Special report
The Middle East
The flow of trade along
the New Silk Road
Paul de Cordova and Richard Dollimore of K&L Gates LLP
explain why ongoing efforts to forge trade and investment
relationships between Asia and the Middle East are likely to be
bolstered through the use of free trade agreements.
T
he Middle East and Asia have a long trading history dating back many thousands of years.
Readers of this article will be familiar with the
ancient trade routes connecting the furthermost
reaches of Asia with North Africa and the Mediterranean.
Growing international business
flows between the Middle East
and Asia in recent years have
revived talk of the “Silk Road”
that connects these regions by
land, sea and air.
In the four years leading up to
the global financial crisis, trade
between the Middle East and
Asia grew from around US$260
billion to some US$765 billion.
Some commentators have indicated that, with economic recovery in sight, further growth in
trade volumes can be expected at
annual rates of between 20 and
30 percent. The financial downturn has been a reminder to us all
of the extent to which regions of the world have become
dependent on each other for economic growth. The desire
to stimulate trade has encouraged trading partners to look
38 ASIAN-COUNSEL
for ways to overcome historic protectionism and market
access restrictions in order to benefit their domestic businesses. To maximise these rates of trade volumes, both
Middle Eastern and Asian countries have recently been
considering the increased use of free trade agreements.
Free Trade Agreements
Globally, trade agreements –
which include free trade
agreements, the establishment
of free trade zones, and bilateral investment treaties – are
amongst the methods used by
countries to encourage trade
between them. Of the many
different approaches to establishing bilateral and multilateral trade understandings, free
trade agreements tend to
be the preferred approach.
There are a variety of reasons
why countries and regions
might embark on free trade
negotiations, and these include:
• the search for improvements in market access;
• reforms of economic policy;
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The flow of trade along the New Silk Road
By Paul de Cordova and Richard Dollimore, K&L Gates LLP
• liberalisation of trade;
• fostering strategic links between trading partners; and
• to maintain a competitive edge over other trading
nations or regions.
Far from exposing trading partners to foreign competition
in their home markets, free trade agreements can improve
and encourage the expansion of markets for goods and services and promote growth, with both sides of an agreement
benefiting from its terms. It is for these reasons that Middle
Eastern and Asian countries are beginning to seek common
ground to enter into such free trade agreements.
Usually these agreements are between two countries
(although they can be made on a multilateral basis between
regional trade “blocs”, and this is occurring with increased
frequency) and are meant to reduce barriers to trade
between those countries. According to the World Trade
Organization, there are more than two hundred free trade
agreements in force. Whilst these agreements will be individually negotiated by the parties to them, some common
attributes include:
• agreement to lift most or all tariffs or quotas on all (or specific) goods imported from the other contracting state;
• the removal of any special fees and taxes which would
inhibit trade between the two contracting parties;
• the promotion and protection of investments by persons
from one contracting state into another;
• ensuring the fair and equitable treatment of investors
from contracting states;
• providing for “most favored nation” status such that a
contracting state (or persons from that state) are treated
no less favorably than persons from other states;
• allowing the free repatriation of dividends, profits or
similar from a state to the other contracting state; and
• dispute resolution procedures for settling of disputes
between the contracting states.
It should be noted that whilst free trade agreements may be
signed in good faith, their actual effectiveness in practice is
sometimes questionable. Rather than increasing employment, governments concerned about a loss of jobs to foreign countries may seek to limit the scope of free trade
agreements. Further, existing national laws or constitutional
issues often delay a trade agreement’s entry into force or its
effectiveness. In particular, many of the Arabian Gulf states
maintain restrictions on company ownership (either for all
Volume 8 Issue 4, 2010
According to Paul
de Cordova,
greater trade is
forecast to arise
from ongoing
efforts by Arab
countries to take
a unified approach to forging trade
relationships with Asia. The
establishment of the GCC has led to
such an approach between these
Gulf states and trading counterparts
around the world.
companies or those operating in certain key sectors). This,
therefore, has a detrimental effect on the ability of foreign
investors to invest in such states under a relevant bilateral
investment treaty. Whilst this is tempered with the establishment of free trade zones (especially in the UAE) which
do allow for 100 percent foreign ownership, it still inhibits
the free flow of trade and investment between countries
which have such protectionist regulations.
