The Influence of OBAOR Strategy in the GCC Countries - Thesis Proposal Example

The Influence of OBAOR Strategy in the GCC Countries: Case Study of UAE Executive Summary As the world is moving towards globalization, more and more nations are slowly aligning their economic strategies in an attempt to cushion regional economies against global shocks that characterize a recession period. However, some of the most observed regions include the GCC, which is considered as the new frontier and an emerging market. The Middle East region is also considered as crucial when it comes to trading activities, particularly from a global front. Western nations enjoy a relatively steady incline in terms of development. However, the problem and the main challenge for Western and European nations is that the consistent economic growth has created a situation whereby there is no further room for growth. For such economies, their respective economic growth can only stagnate or experience a slight increase. Gulf nations, as well as some of the nations in the Middle East, have enjoyed a rapid growth in the recent past. The development is a result of oil and natural gas deposits that exist in the region. To further the competitive advantage of such nations in respect to international trade, bilateral and multilateral agreements have been created. The participants stand to benefit economically as a result of engaging in trading activities with the said regions. The following research will analyze how the GCC nations have grown economically and how the OBAOR strategy has led to a ripple effect in terms of economic growth in the United Arab Emirates. Introduction Laabas and Limam (2005 p. 46) argue that the major motivation behind the formation of the GCC was in order to control to a greater extent trade activities in the region. It was also meant to increase the vibrant nature of the economy in the said regions. Going into the future, the economy of UAE is expected to grow in double digits if all the pending trade agreements are put into practice. Despite the fact that the current global economic outlook has cast some doubt on the economic prospects in the world, it remains to be seen how the GCC region will survive the turmoil and economic uncertainty that is currently being experienced in the world. However, it is important to note that the UAE has over the years been able to experience sustained growth patterns even during extreme conditions and, in particular, the Dubai debt crisis. It can, therefore, be expected that the nation will continue to be an influential trade partner and not just as part of the GCC but also on an individual basis. In addition to this, the various free trade agreements between the UAE and other nations are seen to be the major economic drivers of the nation’s economy. China and GCC Nations Trade Activities The Rapid Development of Economic Relations between China and the GCC states In the recent past, the economic ties between GCC nations and other trading blocs have significantly increased. However, one of the nations that appear to be in the frontline when it comes to trading activities with GCC nations is China. China, being one of the fastest growing economies in the world has in the recent past been trying to extend its trading block beyond the Middle East region. It has specifically targeted the Gulf nations as well as the African continent. The increased trading activities between the Gulf nations and China have seen an exponential growth in the respective regions. Gulf Nations as further placed China in a better position to become an economic powerhouse and probably surpass the United States economy (Zarrouk 2008, p.6). Political, economic, business, and diplomatic relation has improved between China, Asia, European, and Middle East countries due to formation of the New Silk Road. The Silk Road According to Junjie (2015), the Silk Road was formed many years ago, and it extends to China right from Europe. Some of us might think that Silk Road, as the name suggest, is just a road. However, According to the author, the Silk Road, both the ancient and the new one is the network that connects parts of Europe, Middle East and China, the route is land and maritime based. China is thought to have engineered the formation of Silk Road. China has done its best to achieve “One Belt, One Road” also known as the new Silk Road economic or OBAOR Strategy. Based on the archaeological study of the ancient Silk Road, Buddhism and Islam were introduced to China. The new Silk Road is set to bring more changes to China, Middle East and parts of Asia. Research shows that UAE is among the countries in the Middle East that has had many investors from China due to improvement in connection brought by the new Silk Road. The route has also improved trade between Asia and GCC. For example, countries in Asia import oil from the Middle East. Asian countries became the major importers of petroleum from the Middle East because Arab Gulf States are reliable partners. The Gulf States produces significant barrels per day, estimated to be 20 million. Currently, Gulf States are the second largest producers of crude oil. There is also a good relation between the Gulf States and the Asian countries that resulted from trade and investments. As such, the Gulf States formed “Look East policy” due to the existence of large markets for Gulf products such as petrol in Asia (Al-Tamimi 2013, P. 6). Since 2010, China’s interest in the Middle East and parts of North Africa has risen. Studies reveal that China’s intention to trade with the mentioned