The Gulf Looks East: India, China and Japan Are among the Nations Exploiting Opportunities to Trade with the Gulf and Restrictions Are Slowly Being Relaxed

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ONE OF THE most obvious manifestations of the Gulf states efforts to diversify their economies has been the recent round of trade talks with a number of important partners. All governments in the region recognise that relying on hydrocarbon exports to fund the import of consumer and industrial goods from the West makes them economically vulnerable and so they are attempting to diversify not only their sources of revenue but also their pool of trading partners. As a result, a series of bilateral free trade agreements are being drawn up to boost the volume of trade with the rest of the world.

While many western governments seem content to rely on the World Trade Organisation (WTO) to reduce trade barriers and ease trade between different parts of the world, a large number of states in the rest of the world have opted for a more direct approach by taking matters into their own hands. The WTO continues to have some impact, by requiring candidate states to open up their economies to competition and greater private sector participation, but the organisation has to some extent become bogged down in the global battle over agricultural subsidies.

Many rapidly-growing Asian governments have therefore decided to conclude free trade deals with key or potential trading partners. The Gulf Cooperation Council (GCC) has seized on this process to launch negotiations and deals with India and China, while others are now in the offing. Talks between India and the GCC on economic cooperation and a reduction in bilateral trade barriers began in May. The subjects under discussion included a double taxation agreement and improved banking sector cooperation, in addition to the usual deals on investment promotion. Some investment relates to the existing trade in exporting Saudi oil to India, while Indian firms such as Reliance Industries are considered likely investors in the Saudi gas, refining and petrochemical sectors.

To understand the importance of this process, it is necessary to grasp the scale of the protectionist policies adopted by both regions in the past. Until about 1990, India pursued a policy of import substitution and foreign imports of goods in many sectors were restricted, prohibited or heavily taxed. The vast bulk of the Indian economy was controlled by the state or state-owned companies and private enterprise was limited. Although some legacies of this period survive and subsidises remain in some sectors, economic liberalisation has transformed the formerly moribund Indian economy into a vibrant centre of industry that is achieving increasingly impressive levels of growth and attracting far higher levels of foreign investment.

The governments involved have suggested that trade between the two regions could reach $50bn in the medium term, although it is difficult to put a figure on it when the process of building ties in some sectors is still in its infancy. Indian oil imports from the Middle East already stand at about $20bn, while all non-oil bilateral trade has also reached $20bn. India is already Saudi Arabia's fourth biggest trading partner, while the GCC as a whole ranks as India's second biggest trade partner, largely because of oil imports.

A conference on GCC-Indian business cooperation was held in Muscat in Oman at the end of March. At the conference, the Indian minister of commerce and industry, Kamal Nath, commented: "There are synergies here. One of those synergies is obviously going to be oil. India could be building refineries for the conversion of oil in a much more efficient, economical manner than in the past. We could make downstream petroleum products. These are all things which are going to be the new architecture of tomorrow. …