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Middle East: The big picture

There are few regions as pivotal to global trade as the Middle East. The petroleum-rich area is the source of roughly one-third of the world’s oil production. When geopolitical tensions in the Middle East force up oil prices, the whole world catches a cold. 

The Suez Canal is one of the world’s essential transshipment points. And, because of strategically significant nations such as Israel, Egypt and Saudi Arabia, the Middle East punches far above its weight in international politics.

In 2024, the region has been hit by conflict, piracy, and the vagaries of supply chains and the oil market. The spectre of protectionism appears threatening, especially between countries in conflict with each other. 

As the U.S. and the European Union gradually slide into a quasi-permanent protectionist mindset, including tit-for-tat trade wars with China, what happens to free trade in other regions of the world, including the Middle East, will become more important.

To be sure, the big picture is not as bleak as the headlines might suggest. Economists forecast export growth at around 4% for the region in 2024. 

And some of the efforts at diversification, the biggest challenge for oil-reliant Middle Eastern economic power, are succeeding. Non-oil from Saudi Arabia, for example, rose 4.3% to $12.2 billion, while imports increased 5.5% to $34.6 billion in the first two months of 2024, according to Trade Data Monitor.

War in Israel-Palestine

The war in Israel and Gaza has disrupted the economies of both nations. Consumers in Israel are less confident spending money during a time of high risk and conflict. Israeli imports of cars and trucks fell 37% year-on-year to $1 billion in the first quarter of 2024, according to TDM. 

Imports of busses, however, rose 10.6% to $104.3 million. Israeli exports fell in 10 of its 12 top markets. Shipments rose to China and the U.S., but fell to Germany, Turkey, Italy, France, Russia, India, South Korea, Spain, the UK, and the Netherlands. 

The war has made Israel increasingly reliant on its trade relationship with the U.S. Total Israeli exports increased by 1.2% to $16.9 billion. Shipments to the U.S. rose 9% to $4.8 billion. Exports of electronic integrated circuits soared 416.4% to $478.2 billion. 

Protectionist case study: Israel-Turkey

The year has been a study of the volatility of trade in the region. In May, one of the Middle East’s most successful trading partnerships unravelled amid tension over the war in Gaza. 

After Turkish President Tayyip Erdogan said his country would halt exports to Israel, Tel Aviv retaliated by nixing a free trade agreement with Turkey and promising to impose a 100% import tariffs on goods from the country. 

Earlier this month, Turkey said it was stopping exports to Israel during the duration of the Israel-Hamas war, citing a “worsening humanitarian tragedy” in the Palestinian territories. 

However, the Turkish Trade Ministry has said that companies have three months to fulfil existing orders via third countries. Already, trade between the two countries has taken a hit. Turkish imports from Israel fell 21.5% year-on-year to $429 million in the first quarter of 2024, while exports dropped 21.7% to $1.2 billion, according to TDM. 

The challenge of free trade

That’s not what the region needs if its countries are to diversify their economies and build stable middle classes. According to a recent report by the International Monetary Fund, Middle Eastern countries could increase trade by up to 17% by “reducing nontariff trade barriers, boosting infrastructure investment, and enhancing regulatory quality.” 

Countries in the Middle East and North Africa “can mitigate ongoing shipping disruptions by improving their supply chain management, securing new suppliers in the most affected sectors, seeking alternate shipping routes, and assessing air freight capacity needs,” the IMF said.

Trouble in the Red Sea

Protectionism isn’t the only problem the region faces. Attacks on merchant ships in the Red Sea have heightened insurance rates and fears of risk among manufacturers and shipping lines. 

Transits through the Suez Canal have fallen over 50% since the Israel-Palestine war started in October. The Red Sea countries — Egypt, Jordan, Saudi Arabia, Sudan, and Yemen – risk losing around 1% of their gross domestic product if the attacks continue. 

Cargo volumes are down in key regional ports such as Jeddah, Saudi Arabia and Al Aqaba, Jordan. Egyptian imports fell 25.4% year-on-year to $5.5 billion in January, the latest month for which data is available, according to Trade Data Monitor. Egyptian exports fell 16.4% to $3.5 billion over that time.

China

Like other parts of the world, China relies heavily on oil and gas imports from the Middle East. Without petroleum and natural gas supplied by Saudi Arabia, Qatar and others, the Chinese economy would take a major hit, even as it replaces some of its energy mix with fresh supplies of gas and oil coming from Russia. If the conflict drives up energy prices, that will increase manufacturing costs in China.

China, of course, is also a market, but like the U.S. and EU, Middle Eastern countries struggle to penetrate it. When countries like Saudi Arabia look at how they’re going to diversify their economies, one of their main markets, inevitably, must be China. 

After all, China is the leading trading partner for over 100 countries. It remains a challenge. In the first two months of 2024, Saudi non-oil exports to China fell 15.5% to $944.8 million.

Gulf countries including Saudi Arabia, Kuwait, Oman and Bahrain have been negotiating a new trade agreement with China, but Saudi Arabia has stalled talks over China’s reluctance to limit exports to the oil power. Saudi officials want some protection for their own manufacturing sector to develop. The Arab bloc did sign a free trade deal with South Korea late last year.

Precious stones

In times of risk, trade in gold and precious stones often rises as investors seek safety in time-honoured goods. In the first quarter of 2024, Israeli diamond exports rose 14% to $1.8 billion. Saudi Arabia boosted gold imports a whopping 144% year-on-year to $2.4 billion in the first two months of 2024, according to TDM. 

John W. Miller is chief economic analyst for Trade Data Monitor.