THE GULF STATES: CHANGING TRADE PATTERNS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP89S01450R000600630001-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 38
• Document Creation Date: December 27, 2016
• Document Release Date: July 25, 2012
• Sequence Number: 1
• Publication Date: December 1, 1988
• Content Type: REPORT

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The Gulf States: Changing
Trade Patterns
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P A G E NUMMS
TOM NUMBER OF OOPIS_____________
DISSE M DATE
EXTRA OJPIES 90 Y17'
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Secret
NESA 88-10072
December 1988
Copy 3 8 9
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The Gulf States: Changing
Trade Patterns
This paper was prepared by
Comments and queries are welcome and may be
directed to the Chief, Persian Gulf Division, NESA,
Reverse Blank Secret
NESA 88-10072
December 1988
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;, secret
Summary
Information. available
as of 4 November 1988
was used in this report.
The Gulf States: Changing
Trade Patterns 25X1
industrial goods and services.
Trade continues to be the lifeblood of the Gulf Cooperation Council (GCC)
states-Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United
Arab Emirates-and these countries remain a large and profitable market
for world trade, despite the sharp falloff in oil revenues since 1981. These
states consume 2 percent of world exports and supply 23 percent of non-
Communist oil imports. Their dependence on foreign trade probably will
remain high because of the growing gap between domestic demand and the
ability of regional economies to produce sufficient levels of consumer and
trade deficit with Communist states for most of the 1980s.
The most significant trend in the Gulf states' trade has been the rapid de-
cline in their trade surpluses during the past seven years. The trend is
toward greater trade parity, both with developed countries and LDC
suppliers. The GCC's large trade surplus with Japan has fallen by 60
percent since 1981. Merchandise trade-excluding military deliveries-
with Communist states remains small and will continue to be limited by a
lack of mutually beneficial trade needs. The GCC states have run a small
against other major currencies since 1985.
The US trade position with the GCC states has eroded in recent years, and
the United States is not well placed to take advantage of trade opportuni-
ties in the area while postwar reconstruction begins in Iraq and Iran. The
US trade balance with the region fell to a $1.5 billion deficit last year, and
the US share of regional imports declined from 21 percent to 15 percent
between 1982 and 1987. At the same time, US imports of GCC oil have in-
creased substantially. Nevertheless, preliminary data for the first quarter
of calendar year 1988 shows an improvement in US exports to the GCC
states, most likely because of the change in the value of the US dollar
in the two belligerent states.
Shifts in the direction and mix of regional trade with the rest of the world
since the beginning of the decade have been broadly influenced by relative
price changes, national income levels, changes in development priorities,
and the Iran-Iraq war. Income levels and development priorities have
moved domestic demand in favor of private consumption and toward
reduced purchases of capital goods and larger purchases of services. The
dislocation of trade with the rest of the world caused by the Iran-Iraq war
is likely to fade as the northern GCC states obtain most of the reexport
trade associated with anticipated multibillion-dollar reconstruction efforts
Secret
NESA 88-10072
December 1988
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OCUCI '
The concentration of GCC states' export trade with Western Europe and
selected East Asian countries probably will continue, along with the shift
toward the export of greater volumes of refined petroleum products.
Exports of refined products give producers more of the profit associated
with the end use of oil products. In addition, most GCC states are moving
into downstream oil marketing operations. As these countries establish
unique foreign market niches, the volatility of domestic oil earnings
probably will be reduced. This movement downstream also could result in
significant control over selected segments of foreign petroleum markets.
The trend toward greater diversification of imports also is likely to
continue. Lower revenues have made local economic planners price con-
scious, and the diffusion of technology among world producers has
provided a broader source of supply in recent years. Technocrats have
assumed a growing influence in domestic economic decision making and
appear to be more rigorous in their choice of suppliers. They are more
likely to base trade decisions on competitiveness and efficiency rather than
past commercial or political allegiances.
Import diversification is likely to continue to be most pronounced in the
area of military imports. Restrictions on US military sales to the region
and a growing interest among the Gulf states in diversifying their sources
of military supply have caused the direction of arms purchases to shift
toward West European and Communist suppliers. The GCC states signed
$5.2 billion in military purchase agreements in calendar year 1987. The
US share of this large market segment, however, declined by a quarter in
the past four years compared with the period 1980-84. Unless this
deterioration in US military trade with the GCC states is reversed,
Washington may lose influence over the disposition of regional military
materiel-Washington has a say in how US-origin arms are used-because
the majority of new equipment will be purchased from non-US sources.
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Factors Affecting Regional Trade
Currency Fluctuations
2
National Income Levels
3
World Trade and Technology
4
Country Share, Composition, and Direction of Exports .
6
Composition and Source of Imports
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Scope Note The trade patterns of the Gulf Cooperation Council states have undergone
significant changes in both direction and composition as a result of
fluctuations in currency values, national income levels, evolving develop-
ment strategies, and the influence of the Iran-Iraq war. The area remains
important in international trade because of both the GCC states' continued
high level of imports and their large petroleum resources. This paper
explores the evolution in trade patterns during the 1980s and the effect of
variables in the trade equation on commercial relationships and projects
changes in regional trade patterns. It assesses the impact of these trends on
US security and commercial interests in the region.
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Figure 1
The GCC States and Selected Middle East Oil Facilities
* ANKARA
Turkey
Iraq-Saudi Arabia;
Neutral Zone
Phase /-Iraq-Saudi
Spurline 0.5-1.6
'
Administrative
Boundary
Sudan
Yanhu'
._al Bahr
iddah
'Mecca
Ethiopia
Existing oil pipeline
40 Oilfield
- Oil terminal
2.6 Pipeline capacity (million b/d)
Note: Pipeline alignments are approximate.