The Gulf Cooperation Council’s approach
As stated earlier, greater trade is forecast to arise from
ongoing efforts by Arab countries to take a unified approach
to forging trade relationships with Asia. Historically, trade
deals had been struck for the most part on a bilateral basis,
each Middle East state seeking to establish its own advantageous arrangements with trading partners from other parts
of the world. However, the establishment of the Gulf
39
Special report
The Middle East
“Just as
important as the
flow of both
hydrocarbon and
non-hydrocarbon
trade between
the Middle East
and Asia is the substantial flow of
inward investments between the
two regions. Significantly, these
investments are being made in both
directions and at all levels…”
Richard Dollimore
Cooperation Council (GCC) – the group of six states comprising Saudi Arabia, Kuwait, Bahrain, Qatar, the UAE, and
Oman – has led to a more unified approach to forging trade
relationships between these Gulf states and trading counterparts around the world.
The first free trade agreement struck between the GCC
and an Asian country was that signed with Singapore in
December 2008 covering trade in a range of goods, services
and investments. Although progress in signing further free
trade agreements has been slow, talks continue between the
GCC and other Asian countries, including most notably
China. Trade between China and the GCC has rocketed
over the past decade from around US$2 billion in the early
1990s to in excess of US$40 billion today. Despite these
significant levels of trading activity and the prospect of
much more to come, talks with China over a free trade
agreement, which started in 2005, have made only limited
progress. A study conducted by the GCC in 2009 entitled
Economic Relations Between GCC Member States and the
People’s Republic of China cited a number of obstacles to
40 ASIAN-COUNSEL
further progress in reaching accord on a free trade agreement. These included:
• the absence of a database on the volume and types of
investment and trade opportunities available to Chinese
companies and the GCC private sector;
• disparity between economic ideologies (China’s closed
door policy compared with the GCC’s open door free
market policy);
• issues regarding quality and adherence to standard
specifications; and
• restrictions on the export of commodities and goods,
especially petrochemicals, from the GCC to China.
However, given the ambitions of Chinese companies to
become leading exporters to the Middle East, it is unlikely
that these issues will remain insurmountable barriers to
closer trading ties with the GCC.
On a Pan-Asian level, talks are ongoing between the
GCC and ASEAN to reach accord on a free trade agreement between the two trading blocs covering food and oil.
There is perceived to be common interest between the two
blocs centred around the GCC’s need for sustainable supplies of foodstuffs and the ASEAN economy’s need to
secure access to reliable supplies of oil and gas (plentiful in
the Middle East).
Further examples of economic cooperation
Just as important as the flow of both hydrocarbon and nonhydrocarbon trade between the Middle East and Asia is the
substantial flow of inward investments between the two
regions. Significantly, these investments are being made in
both directions and at all levels, and they include massive
sovereign wealth fund investments. Two examples of such
investments are the US$1 billion joint venture between
Saudi Basic Industries and Japan’s Mitsubishi Rayon to
build an acrylics factory in Saudi Arabia, and the US$9 billion joint venture between Kuwait Petroleum Corporation
and China’s Sinopec for the construction of an oil refinery
in China. The UAE is also investing in Asia, with Dubai
World now operating seven terminals in China and further
ports in other parts of East Asia. Mubadala Development
Corporation also recently acquired the Indonesia-based
Pearl Energy hydrocarbon exploration and production company. Whilst investments are already being made between
the two regions and there are some bilateral investment
treaties between states in these regions, they are far
from comprehensive. It would therefore appear that such
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The flow of trade along the New Silk Road
By Paul de Cordova and Richard Dollimore, K&L Gates LLP
investment activity could be strengthened by the increased
use of bilateral (or even multilateral) investment treaties
and that such treaties would only benefit the flow of investments both East and West along the new Silk Road rather
than to Europe or the United States.
In addition to the investments being made and joint
ventures being entered into between the two regions, further economic cooperation has been illustrated by the large
number of major contracts that have been awarded to
Japanese, Chinese and South Korean companies to build
and supply labour for multi-billion dollar projects in the
Arabian Gulf. Contracts have included prestigious residential developments, infrastructure projects, new oil and gas
refineries and the US$2 billion nuclear power programme
awarded to Korean companies. Such contracts will have
cemented the inter-dependence between the regions and
make further cooperation more likely.
Formalising relationships
As trade and investment and therefore inter-dependency
between Asia and the Middle East increases, there will
likely be an increased political will to formalise relations
between countries in these regions and to improve and
expand already healthy relationships. In light of the economic troubles being faced by North America and Europe,
a re-focusing by the countries in these regions on the growing economies of China and India has already begun.
Middle Eastern countries, and especially debt-laden Dubai,
will therefore be keen to ensure that other countries do not
create any roadblocks along the lucrative trade routes of the
new Silk Road, and one way to ensure this is by aggressively pursuing the use of free trade agreements.
As free trade agreements progress between countries
and trade blocs along the new Silk Road, it will be important for investors and traders alike to keep abreast of new
developments and opportunities in this area so as to maximise returns in the new economic environment.
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Volume 8 Issue 4, 2010
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