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Winds of change? How the Middle East can respond to shifts in global trade patterns

Richard Boxshall Middle East Chief Economist, PwC Middle East 23 May, 2019

In the latest edition of our Economy Matters series, we step back from the noise of the latest economic data to consider one of the broader trends impacting the region.

This concerns a shift in trade routes between Asia (particularly China) and Europe and Africa, which could disintermediate trade hubs in the region, above all Egypt and Dubai. This has been a slow trend so far, masked by a growth in overall trade volumes. However, new ports in Africa and longer periods of ice-free seas in the Arctic Ocean could lead to bigger shifts in the near future.

Geographic rents

The Middle East’s location between Europe, Asia and Africa has been a valuable asset since the days of the silk and spice trades.

More recently, Dubai’s economic model was founded on being a trade hub. Egypt has long had a key role via the Suez Canal, which it expanded in 2015 to mediate additional trade volumes (cargo throughout has grown by 20% since 2014 to nearly 1bn tonnes). Airlines in the Gulf have also leveraged their locations to develop world class transit networks.

China seeks new routes

Much of the growth in trade in recent decades, benefiting Middle East intermediaries, has been driven by China. Now China is developing new trade routes as part of its Belt and Road Initiative. Three elements of this threaten the Middle East’s role: direct shipping to Africa, rail routes across Asia and the Northeast Passage.

Port development in East Africa is increasing the capacity for direct trade with Asia. Ironically Gulf companies have played a role in facilitating this. DP World developed the landmark Doraleh container terminal in Djibouti (although the government later transferred the port to China Merchants, sparking legal challenges). DP World has since developed Berbera in Somaliland as a rival gateway to Ethiopia. Further south, work began in 2018 on the giant Bagamoyo port in Tanzania, backed by Oman (and China). Kenya is developing its own mega port at Lamu and has sought Qatari support.

The Middle East is also bypassed by the New Eurasian Land Bridge, a 12,000km network of train links from China to Europe through Kazakhstan, although this route is about five times the cost of maritime shipment.

More seriously, the Northeast Passage through the Arctic Ocean is beginning to open up as climate change erodes sea ice for longer each year. The first cargo ship (not hardened for ice) took this route in 2013 and, as the annual melt period expands, more will follow. China released a white paper scoping out this new Polar Silk Road in 2018, which can cut shipment times to Europe by over a third and avoid the Suez Canal levy.

Opportunities remain

Despite the threat of competition, there are still opportunities, with world trade growing by about 3% a year. Oman in particular is seeking new business, developing Duqm for transhipment and shipping services. Jordan is also expanding Aqaba to provide Iraq with access to the Red Sea. At the same time, there is also growing regional competition as Middle Eastern ports expand in capacity and capabilities. This includes plans to significantly grow Saudi Arabia’s Red Sea Gateway Terminal in Jeddah.

Nevertheless, the bottom line remains, ports will primarily be competing on price and speed.  Ports operating in the region will therefore need to work hard to cut costs, boost efficiency and provide value adding ancillary services if they are to stand their ground now and into the future.

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Richard Boxshall

Middle East Chief Economist, PwC Middle East

Tel: +971 4 304 3100

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