Boundary representation is
not necessarily authoritative
300 Kilometers
300 Miles
~gyanrain~7 Dome V Hoail of
INANAMA gasfield Ad
United ptedv
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The Gulf States: Changing
Trade Patterns
ates.
free world oil imports.
The Gulf Cooperation Council (GCC) states remain
dependent on foreign trade, although there have been
changes in the composition and direction of regional
trade patterns over the years.' The rapid pace of Gulf
state development during the last 15 years has created
a large demand for foreign goods and services. Mer-
chandise imports increased from $1.6 billion in 1970
to almost $58 billion by 1982, before declining to $34
billion last year. The GCC states still consume 2
percent of free world exports. During the past 18
years, demand for services escalated sharply and now
top $30 billion annually. This demand was financed
by an even more dramatic increase in Gulf state
exports-crude oil and refined petroleum products.
Their vast oil reserves make them an important target
of world traders. Despite rising oil production outside
the Persian Gulf, the GCC states still control 49
percent of proved oil reserves and supply 23 percent of
Factors Affecting Regional Trade 2
Liberal Trade Policies
Several key variables shape the scope and direction of
GCC trade. The trade policies of the GCC states are
relatively liberal compared with other developing
countries such as Algeria, India, and Pakistan. This
openness to international commerce has paved the
way for the extraordinary growth of regional trade
since 1970. Few items are banned, and exchange
restrictions are not a constraint, according to US
Embassy reporting. This stems from the coincidence
of ample supplies of foreign exchange and economies
dependent on imports for development. Tariffs are
used to foster the growth of selected domestic indus-
tries but are not a serious obstacle to trade with the
region. Since the early 1980s all GCC states have
' The states of the Gulf Cooperation Council include Bahrain,
Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emir-
The Gulf Cooperation Council as a Trading Bloc
Although some of the Gulf Cooperation Council's
most significant achievements have been in the eco-
nomic sphere, its members have yet to become a
cohesive trading bloc. So far, they have established a
framework for increased commercial ties, taken steps
to link transportation and communication networks
of the member states, and implemented policies to
eliminate obstacles to the free movement of capital
and labor among GCC states, according to US Em-
bassy reporting. The GCC has not responded as a
body to the soft oil market, however, and has only
recently established a unified front to negotiate petro-
chemical trade quotas with the EC, Japan, and the
United States.
We believe the greatest obstacles to broader GCC
trade cooperation are political. Each state is suspi-
cious of the actions and intentions of the others,
creating tensions that will inhibit cooperative efforts
over the next several years, according to Embassy
reporting. Although they recognize the benefits of
cooperation, GCC governments fear a loss of individ-
ual influence and national sovereignty; in particular,
the smaller states are wary of Saudi attempts to
dominate them. Although the smaller GCC states are
beginning to act more aggressively to protect their
individual interests, we believe that the Saudis will
continue to dominate the Council and to use the GCC
to advance Riyadh's agenda of commercial arrange-
ments.
moved toward a unified system of trade regulations to
expedite commerce and development. Most states,
however, do require that trade be channeled through
locally owned agencies.
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Figure 2
Trade Weighted Exchange Rate of GCC
Currencies, 1980-88
I I I I I 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1-i
I II III IV I II III IV 1 11 111 IV I 11 111 IV 1 11 III IV I 11 111 IV I II III IV I II II] IV 1
1980 81 82 83 84 85 86 87 88
0 Index of the amount of goods that can be purchased
with each dollar of oil earnings weighted for each
country's six major trade partners.
Currency Fluctuations
Fluctuations in the value of regional currencies have
had a pervasive impact on GCC trade volumes and
partner shares. Between the period 1978 and midyear
1985, the purchasing power of local currencies in-
creased by 70 percent against those of major trade
partners before falling to slightly below the 1978 level
in the first quarter of this calendar year. Local
currencies, with the exception of Kuwait's dinar, are
pegged to the US dollar and have largely followed
trends in its value. We estimate that a 1-percentage
point change in the value of local currencies relative
to those of major trade partners will result in an
equal-percentage-point change in the amount of real
GCC imports, although the change will not take
effect for about two years.
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Figure 3
GCC Oil and Nonoil Revenues,
1980-88
National Income Levels
Academic studies suggest that national income levels
help determine import volumes, and the GCC states
are no exception. Their experience has been unusual,
however, because since 1972 a 1-percent change in
GDP has produced a greater-than-l-percent change
in imports. This has been largely a consequence of the
rapid rise and fall in the price of crude oil without a
corresponding change in overall levels of real national
productivity. As a result, regional economies almost
doubled their dependence on foreign suppliers be-
tween 1972 and 1983. GCC governments have at-
tempted to maintain import levels relative to GDP
since oil prices began to weaken in the early 1980s,
but their efforts have been frustrated by rising budget
and foreign payments deficits. In 1988 imports as a
share of national income appear to have leveled off at
about 24 percent of GDP, nearly 12 percentage points
below the 1983 peak, indicating both the degree of
austerity and the reduction in dependence on foreign
suppliers that has occurred.
Governments have been the engine of growth and
development in GCC economies since oil revenues
began their rapid rise in the early 1970s. The falloff in
imports as a percent of GDP is directly traceable to
the reduction in government revenues and spending.
Although private consumption has increased and re-
mains high, the private sector has not shown the
dynamism required to sustain growth-and import
demand-without heavy government subsidies, ac-
cording to US Embassy reporting. Moreover, work by
an independent contractor shows that local credit is a
key determinant of demand and is directly related to
levels of government spending.
