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Fri 25 Jan 2019 01:03 AM

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Opinion: Trade, troubles and transformation

This year is set to become a critical turning point for the world economy and for countries in the Middle East

Opinion: Trade, troubles and transformation
Moving the world Asia was responsible for much of the recovery of world merchandise trade in 2017 on both the export and import sides

This year will be a critical turning point for the world and, in particular, for the Middle East. The convergence of intensifying great power rivalry, a fragmenting trade environment, increasing pressure on natural resources and accelerating technological innovation will generate fundamental changes in the global operating environment.

Our predictions outline specific global developments with profound potential strategic implications. For policymakers and business leaders in the Middle East, our geopolitical and economic predictions are of particularly urgent relevance.

Unstable geopolitical fault lines

The global geopolitical environment is poised for a period of deepening instability. How these global dynamics will play out in the Middle East in 2019 will be a function of the extent to which great powers perceive an alignment of vital interests in support of Middle East stability and economic growth or continue to view the region as an arena for pursuing their rivalry. The regional outlook is unclear at best. We anticipate that the US-China trade war will intensify. For China, the incentives for rapidly reducing dependence on the United States have rarely been stronger – even if a near-term symbolic agreement is reached.

For the Middle East, the intensifying trade war will result in a reduction in global economic growth that will place downward pressure on oil prices

Relatedly, we predict that the Xi-Putin relationship will deepen in highly consequential ways given the alignment of their strategic interests with respect to Trump’s “America First” doctrine, their resource complementarity and resulting growing energy and agricultural ties, as well as their collaborative efforts with respect to North Korea and the Arctic, where they are already developing trade routes jointly.

For the Middle East, the intensifying trade war will result in a reduction in global economic growth that will place downward pressure on oil prices. In addition, the strengthened alignment of Xi and Putin will greatly complicate the diplomatic challenges of navigating an ever more divided geopolitical environment.

Disruptive economic shocks and opportunities

The global economic environment in 2019 is likely to be subject not only to fragmentation and new forms of localisation, but also to new and largely unexpected resource constraints. We anticipate that the global shipping industry will be disrupted by new sulfur regulations that will be implemented by the International Maritime Organisation (IMO).

Starting from January 1, 2020, they will enforce a ban on ships using fuel with a sulfur content of 0.5 percent or higher. At a cost of between $1m and $10m per ship, the transition to the new environment in 2019 is likely to significantly increase shipping costs as well as higher oil and gas prices for consumers.

For the Middle East, the implications may be significant. Despite the slowdown in global trade growth in recent years, the Middle East has managed to capture, and in select countries generate significant value from, global trade flows.

From 2000 to 2015, the annual growth rate of global container trans-shipment activity flowing through the Middle East was 9 percent, exceeding growth in total global container trans-shipment activity. This reflects the increasing significance of the Middle East in the global trade ecosystem as the economic center of gravity is shifting both South and East. This growth has also been a result of intentional efforts by regional public and private sector leadership to enhance their logistical and regulatory attractiveness.

Any shock to shipping costs may well directly affect this important engine of economic growth. The construction industry may also face a disruptive shock – from sand. We anticipate that in 2019, rising sand prices due to a global shortage may place financial pressure on the construction industry. Increasing sand demand is causing significant environmental degradation, making enforcement of the corresponding regulations a growing priority.

We anticipate that the global shipping industry will be disrupted by new sulfur regulations that will be implemented by the International Maritime Organisation

While these potential economic shocks represent threats to global and regional growth, the trajectory of Africa represents a vast opportunity. In 2019, we anticipate that intra-African cooperation and economic integration will accelerate significantly.

The African Continental Free Trade Area (AfCFTA) now has 49 signatories and the potential to increase African regional trade by 52 percent by 2022. In addition, the Single African Air Transport Market (SATAM) will deepen the connectivity of the region by reducing airfares and increasing the availability of direct flights. This increased connectivity and accelerating growth in Africa will create tremendous opportunity for the Middle East not only for economic growth, but also for new strategic partnerships.

The power to choose the future

The changes likely to unfold in 2019 will have profound near-term consequences globally and in the Middle East. The long-term strategic implications of these dynamics, however, will be a function of the choices made by regional policymakers and business leaders to shape their trajectories, and therein lies the good news.

In parallel to the challenges that are emerging, we are also witnessing an arguably unprecedented solutions revolution in which innovations not only in technology, but also in strategy and policy design are creating new forms of transformative power. Harnessing this power has never been more possible. We can all agree that the time for doing so is clearly now.

*Rudolph Lohmeyer leads the National Transformations Institute, the Dubai-based platform of A.T. Kearney’s Global Business Policy Council 

Rudolph Lohmeyer, Vice President, Global Business Policy Council at A. T. Kearney

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