countries is as a result of vast economic resources such as petroleum. China has made huge investments in UAE, states in the Middle East. Dubai is one of the cities in UAE that attracts investors and businessmen. Zero percentage taxation favors the investors. As such, China has a variety of banks; one among the biggest is Industrial and Commercial Bank of China. There are, also, other international banks such as HSBC that serve Chinese companies. Favorability of Dubai environment has attracted many Chinese working in the Middle East and Northern parts of Africa. Statistics shows that there are more than 200,000 Chinese operating in the UAE. The trade between UAE also has risen in the past few years due to the conducive working environment. As per 2009 reports, trade between UAE and China was $21 billion. Studies also reveal that trade is expected to increase further to a higher level, probably $100 billion by the end of 2015. Furthermore, there has been an increase in working relation between UAE and China. Contracting companies from China have also won a significant number of contracts in UAE (Miles & Edwards). The trade relationship between China and GCC nations has led to several mutual benefits which include; Increased Bilateral Trade From an economic perspective, nations across the world often attempt to establish some competitive advantage by entering into agreements that are mutually beneficial to each other. Under the same context, the bilateral trade agreements between China and GCC nations has led to increased trade activities between the nations involved. Some of the major factors that inhibit effective trade and trading practices include trade quotas and taxes that otherwise discourage the importation of products into a nation. In such agreements, the nations involved can decide to scrap away the taxes that are applied to imports that make it easier for such nations to trade with ease thereby encouraging international trade. Growth in Bilateral Investments between China and Gulf Nations The increase in oil prices is one of the major factors that greatly favor the GCC nations. In most cases, such nations are the main beneficiaries when oil prices increase which are the case in the current global context. However, such fluctuation in oil prices can be counterproductive depending on the direction and the context under which the price changes. The fluctuations are the major reason oil producing countries from a regional block in order to take control of the oil trade. However, the formation of oil blocks for oil producing nations that are predominantly In the Gulf region have been met with worldwide criticism regarding the operations of the said blocks. In some quarters, the blocs are seen as operating as cartel in order to influence the global market prices of oil. However, there is another approach to the same situation when it comes to interpreting the formation of trading blocks. Such blocks are supposed to put a price quota on the prices so that the same cannot be manipulated by marketers. Overview of UAE’s Economy “The growth witnessed in UAE is a clear indication of how free market policies can influence the economy positively for the betterment of not just the nation but the entire Gulf region” (Menon, 2009, p.1389). Historically, the UAE did not play a key role in the region nor was it considered as an economic powerhouse. However, the Gulf nation initiated a raft of measures aimed at increasing trading activities with other nations and not just those in the Gulf region. Currently, the UAE is said to have entered into the bilateral agreement with over 50 nations across the world. Such agreements are part of UAE’s free market policies and strategies that continue to dominate the nation’s economic outlook. One of the major factors that characterize the UAE economy is that the economy tends to lean towards sustainable and diversified development. It would be expected that for a country rich in oil and gas deposits, the main economic focus would be related to the oil industry that UAE has significant influence over. However, UAE’s economy is one of the most diverse economies in the world where key economic contributors spread across all the key sectors within the country including the hospitality industry. The government in UAE has invested a lot in key economic sectors, a situation that has seen the Gulf nation take a leading role in the economic development in the GCC region. UAE Economic Growth UAE has one of the highest GDPs among the Gulf nations with the nation recording a rise in GDP to $222.1 in 2006 alone. The GDP continued to rise significantly reaching the $314.6 mark in 2008 and $297.1 in 2010. The decline in GDP in 2010 compared to 2008 was attributed to the global economic slowdown that continues to be experienced in parts of the world including the Gulf region. However, it is widely expected that the nation’s economy is on the path of growth which by extension means that the current figure in terms of the GDP might be relatively higher than what was market din 2008 which is so far the highest figure. Despite the fact that the current global economic slowdown is weighing heavily on the economic development and progression in some countries, the UAE has continued to experience a steady economic growth characterized by increased trading activities particularly in international trade. This situation is seen as going against the market expectations where it would be expected that the nation be experiencing the same situation as many other countries across the world are experiencing. What