Development Priorities
Economic development priorities in the GCC states
have substantially altered import levels and the com-
position of regional trade. Development plans in the
region show a steady decline in infrastructure spend-
ing over the past eight years and a greater emphasis
on human. resources and social development. The
change is especially marked in Saudi Arabia, where
the government has reversed the relative share of
development spending on infrastructure and social 25X1
programs in the current Fourth Development Plan,
compared with the first five-year plan, according to
US Embassy reporting. The impact on trade is visible
in the reduced imports of manufactured goods and
machinery and in the shift to service imports. Overall,
we estimate that shifting development priorities have
accounted for about 14 percent of the change in trade
volumes since 1978 and in the persistence of large net
service deficits.
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'Figure 4
GCC States: Average Propensity to
Import, 1980-87
Percent
40
35
30
25
20
15
10
5
0 1980 81 82 83 84 85 86 87
e Average propensity to import is the ratio of real
imports to real gross domestic product. It measures the
relative reliance of an economy on foreign trade.
World Trade and Technology
Increases in the volume of world trade and technology
have not had a discernible effect on GCC trade levels
but probably have influenced the relative trade shares
of several of the GCC trade partners since the late
1970s. The availability and variety of goods as well as
sources of supply often improve with increases in
world trade values-up 40 percent in real terms since
1980. Moreover, change in technology over time
influences the relative cost and quality of goods. US
Embassy reporting suggests that several GCC states
have turned to Japan and the newly industrializing
Asian countries of Singapore and South Korea, as'
well as Taiwan, for oil and gas technology previously
available only from Western companies. GCC states
have also changed their supply sources for some farm
equipment, electronic goods, and transportation
equipment because of the evolution of relative tech-
nology.
The Iran-Iraq War
The Iran-Iraq war profoundly affected the composi-
tion and direction of GCC trade. Since 1980, imports
of military equipment have increased in volume as
well as a percent of trade in response to the threat of
Iranian aggression. Accelerated Iranian and Iraqi
attacks against nonbelligerent shipping caused the
lucrative reexport trade previously handled by north-
ern Persian Gulf ports to move south to the United
Arab Emirates-especially Dubayy-and Oman.
the reluctance of some
shippers-especially Japanese merchantmen-to sail
to Kuwait and Saudi Arabia caused the Gulf states to
route about a third of oil exports to the Red Sea by
pipeline or to ports outside the Strait of Hormuz for
transshipment to foreign tankers. The higher risk
attached to Gulf oil supplies caused by the war
contributed to the development of non-GCC oil re-
sources and the diversification of oil suppliers by
many GCC oil customers.
Trade Dynamics
Overall, changes in currency values, lower oil income,
new development priorities,.and the Iran-Iraq war
have taken a heavy toll on the balance of payments of
the GCC states. Combined export receipts fell 1.5
times faster than imports from their peak in 1982.
The drop in the number of expatriate workers and a
commensurate reduction in worker remittances dur-
ing the period, coupled with reduced demand for
services in the oil sector, helped cut the large net
services deficit by about a half. The burden, however,
has not been evenly distributed among the six states.
Kuwait and the United Arab Emirates have main-
tained large, though declining, current account sur-
pluses. Saudi Arabia, Qatar, and, to a lesser extent,
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Table 1
GCC States: Current Account Balance, 1982-88 a
Trade balance
57.8
29.4
28.4
25.0
11.5
17.7
18.1
Exports (f.o.b.)
115.5
83.2
76.6
63.5
44.6
51.7
53.2
Oil
109.3
76.9
70.2
57.5
38.6
44.1
45.3
a Because of rounding, components may not add to the total shown.
b Projected.
Assumes combined oil exports of 7.6 million b/d at $16 per barrel.
d Includes military imports.
Table 2 Billion US $
Current Account Balances of the GCC States, 1982-88
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Figure 5
Share of Real Exports, 1980-87
Bahrain 1
Oman 2
Qatar 4
Bahrain 2
Oman 6
Qatar 3
Kuwait 15
UAE 22
Oman have experienced current account deficits in export share falling to slightly less than half the
recent years because of sharp reductions in oil exports regional total, down from two-thirds of all exports in
and continued heavy spending on imports, according 1980. Qatar's share also slipped by a small amount.
to US Embassy reporting. On the other hand, Oman's export share almost
tripled during the period as Muscat brought addition-
al oil production capacity on line, according to the US
Country Share, Composition, and Direction of Exports Embassy in Oman. Similarly, higher oil export vol-
umes in the United Arab Emirates and Kuwait helped
The relative share of goods exported by the six GCC push up their share of exports by almost 7 and 4
states has changed sharply since 1980. A large shift in percentage points, respectively.
the pattern of regional oil exports is the primary
cause. Saudi Arabia has been the biggest loser with its
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Significant changes have also occurred in the compo-
sition of GCC exports. Although petroleum export
volumes are about the same as in 1980, petroleum
products have assumed greater prominence in the
export mix. Product exports tripled to 15 percent of
petroleum exports between 1980 and 1988. Exports of
gas also increased sharply from 3 percent to almost 7
percent of hydrocarbon exports during this period. As
a result, crude oil as a share of total exports fell by al-
most 18 percentage points, to about three-quarters of
all exports. This shift in emphasis reflects the large
amount of refinery capacity that has come on line in
recent years-especially in Kuwait-and government
attempts to capture more of the value associated with
finished petroleum products, according to US Embas-
sy reporting.
Nonoil exports continue to account for only a small
share-15 percent-of regional foreign sales receipts.
Overall, nonoil receipts have increased by $1.7 billion
since 1982, to about $7.9 billion. Most of this small
increase in the nonoil share of exports during this
period is attributable to the fall in oil receipts. In real
terms, nonoil sales have remained virtually flat since
the beginning of the decade.
