Professor Habibi’s  work on trade in the Middle East is forthcoming in the Journal of Economic Cooperation and Development. The title of the paper is “Role of Geopolitics in Import Shares of Leading Trade Partners in GCC Import Markets.”  A Summary of the work is included below.

Nader Habibi 2011

In recent years, the high prices of crude oil and natural gas have increased the purchasing power of oil-exporting countries of the GCC (Saudi Arabia. Oman, Bahrain, Kuwait, Qatar and the United Arab Emirates). As a result, competition among major industrial countries for export of goods and services to the GCC nations has intensified. For industrial countries, which have had to pay considerably more for crude oil and oil products since 2000, the GCC import market has become more significant than before.

The available import data for the GCC shows that as the total volume of imports for these countries has sharply increased in the past 10 years, the relative market shares of their trade partners have not remained stable. The market shares fluctuated over time and some countries even gained market share at the expense of others. In this article the market shares of the United States, Western Europe, Japan and China in the import markets of GCC countries will be analyzed.

The study focuses on how the market shares of leading exporters in the GCC countries have been impacted by major geopolitical events. An econometric model is used to investigate the impact of important events on import markets. The main hypothesis is that GCC imports from the US are sensitive to the US involvement in the Arab-Israeli conflict and US military interventions in the Middle East. To investigate this theory, four important geopolitical events are considered: Gulf War I (1991), Second Palestinian Intifada (2000-2001), The September 11 terror attacks (2001) and the US invasion of Iraq (2003-2004). 

Two important geopolitical factors are expected to influence trade relations between GCC and the United States: the US role in the Arab-Israeli conflict and the special security arrangement that each GCC government has developed with the United States to protect itself and its oil assets against internal and international threats. On the one hand, the United States expects favorable trade and investment relations with GCC countries in return for the security and protection that it extends to the countries and the ruling regimes.

On the other hand, the US support for Israel adversely impacts US relations with GCC countries. The GCC ruling regimes that maintain close ties with the US face domestic political pressure to cut back their economic and diplomatic ties as a show of solidarity with the Palestinians. While they have not resorted to an oil embargo for this purpose, ever since 1973, their purchase of American products is expectantly impacted by this factor.

The empirical analysis in this study offers a number of insights into the sensitivity of GCC imports in relation to the Middle East policies of the exporting countries. The strongest results obtained are first, the United States’ lost market share in several GCC and other Arab countries in the years immediately following the second Palestinian Intifada and the September 11 terrorist attacks. Second, the United States’ gained market share in GCC countries after it drove Iraq out of Kuwait.  Both of these findings indicate that US foreign policy in the Middle East has an impact on its trade relations with the GCC. In other words, the identity and foreign policy of trade partners matter to Arab importers and consumers.

The findings also lead to two more specific results on this issue. The reaction of GCC countries to geopolitical events is not fully coordinated and depends on each country’s unique diplomatic and strategic relation with its trade partners. For example, after the liberation of Kuwait in 1991, the US gained market share in four GCC countries but not in Oman and the UAE. Similarly, after the second Intifada and September 11 attacks, the US lost market shares in Bahrain, Saudi Arabia, and the UAE but not in Kuwait, Oman, and Qatar. These findings are not surprising. While GCC countries have been successful in internal economic cooperation, they remain weak in coordination of their foreign trade policies, particularly towards the United States. Bahrain, for example, signed a free trade agreement with the United States despite Saudi objections to some aspects of this agreement. As a result of this weak coordination, the GCC countries cannot use their collective economic power as a diplomatic weapon.

Statistical analysis also reveals that in cases such as the intifada and September 11, where a significant adverse impact on US market share occurred; the relative magnitude of this market share loss was rather small. This observation suggests that although people and governments of GCC countries express strong sympathy for Palestinians, the amount of trade and economic sacrifice that they are willing to make for this cause is rather limited.  This limited sacrifice, perhaps, results from the importance of the United States for their security and/or a realization that they cannot influence the US policy through economic and trade incentives. Overall, since US engagement in the Arab world in general and the GCC countries in particular, is likely to continue for the foreseeable future; these questions deserve further empirical and institutional analysis.


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