then is the UAE doing differently that has led to the enormous growth of the economy despite the economic challenges in the world? According to Toledo (2011, p.256), One of the strategies used by UAE to overcome the economic downturn it to reduce the dependence on petroleum products. The best alternative for such economic contributors such is tourism and the hospitality sector. In the year 2010 alone, non-oil industries contributed to approximately 31% of the real SGDP in UAE. Despite the fact that the rest of the percentage can be terraced back to the success of the oil industries, the contribution by the rest of the economic sectors shows just how the government was able to integrate an economic approach that diversifies the economic reliance on a specific sector of the economy. Trade Policy Development According to Hoekma and Zarrouk (2009, p.112), the UAE has over the years operated under the strategy where free trade is allowed to thrive. The objective is to allow the nation to progress economically as well as increase the level of trading activities in the nation. For most people in the UAE, allowing other nations to trade freely not just in the nation but the entire Gulf region is the major reason the country has been so successful on the global front and in terms of economic development. While other nations across the world continue to rely on punitive taxation models where trading partners are required to pay taxes for imports and exports, UAE has fronted the strategy where trading activities in the nation are open and thus prices as well as other additives are set by the market forces. This approach to trade has been explained as the main reason the GCC was formed. The formation of the GCC was aimed at increasing trading activities and, in particular, international trade in the region for better economic growth. Current and Proposed FTA’S Across many parts of the world, export and import business has always been a difficult undertaking moreover for companies that cannot effectively carry out the international trade. The difficulties are attributed to the legal, structural and state restrictions in relation to international trade. This explains why most nations often prefer approaching the concept of international trade from a regional economic block perspective. The case is no different in the UAE. The UAE as an individual nation has signed numerous FTA’s with many nations including the most recent one with Morocco. However, it was recently passed that any future FTA between UAE and other nations will be done through the GCC secretariat. Under the current framework, it can be assumed that any future agreements with the UAE might be hindered by the fact that the GCC has to be included in the negotiations. This may further affect the export strategy of the nation that is more inclined to a free trade policy in relation to international trade. “The export strategy includes that in relation to Dubai, which contributed to over 94% of UAE’s non-oil exports” (Hertog, 2007, p.52). Image.1 Dubai’s Export Market Gulf Cooperation Council “UAE was one of the nations that facilitated the formation of the GCC together with Bahrain, Oman, Qatar and Saudi Arabia” (Habibi, 2010, p.4). The formation of the GCC was aimed at introducing a free trade area in the region further aimed at increasing significantly the trading activities between the nations that formed the GCC. Among the first agreement to be signed was the Unified Economic Agreement, which was signed in 1981, in November. Agreement laid the foundation for the formation of the regional block in terms of both internal and international trade. In 2001, the nations signed what was known as the GCC Economic Agreement, which was predominantly supposed to provide the customs department in the GCC with a harmonize framework of operations. The agreement included import duties and other forms of taxes on goods and services. A harmonized system would further facilitate the existence of a system where all the nations involved have a better platform for operations. In addition, this agreement was supposed to align the monetary policies of all the nations involved in the whole regional block. A move aimed at ensuring that any of the nations does not suffer an undue disadvantage when it comes to international trade and the cooperation between the nations. In 2003, the nations formed the GCC Customs Union whose main mandate was to harmonize the trade tariffs among the nations in a region characterized by increased economic competition. The tariffs were harmonized to an extent that a certain percentage was pegged to certain n products and trading activities. This way, all the nations that had signed the or9iiginal agreement were required to adhere to the said tariffs thus making trading activities in the region easier and less competitive amongst the said nations but more competitive as a regional economic block. In addition to this, over 100 services were liberalized in almost every sector of the economy a move that would lead to the massive increase in international investment between the said nations and mostly in the banking sector. One such common investment between the nations was the formation of the Arab National Bank, which was a joint venture between Saudi Arabia and UAE. It can be seen that the UAE was the main facilitator and the imitator for the formation of the GCC. The nation is considered as pivotal in the region block including handling most of the international negotiations between the region and other trading blocks and regions. Some of the trading negotiations