GCC industrial development policies largely account
for the slow growth of nonoil exports, according to US
Embassy reporting. Import substitution-develop-
ment of productive capacity designed to meet domes-
tic needs-has been a primary goal of regional indus-
trialization efforts. Moreover, despite comparatively
low production costs, GCC nonoil exports compete for
already glutted petrochemical and metals-alumi-
num-markets and frequently face protective trade
regulations from foreign governments.
The GCC states have become more dependent on a
selected group of trade partners since 1980. The trend
toward diversification of export trade, especially with
LDCs, reversed course in 1984. Exports in general
have become more concentrated among developed
countries, which now account for 85 percent of region-
al foreign sales receipts; Japan and the United States
alone account for 55 percent of GCC exports. Al-
though shipments to LDCs rose to 23 percent of
foreign sales in 1983, sales to this group returned to
the 1980 level of 15 percent of export receipts last
year. Exports to LDCs also have become more con-
centrated among Singapore, South Korea, Brazil, and
Indonesia. In addition to greater concentration of
exports, there has been a progressive shift of export
trade to East Asian countries, including Japan, which
now purchase almost 55 percent of GCC exports-up
from 37 percent in 1980. Less than 1 percent of
regional exports goes to Communist states.
Export Trends of Individual GCC States
These trends, although characteristic of the region,
apply to a different degree in each GCC state.
According to official trade data:
? Saudi Arabia is the largest single exporter, with $23
billion in foreign sales last year. Riyadh has experi-
enced the smallest shift in sales to East Asia and
since 1985 has more than doubled its exports to the.
United States.
? The United Arab Emirates had annual sales of
$12.0 billion in 1987. The Emirates have experi-
enced a substantial eastward shift in their oil ship-
ments, with sales to Singapore and South Korea
increasing most rapidly in recent years.
? Kuwait has about $8.3 billion in foreign sales and
has experienced the greatest shift toward the export
of petroleum products. About 42 percent of exports
go to East Asian states, roughly the same level as in
1980.
? Oman had foreign sales of $3.8 billion in 1987.
Although three-quarters of Muscat's' exports still go
to East Asian customers, since 1985 a growing
volume of oil sales has gone to Western countries,
especially the United States.
? Bahrain is the fifth-largest exporter-$2.4 million
in foreign sales last year-and one of the most
dependent on trade with East Asia, particularly
Japan, Singapore, and South Korea, which account
for 67 percent of total exports.
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Figure 6
Share of Real Imports, 1980-87
Percent
1980 1987
Total=40.2 Billion US $ Total=28.6 Billion US $
Bahrain 3
Oman 3
Bahrain 4
Qatar 3 Oman 5
Qatar 3
Kuwait 13 Kuwait 11
UAE 16 UAE 17
Saudi Arabia 60
Saudi Arabia 62
? Qatar is the smallest exporter, with sales of $2.1 declining by 40 percent last year. Saudi Arabia
billion last year. It has suffered one of the sharpest experienced the largest drop in imports-down about
reductions in oil earnings and the greatest shift since 54 percent from the peak. The United Arab Emirates
1980 in its sales to Japan and Singapore. F__~ suffered the least and was able to limit the decline to
about 19 percent. Compared with more normal 1980
import levels-when the sharp increase in GCC im-
Composition and Source of Imports ports was just beginning-the decline has been less
Although the relative share of regional imports pur-
chased by each state has changed little since 1980, the
level of imports in each state has changed significant-
ly. Total imports peaked in 1982 at $58 billion before
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severe. Kuwait experienced a 34-percent reduction,
while Bahrain's imports remained nearly constant and
Oman's import level actually increased by 11 percent.
The composition of GCC import trade changed dra-
matically in favor of capital goods during the past
seven years before returning to a mix similar to the
early 1980s. The largest import category-manufac-
tured goods-currently accounts for about 80 percent
of total imports, nearly the same level as 1980. This
category experienced the largest increase and subse-
quent decline as a percent of imports during the
period. Within this category, purchases of consumer
goods have increased substantially, while imports of
transportation equipment have declined as a percent-
age of trade in manufactured goods. Machinery im-
ports have continued to represent about 25 percent of
trade despite the slowdown of domestic development
programs. Imports of agricultural commodities have
declined slightly in terms of US dollars but increased
as a percent of total imports. Larger purchases of
meat products and agricultural processing equipment
have replaced imports of cereals as domestic grain
production programs have become active. Expansion
of domestic refining capacity has nearly eliminated
processed fuel imports.
Although the share of GCC imports obtained from
developed countries compared to LDC suppliers-88
percent and 11 percent, respectively-has not
changed since 1980, diversification of suppliers within
each trade group has increased significantly. Japan
(18 percent) and the United Kingdom (16 percent)
have replaced the United States (15 percent) as the
largest suppliers to the GCC. Trade with the United
Kingdom, in particular, has accelerated rapidly since
1985. In general, GCC import trade with developed
countries has shifted toward West European suppliers
since 1980. Trade with LDC suppliers does not show
the trend toward greater trade with East Asia that
exists in GCC export trade. About 1 percent of
regional imports are obtained from Communist states.
The US share of Gulf states' imports-both civilian
and military-has dropped sharply since the begin-
ning of the decade because of the dollar's strength and
aggressive competition from Western and Third
World suppliers. US suppliers now trail Japan and the
United Kingdom as primary suppliers to the six GCC
states. This shift is most pronounced in trade relations
with the smaller GCC states. Since 1982, we estimate
that the US share of the regional import market
declined from 21 percent to 15 percent, while the US
trade balance went from a $5 billion surplus in 1983
to a $1.5 billion deficit in calendar year 1987.
