23% of its imported fuel from Africa in 2005, though Africa only supplied 3.5% of China’s total imports. For Asia as a whole, Africa supplied 5.6% of Asia’s imported fuel and mining products. Given that Africa has 9.4% of the world’s proven crude oil reserves and currently accounts for 11.4% of global crude oil production, the potential for further development in trade or investments between the two regions should not be overlooked.
Asia-Middle East Trade: Fuelled by Fuels
Middle East is another and a larger source of energy for Asia. Indeed, the flows of fuel from the Middle East to Asia dominate the flows in the world, accounting for 17.5% of world trade in fuel in 2005, up 44% over 2004. Total trade flows between Asia and the Middle East amounted to $370bn in 2005, which is over three times the $103bn between Asia and Africa. Reciprocally, Asia is the Middle East’s major exports market, absorbing over 50% of its merchandise goods. Again, 88% of the Middle East’s exports to Asia were fuel and mining products in 2005, with China getting 39% of its imported fuel from the Middle East. On the other hand, as in the case with Africa, 84% of Asia’s exports to the Middle East were manufactured products in 2005. From China’s statistics, its exports of manufactured products to countries in the Middle East or Africa were mainly textiles and clothing, machinery and electrical equipment.
Traditionally, Europe is the biggest supplier of manufactured goods for Africa and the Middle East, but this position is being eroded gradually by Asia. In 2005, Europe supplied 54.7% of Africa’s manufactures imports, down from a 59% share in 2000. During the same period, Asia’s share in Africa’s manufactures supply rose from 20.3% to 25.8%, up 5.5 percentage points in contrast to Europe’s 4.3 percentage point decline. However, the shift in manufacture sources in the Middle East is less apparent. During 2000-2005, Europe’s share in Middle East manufactures supply dropped by only 1.6 percentage points from a 42.5% share in 2000 to 40.9% in 2005. Over the same period, Asia’s share in supplying manufactures to the Middle East only grew marginally from 29.1% to 29.2%.
From Trade to Investment
The deepening relationship among Asia, Africa and the Middle East goes beyond trade, and most notably to direct investment. This is mainly from Asia to Africa or the Middle East in infrastructure and the energy and resources sector, but also from the Middle East to Asia. China’s intention to tap into Africa’s resources is obvious, as suggested by its pledged investment in Africa’s biggest copper producer, for example. Malaysia is also brokering a deal to develop Iran’s gas fields and liquefied natural gas plants. Such investments are beneficial to the recipient countries with new employment and more diversified economic activities. Given the low female labour participation rates of just over 30% in the Middle East and North Africa, the potential for increased employment and thus a lift to overall income is substantial. The Middle East is also keen on attracting more foreign investment to increase industrial diversification away from its heavy reliance on energy exports. The United Arab Emirates has been putting a lot of effort into developing industries such as cement, building materials, fertilisers, foodstuffs, garments, furniture, and processed metals. Along with increased trade flows, commercial services, including travel agencies and restaurants, are blossoming too.
On the other hand, the Middle East is also active in investing in Asia with its surplus petrodollars. Statistics on these kinds of activities are far from comprehensive, but to cite some examples, Middle East investors are among the biggest buyers of the multi-billion dollar initial public offerings of Chinese banks. There have also been large transactions with Middle East investors buying into telecommunication companies in Hong Kong. Recently, Middle East investors seem to be interested in Asia’s real estate and construction sectors as well.
Conclusion
While starting from different bases, economic links between the Middle East and Asia, and those between Africa and Asia are to be fostered by huge and matching needs and supplies. There are challenges as always, here mainly on the liberalisation of trade and investment policies. These can be improved multilaterally, but also bilaterally as shown by the establishment of free trade agreements or special economic zones between the regions, such as those between Thailand and Bahrain, Singapore and Jordan, and, of late, China and Zambia.