that are currently underway in relation to international trade include those with the European Union and the EFTA states including Singapore and New Zealand. Proposed FTA’s GCC has been in the recent past discussing various FTA’s with the European Union and also the Arab League in an attempt to implement the free trade approach to international trade. The agreement with the EU is almost complete as it is considered to be almost in the last phase of implementation. However, the talks are said to have stalled due to some insertion to the initial agreement, a situation that led to a crisis in the nations involved. This was after the EU insisted on the inclusion of the nations involved commitment towards safeguarding of human rights, as well as political development. While the GCC nations acknowledged to the fact that they do not have an issue or any objection to the insertion of the said clauses, the bond of contention occurred when the EU stated in the agreement that it had exclusive rights to terminate the original agreement should there be any violation of human rights or even democracy issues. While this might be seen as a reasonable term within the agreement, most of the nations in the Gulf region and the neighboring nations in the Middle East are characterized by political instability. Conflicts make such an agreement untenable under the current circumstances. Fasano and Iqbal observe that other FTA’s between the UAE and by extension the GCC are that with both India and Australia (2003, p. 34). In relation to these forms of agreement, it has been agreed that the nations involved will have to cooperate in terms of international trade, particularly when it comes to the growth and development of technology. India is among one of the fastest growing economies together with China. This explains why both India and China are considered some of the best strategic partners in international trade. This by extension means that the focus has been shifted from the traditional Western focus, and most nations are seen to be going East in terms of trade. The negotiations between the UAE and India are at advanced stages, and the latter has agreed to fast track the process for the mutual benefit of the two nations. It is expected that the trade agreements that the UAE has signed so far regarding matter of international trade and the implementation of the free trade agreements strategy will oversee exponential growth in one of the regions that has a consistent economic growth and development in recent years. Future Outlook and Conclusion UAE is considered as one of the advancing economies globally in a list that has India and China. While UAE enjoys close ties with nations such as the EU and the U.S. the nation’s still maintain close trade ties with Iran and other nations in the Middle East. However, it is known that the Western nations have placed trade sanctions on some nations that are considered to have violated human rights as well as being led by authoritarian administrations. Such nations include Syria and Iran. However, the measures taken by the Western and European nations have proven to be difficult in implementation owing to the fact that the said sanctions placed on the said nations do not have any far-reaching implications of the affected nations. For a country like Iran, the United States has placed trade sanctions on the Middle East nation due to the rights abuses that have occurred in the nation. As stated by Dar & Presley, (2001, p.1162), Iran engages in trading activities with economic powerhouses such as the UAE and Russia. As such, it puts to question the strategy the U.S in punishing Iraq for the violations stated. It is from this context that it remains to be seen how the U.S. and the EU will precede in terms of the trade relations with UAE and other nations in the Gulf Region. The decision by GCC nations to form a regional economic block and by extension a free trade area is seen as one of the greatest step by the nations in the region. It is also significant Middle East states to take control of international trade, not just in the region but other regions such as Europe and Southern parts of the world. However, the strategies put in place can be said to be working as trade activities appear to be on the rise in the said regions. In addition, it is often assumed that the formation of trading blocs is aimed at creating some form of monopoly, particularly when the nations involved have some common characteristics. In this case, GCC nations are primarily oil producing countries. It can, therefore, be argued that the major motivation of the GCC was to try and monopolize oil prices and by extension the oil industry. Despite the numerous challenges, the general economic prospects in this region remain positive. References Al-Tamimi, N. (2013). Asia‐Gcc Relations: Growing Interdependence. Analysis No. 13ISPI Dar, H. A., & Presley, J. R. (2001). The Gulf Co‐operation Council: A Slow Path to Integration?. The World Economy, 24(9), 1161-1178. Fasano, U., & Iqbal, Z. (2003). GCC countries: from oil dependence to diversification. International Monetary Fund. Habibi, N. (2010). The impact of sanctions on Iran-GCC Economic Relations. Middle East Brief, Brandeis University, 45, 4. Hertog, S. (2007). The GCC and Arab economic integration: a new paradigm. Middle East Policy, 14(1), 52-68. Hoekman, B., & Zarrouk, J. (2009). Changes in cross-border trade costs in the Pan-Arab free trade area, 2001-2008. World Bank Policy Research Working Paper Series, Vol. Junjie, Ma. 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