The mix of commodities purchased from each trade
partner has also shifted. The United States remains
the largest supplier of agricultural commodities to the
region-$670 million last year-although several
West European countries have made significant in-
roads into the US position. The United States contin-
ues to supply the largest share-20 percent-of de-
clining GCC raw material imports; Italy and the
Benelux countries, however, have rapidly expanded
their share of this market. West European suppliers 25X1
have taken an increasing share of the large GCC
trade in manufactured goods, primarily at the expense
of the United States. Japan continues to be the largest
supplier of manufactured goods to the GCC.
We believe that the Gulf states are likely to continue
to diversify trade. As technocrats have assumed a
growing role in economic decision making in the GCC
states, so has the trend toward diversification of
commercial relations. Largely trained in the United
States, these new managers are often more capitalistic
and less inclined than their more traditional predeces-
sors to base decisions strictly on personal relationships
or loyalties, according to US Embassy reporting. They
have been increasingly reluctant to accept any sem-
blance of client-state status. As a result, regional
economic planners have come to believe that the
strategic value of the GCC states gives them the
upper hand in negotiating economic deals. They have
grown adept at playing trade partners and political
allies against each other. In trade negotiations, US
Embassy reporting indicates that the GCC states
increasingly stress successful talks with other trade
partners as a mechanism to obtain concessions, espe-
cially from the EC, Japan, and the United States.
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Trends in Military Imports
Saudi Arabia's recent letter of intent to buy addition-
al Tornado fighter aircraft from the United Kingdom
illustrates the growing GCC and regional interest in
diversifying sources of arms supply. So far in 1988,
the GCC states have signed agreements or stated
intentions to purchase over $20 billion in new mili-
tary equipment deliveries over the next five years,
almost two times the total of any previous year,
according to US Embassy and industry reporting.
Over the past four years, most regional military
contracts have gone to West European traders. The
US share of military sales to GCC states fell by at
least one-quarter between the period 1980-84 and the
period 1985-88 because of US restrictions on arms
sales and efforts by the GCC countries to diversify
military suppliers. We believe that this trend will
continue.
Gulf purchases from Communist countries will prob-
ably increase but will remain a relatively small
proportion of the regional market. The main selling
feature of Communist states is their ability to supply
alternative weapons quickly-Moscow's sale of SA-
14 missiles to the United Arab Emirates, for exam-
ple-or by offering equipment Western states refuse
Kuwait's attempt to obtain protection for its tanker
fleet, for example, included a calculated appeal to
both Washington and Moscow.
Import Trends of Individual GCC States
Although each GCC state has diversified its relations
with suppliers, the six states differ in the pattern of
their sources of imports. According to official trade
data:
? Saudi Arabia is the region's. largest importer, with
$18 billion in purchases last year. Riyadh's reliance
on the United Kingdom has increased sharply since
1985, placing London in a three-way competition
with Japan and the United States for primary
supplier to Saudi Arabia.
to provide, such as China's sale of ballistic missiles
to Riyadh. Most Communist country sales, however,
probably will continue to involve relatively small
amounts of light arms and ammunition and occasion-
al military construction contracts, as a result of
lingering GCC suspicions about the regional inten-
tions of the Communist states and the perceived
lower quality of Communist weapons systems.
We believe that reduced oil revenues and the end of
the Iran-Iraq war probably will not deter the GCC
states from the major aspects of their military im-
provement plans. So far, they have largely spared
military budgets, while spending less on other budget
categories, according to US Embassy reporting. Re-
gional fear of Iraq's postwar intentions and distrust
of Iran, which remain high, serve as reasons to
proceed with military modernization programs. We
believe that air force and air defense systems linked
to sophisticated command and control centers will
most likely remain the highest priority military
purchases over the next five years.
? The United Arab Emirates imported $6.2 billion in
goods last year. Japan remains the largest supplier
to the Emirates, with West Germany almost dou-
bling its share of the domestic market-15 percent
in 1987-at the expense of the United States and
the United Kingdom.
? Kuwait made $4.8 billion in purchases last year.
Japan and the United States have remained the
largest suppliers, but the US position has eroded in
the past several years. Kuwait has one of the most
diversified trade relationships.
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? Bahrain has about $2.3 billion in annual imports.
Manama has made a major shift in its supplier
relationships in favor of West Germany-18 per-
cent of imports-largely at the expense of Japan.
? Oman is the next-to-the-smallest market-$1.8 bil-
lion-in the GCC. The largest percentage of its
imports continues to come from the United King-
dom-30 percent-with imports from Japan falling
by almost half since 1980, to 12 percent of imports.
? Qatar's import trade-$1 billion-is the smallest of
the GCC states. Doha's supply relations have
changed little since 1980, with the United Kingdom
providing about 22 percent of domestic imports.
GCC service trade-nonmerchandise financial
flows-is poorly documented but appears to have
undergone several major shifts in direction over the
past seven years.' Receipts from large foreign invest-
ments-an inflow of funds-have declined. This
largely reflects regional states' drawdown of reserves
to meet domestic financial needs-especially in Saudi
Arabia. Moreover, declining international interest
rates have reduced earnings on remaining invest-
ments. Imports of foreign labor and oil services-
maintenance, technology, and expertise-have also
declined, although a large net services deficit has
remained. The direction of regional services trade
appears to follow trends in merchandise trade. More
investments are being placed in East Asian countries,
and a larger share of labor and technology imports are
coming from a broader spectrum of developed coun-
tries and LDC suppliers.
' Services are a heterogeneous group of largely financial flows that
are usually related to, or help facilitate, merchandise exports and
imports. Services can represent an inflow or outflow of funds from
an economy. Commonly incurred services include freight and
insurance fees associated with merchandise imports, remittances of
nationals working abroad'.,or expatriates working in the GCC states,
or interest and dividends darned on foreign investments.
