Trade and Investment

Can the Red Sea become a global trade and investment hub?

A ship is loaded with containers at Sydney's Port Botany container terminal March 4, 2013. Australia's trade deficit shrank by much more than expected in February to its smallest in 14 months thanks to higher prices for resource exports, a likely boost to profits and incomes that also gave the local dollar a lift. Wednesday's figures from the Australian Bureau of Statistics showed exports climbed 3.3 percent overall to a seasonally adjusted A$25.64 billion, the highest total in eight months. Earnings from farm goods, coal, metals and iron ore all increase in the month thanks in part to rising prices. Picture taken March 4, 2013. REUTERS/David Gray

A ship is loaded with containers. Image: REUTERS/David Gray

Fahd Al Rasheed
Managing Director and Group CEO, King Abdullah Economic City.
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Trade and Investment

The Red Sea has played a pivotal role in global trade for millennia. In the time of the pharaohs, it was at the heart of the global spice trade. Today, it is an essential global artery, feeding Western demand for hydrocarbons and facilitating the flow of goods between Europe and booming Asian markets. More than 10% of world trade moves through the Red Sea basin every year, a figure that is set to increase as Egypt doubles the capacity of the Suez Canal.

And yet, with a few exceptions, most of the modern wealth generated by that trade sails rapidly onward, leaving little to show for its passage. There is no reason that should continue to be the case. A regional effort to facilitate trade and build infrastructure has the potential to reposition the countries surrounding the Red Sea as destinations for global investment and international trade.

The Red Sea region, comprising the 20 countries that use the route as their primary trading corridor, is the largest, fastest-growing, and least exploited emerging market in the world. Over the next 35 years, the United Nations expects the region’s population to rise more than twofold, from 620 million today to 1.3 billion. This population growth will be accompanied by one of the world’s highest urbanization rates, creating a burgeoning middle class, which the Brookings Institution estimates will grow from 136 million today to 343 million by 2050.

Over the same period, according to current projections, the region’s GDP will triple, from $1.8 trillion to $6.1 trillion, while trade will increase fivefold, from $881 billion to $4.7 trillion.

And yet, as encouraging as these numbers may be, the region has the potential to do much better. Long-term forecasts for the Red Sea region’s share of global trade are comparatively flat. According to HSBC, for example, trade within the Middle East and Africa will account for 10% of the global total in 2050, up only slightly from 9% today.

Source: Oxford Economics

There are good reasons for this conservative outlook. Many of the countries in the Middle East and Africa have comparatively limited infrastructure; there are few world-class deep-water ports in the Red Sea or nearby. Levels of economic development vary widely, from the wealthy countries of the Gulf Cooperation Council to the emerging economies of sub-Saharan and East Africa. And, unfortunately, political and cultural differences do not always encourage cross-border cooperation.

A coordinated initiative to facilitate trade within the Red Sea region would have a significant impact on future development, boosting GDP by about 10% to $6.6 billion and increasing trade by nearly 35% to $6.3 trillion, according to research commissioned by King Abdullah Economic City. By providing greater access to international trade for small and medium-size enterprises, the core drivers of growth and job creation, such an initiative would diversify exports and significantly enhance the local share of the global value chain.

Achieving this would require significant improvement of logistics capabilities in the region. The World Bank’s Logistics Performance Index (LPI) scores most of the countries in the Red Sea economic region below 2.6 on its five-point scale. The most logistics-friendly market in the region, the United Arab Emirates, has a score of 3.54, placing it just within the top 20% of countries in the LPI.

The private sector should be at the forefront of the effort to build the infrastructure and logistics links that form the backbone of global trade, install the technologies and systems that maximize efficiency, and provide the training and skills to boost performance. This process alone will create jobs, open career paths, and improve access to education across the region.

National governments will also need to participate, streamlining customs controls, border management policies, and regional trade regulations. A good place to start would be the formation of a Red Sea Trade Agreement, similar to the Trans-Pacific Partnership, outlining specific measures to reduce the costs of cross-border trade and mechanisms to settle disputes between investors and governments.

Another potential initiative would be the formation of a regional infrastructure bank, modeled on China’s Asian Infrastructure Investment Bank. Such an institution would facilitate the efficient distribution of capital to infrastructure development around the region, enhancing national trade capabilities and promoting sustainable economic growth.

The Red Sea region has a unique opportunity to develop into a global center of excellence in trade facilitation, strengthening economic ties throughout the region and building a new growth engine for the global economy. All that is needed is the will to seize it.

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