The cease-fire in the Iran-Iraq war has significantly
altered prospects for GCC oil sales over the next five
years. Iraq and, to a lesser extent, Iran have the
capacity to put up to 2 million barrels per day of
additional crude oil on world markets in the next
year alone. Nevertheless, we project that demand for
OPEC oil will increase by only about. I or 2 percent-
400,000 b/d-annually over the next few years.
Statements by Iraqi oil officials and analysis of Iraqi
oil policy goals suggest that Baghdad will attempt to
export as much oil as possible without triggering an
overall price collapse and will probably usurp any
increase in demand for OPEC oil. Such a policy
limits the likelihood of any significant increase in
GCC oil exports. Moreover, the possibility of higher
Persian Gulf oil production will probably put down-
ward pressure on prices over the next several years
and make them more volatile. As a result, we believe
prices will most likely average between $11 and $15
per barrel next year. This scenario would cause a
reduction in most GCC oil export receipts in 1989.
The reaction of the GCC states to higher Iraqi and
Iranian oil production will vary. There is little
cooperation between the GCC states on oil production
matters. Saudi Arabia probably will continue to use
its capacity to raise oil production to obtain coopera-
tion on oil production levels from other GCC states,
Iraq, and Iran. Riyadh is unlikely to accept a signifi-
cantly smaller share of OPEC production. Kuwait is
primarily concerned with maintaining its long-term
position in the market and supplying its downstream
operations and probably will alter its production as
necessary to maintain market share. The United
Arab Emirates has grown increasingly impatient over
low prices and probably will challenge any attempt by
OPEC members to impose a quota substantially
lower than 1.5 million b/d. The smaller states have
little recourse but to follow the lead of the larger
regional players in the oil market.
25X1
25X1
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The Trade Balance
The overall trend in trade relations has been the rapid
erosion of the large trade surpluses of the early years
of this decade. Whether with developed countries or
LDCs, the trend has been toward a greater balance in
trade. We estimate that the $58 billion trade surplus
of GCC countries in 1982 will decline to a projected
$18.1 billion surplus in calendar year 1988, a result of
the sharp reduction in oil prices since 1985. The large
trade surplus with Japan has fallen to $11.5 billion, a
60-percent decline since 1981. A declining trade
surplus with Singapore-$2.7 billion in 1987-is most
of what remains of the $20 billion surplus with LDCs
in 1981. There are, however, several exceptions to this
trend. The GCC's trade deficits with the United
Kingdom, West Germany, and, to a lesser extent,
France, have continued to increase as these states
expanded sales to the region and reduced their pur-
chase of regional oil. Trade surpluses with the United
States, the Netherlands, and Italy have increased in
recent years.
We believe that Gulf states' dependence on foreign
trade will remain high, despite efforts to establish
domestic industries to substitute for imports. National
markets are small and cannot sustain domestic pro-
duction of the broad spectrum of products local
economies need as they mature and become more
urbanized. Moreover, a paucity of natural resources,
expertise, and labor leaves little margin for compara-
tive advantage in the production of most goods and
services outside petroleum-based commodities. Even
in this area, however, efforts to establish a market
share will be difficult well into the next decade, and
profit margins will be constrained because of world-
probably will be most pronounced in Bahrain, Oman,
Saudi Arabia, and Qatar, which are experiencing the
greatest budget burdens relative to available financial
resources. Kuwait and the United Arab Emirates are
in the best position to maintain purchasing patterns on
the basis of factors other than cost.
As a result of shrinking government finances, interna-
tional trade relations probably will come under in-
creased financial and technical scrutiny. Quality con-
trol and delivery schedules will play a larger role in
determining the direction of trade, according to US
Embassy reporting. Moreover, we believe that the
direction of trade will increasingly be determined by
the degree of trade financing a supplier is willing to
provide. Regional governments have moved to redress
the problem of payment delays, but late payments
problems probably will remain a source of friction in
commercial relations in direct proportion to national
oil revenues.
In our view, the shift in consumption from the public
to the private sector will persist as long as government
revenues remain depressed. The trade mix probably
will continue to reflect a growing share of services and
consumer goods, especially durable goods and pro-
cessed agricultural commodities, and a smaller per-
centage of capital goods.
The trend toward production and export of petroleum
products almost certainly will continue as govern-
ments attempt to obtain more profit from their petro-
leum resources and circumvent OPEC strictures on
crude oil trade, according to US Embassy reporting
from the region. Kuwait is far ahead of the other
GCC states in establishing downstream outlets for its
refined oil products, but Saudi Arabia and the United
Arab Emirates are rapidly expanding their overseas
oil product marketing operations.
wide surplus capacity for petroleum products.
We believe that government revenue levels will play a
larger role in trade relations than in the past and will
magnify the impact of price changes in the years
ahead. As governments cut their spending to mini-
mum levels, they probably will sacrifice quality and
increase their reliance on lower cost suppliers-espe-
cially East Asian countries. We project that this trend
This change in the export mix will affect not only the
direction of oil sales, but also the impact that selected
GCC states may have on overseas markets. Although
it is unlikely, some GCC states could obtain consider-
able control over a specific range of petroleum prod-
ucts such as transportation fuels, especially in West-
ern Europe. We believe that, as the markets for GCC
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oil shift, there is a strong chance for a corresponding
change in the direction of imports, especially toward
East Asian economies that have a growing depen-
dence on GCC oil and an expanding capacity to
provide a variety of high-quality goods and services.
Services and spare parts trade probably will expand
along with imports of computer technology necessary
to control increasingly complex industrial processes as
the Gulf governments attempt to complete and main-
tain their economic infrastructure. We believe that
trade in all types of services, especially those at the
high and low end of the technology spectrum, are
likely to be in the greatest demand. GCC economies
have an acute shortage of skilled technicians who will
be in increasing demand as governments attempt to
improve their utilization of capacity and the efficiency
of public utilities and industrial facilities, according to
US Embassy reporting. Computer technology and
expertise will probably be in particularly high demand
as economic planners attempt to integrate production
processes and maximize output from existing infra=
structure. Maintenance services and spare parts most
likely will increase as a percent of industrial demand
as large-scale development projects advance in age.
A substantial shift in the direction, if not the mix, of
GCC trade is likely to accompany the end of the Iran-
Iraq war. US Embassies report that Kuwait and
Bahrain enjoyed a large and lucrative reexport trade
to Iran and Iraq before the war and are likely to
regain their status as major entrepots once the multi-
billion-dollar reconstruction efforts begin in the two
former belligerents. Construction and manufactured
goods, especially equipment related to the oil sector,
probably will dominate, regional reexport trade once
reconstruction begins. We believe that oil trade also
will undergo a significant change in direction. Higher
output in Iraq and, to a; lesser extent, in Iran probably
will hinder the growth of GCC oil revenues, according
to US Embassy reporting. Many GCC oil customers
may attempt to diversify their oil supply relations or
position themselves for reconstruction contracts by
increasing their purchases of Iraqi or Iranian oil.
Trade opportunities for Communist states remain
limited by the poor quality of their manufactures and
the lack of mutual trade needs. The GCC states have
had a small trade deficit with Communist states for
most of the 1980s. Both the USSR and China,
however, have increased their efforts to promote trade
with the region in recent years to improve their
influence in this strategic area, according to US
Embassy reporting. The USSR, for example, has
become a major participant in recent Saudi grain
sales. China, in particular, has made significant pro-
gress as an arms supplier to the region, most notably
in its multibillion-dollar sale of missiles to Saudi
Arabia. Oil remains the single area of long-term
mutual economic interest. Although the Gulf states
have not had a significant petroleum supply relation-
ship with Communist countries, East European states
probably will seek Gulf oil as Moscow husbands its
domestic oil resources. Nevertheless, we believe that
limited prospects for mutually beneficial trade and
daunting payment problems will continue to limit
GCC trade with Communist states-currently about
1 percent of total merchandise trade.
Increased US imports of GCC oil, coupled with
reduced US exports to the region, have left the United
States as one of the few trade partners-and the only
primary partner-with a growing trade deficit with
the GCC states. US merchandise exports to the
region, $5 billion last year, provided or affected the
jobs of about 500,000 US workers, according to US
Commerce Department estimates. Meanwhile, US
purchases of GCC oil, especially Saudi oil, have
increased from 300,000 b/d in 1985 to 1.2 million
b/d-18 percent of US oil and product imports-in
the first quarter of calendar year 1988.
The United States risks losing further trade opportu-
nities that are likely to emerge in the 1990s-when oil
prices are expected to rebound and postwar recon-
struction efforts in Iran and Iraq will be under way-
unless the deterioration in the/US market position is
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reversed. The United States faces formidable compe-
tition from a growing number of suppliers, according
to US Embassy reporting:
? Western and several Asian countries have vigorous-
ly pursued trade in the region and have responded
quickly to commercial openings, frequently appear-
ing more attuned to the regional business environ-
ment than many of their US counterparts.
? Foreign firms can now provide goods and technol-
ogy previously available only from US firms.
foreign suppliers also
frequently offer lower prices or concessional financ-
ing and make joint production arrangements in an
attempt to secure a long-term market presence.
? Foreign competitors have been more open to the use
of countertrade-bartering manufactured goods
and services for Gulf state oil-to obtain contracts,
an arrangement that has particularly improved the
advantage of many Third World countries in negoti-
ating trade agreements, especially arms sales.
? Foreign governments-especially Japanese and
West European-often cooperate with domestic
firms in marketing their wares.
Waning US commercial relations with the GCC
states also risks weakening US political and security
influence in this strategic region. The still large trade
deficits of many of the region's trade partners and
their growing dependence on GCC oil, on the other
hand, give ample incentive for these states-most
West European countries, Japan, and a growing group
of LDCs-to both strengthen political ties and in-
crease exports to the GCC. In our view, the US
military supply relationship probably is in the greatest
jeopardy, as indicated by recent large arms contracts
with the United Kingdom and China. Although the
GCC states almost certainly will continue to rely on
the United States as the ultimate guarantor of region-
al peace, Washington may, at a minimum, lose con-
trol over a large share of GCC military materiel as
the origin of GCC arsenals change; Washington has a
say in how US-origin military goods are used by
foreign governments.
Figure 7
GCC Military Equipment Agreements,
1979-88
Includes Chinese CSS-2 missile sale to Saudi Arabia.
b This does not include the well publicized Saudi letter
of intent to purchase 48 additional British Tornados, and
other military equipment. Although press reports place
the value of the deal up to 30 billion dollars, we believe
the value will be less than 20 billion dollars.
A general preference for US goods and services and
the lower relative value of the dollar, however, are
positive signs for US commercial prospects in the
region. Although it is too early to determine how
much impact the sharp fall in the value of the US
dollar will have, our analysis of preliminary trade
data does show a 2-percentage-point jump in the US
share of GCC imports in the last half of 1987 and
25X1
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early 1988; any change in the relative value of the
dollar is not reflected in regional trade flows for about
two years. The favorable change in the value of the
dollar should be enhanced by the still high regional
regard for US goods and technology. US Embassy
reporting suggests that many firms will choose US
goods first if prices are not too far removed from those
of competitors.
Although GCC states have curtailed development
spending, selected development projects are proceed-
ing and continue to offer opportunities for a variety of
goods and services from the United States. Govern-
ment emphasis on improving social infrastructure is
opening significant opportunities in the areas of urban
management, waste and water control, and transpor-
tation design-all areas where US expertise exceeds
that of most competitors. The shift in private con-
sumption toward more processed goods and consumer
durables also opens new doors for US trade.
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Appendix
Table A-1
Direction of GCC Exports, 1980-87
1980 1981 1982 1983 1984 1985 1986 1987
Includes OECD (19) economies.
b Includes Hong Kong, Malaysia, Mexico, the Philippines,
Singapore, South Korea, Brazil, Chile, Thailand, Pakistan, Indone-
sia, and Argentina.
Note: Because of rounding, components may not add to the totals
shown.
Table A-2
Share of GCC Exports, 1980-87
a Includes OECD (19) economies.
b Includes Hong Kong, Malaysia, Mexico, the Philippines, Singa-
pore, South Korea, Brazil, Chile, Thailand, Pakistan, Indonesia,
and Argentina.
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Table A-3
Direction of GCC Imports, 1980-87 a
a Excludes most military trade.
b Includes OECD (19) economies.
Includes Hong Kong, Malaysia, Mexico, the Philippines, Singa-
pore, South Korea, Brazil, Chile, Thailand, Pakistan, Indonesia,
and Argentina.
Table A-4
Share of GCC Imports, 1980-87 a
1980 1981 1982 1983 1984 1985 1986 1987
a Excludes most military trade.
b Includes OECD (19) economies.
Includes Hong Kong, Malaysia, Mexico, the Philippines, Singa-
pore, South Korea, Brazil, Chile, Thailand, Pakistan, Indonesia,
and Argentina.
Table A-5
Share of GCC States Balance of Trade
(Exports-Imports), 1980-87 a
Total
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Developed countries b
83.6
80.5
71.1
53.0
60.7
70.8
67.6
73.3
LDCs ~
16.8
19.7
29.6
48.4
40.3
30.7
35.6
29.5
a Excludes most military trade.
b Includes OECD (19) economies.
Includes Hong Kong, Malaysia, Mexico, the Philippines, Singa-
pore, South Korea, Brazil, Chile, Thailand, Pakistan, Indonesia,
and Argentina.
Secret 18
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Table A-6
GCC Exports to Developed Countries, 1980-87
19 Secret
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Table A-7
Share of GCC Exports to Developed Countries, 1980-87
1980 1981 1982 1983 1984 1985 1986 1987
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Table A-8
GCC Imports From Developed Countries, 1980-87 a
Japan
8.2
.9.9
10.9
10.8
9.1
7.6
5.6
5.8
West Germany
3.6
4.3
5.5
4.6
3.7
3.1
2.9
3.1
Belgium/Luxembourg
0.8
0.9
0.9
0.9
0.9
0.7
0.7
0.6
Switzerland
0.9
0.9
1.2
1.1
1.0
0.9
0.9
1.1
Austria
0.2
0.3
0.4
0.4
0.3
0.3
0.3
0.2
21 Secret
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Table A-9
Share of GCC Imports From Developed Countries, 1980-87
'United States 22.1 23.7 24.3 22.1 19.2 19.0 18.2 17.3
Table A-10
GCC State Share of Exports, 1980-87
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Table A-I1
GCC State Share of Imports, 1980-87 a
Table A-12
GCC States' Trade Balances (Exports-Imports), 1980-87
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Table A-13
GCC-OECD (19) Partner Export Trade, 1987
GCC Bahrain Kuwait Oman Qatar Saudi United Arab
Arabia Emirates
Billion US $
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Table A-14
GCC-OECD (19) Partner Import Trade, 1987
GCC Bahrain Kuwait Oman Qatar Saudi United Arab
Arabia Emirates
Austria 0.2 NEGL NEGL NEGL NEGL 0.1 NEGL
Denmark
0.4
NEGL
0.1
NEGL
NEGL
0.3
0.1
Table A-15
Composition of Regional Exports, 1980-86
Directional trade data may not include all countries. Disaggregat-
ed trade data for the GCC is not available for 1987.
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Table A-16
Composition Share of Regional Exports, 1980-86
Directional trade data may not include all countries. Disaggregat-
ed trade data for the GCC is not available for 1987.
Table A-17
Composition of Regional Imports, 1980-86 a
Disaggregated trade data for the GCC is not available for 1987.
b Excludes most military trade.
Table A-18
Composition Share of Regional Imports, 1980-86 a
Fuels
7.6
8.1
5.7
1.1
0.8
0.8
0.7
Manufactured goods b
76.7
77.4
81.1
85.0
82.3
82.6
79.8
a Disaggregated trade data for the GCC is not available for 1987.
b Excludes most military trade.
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Table A-19
Composition of Exports by GCC State, 1986
Total Trade Foodstuff Raw Materials Fuels Manufactured Other
Goods
Table A-20
Composition of Imports by GCC State, 1986. b
Total Trade Foodstuff Raw Materials Fuels' Manufactured Other
Goods
Disaggregated trade data for the GCC is not available for 1987.
b Excludes most military trade.
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Table A-21
Composition of GCC Exports to Developed Countries, 1986
Total Trade Foodstuff Raw Materials Fuels Manufactured Other
Goods
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Table A-22
Composition of GCC Imports From Developed Countries, 1986. b
Total Trade
Foodstuff
Raw Materials
Fuels
Manufactured
Goods
Other
Spain
0.5
0.1
NEGL
0.0
0.4
0.0
Australia
0.5
0.5
NEGL
0.0
NEGL
NEGL
Netherlands
1.3
0.3
NEGL
NEGL
0.5
NEGL
Disaggregated trade data for the GCC is not available for 1987.
b Excludes most military trade.
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Secret `~ -
Secret
Declassified in Part - Sanitized Copy Approved for Release 2012/10/15: CIA-RDP89SO145OR000600630001-2