Middle East–China Trade Prospects Remain Robust Despite Red Sea Crisis

commentary

Feb 9, 2024

A container ship passes an oil platform at the Gulf of Suez towards the Red Sea before entering the Suez Canal, outside of Cairo, Egypt September 1, 2020, photo by Amr Abdallah Dalsh/Reuters

A container ship passes an oil platform at the Gulf of Suez towards the Red Sea before entering the Suez Canal, outside of Cairo, Egypt September 1, 2020

Photo by Amr Abdallah Dalsh/Reuters

This commentary originally appeared on Al-Monitor on February 8, 2024.

Disruptions to shipping through the Red Sea and Suez Canal are likely to have only modest effects on Chinese goods trade with most of the Middle East but could lead to significant costs for China's global trade. China has relied on the route as the shortest path to supply Europe but also uses it to reach the United States and receives Russian oil imports via the Suez Canal. Focusing only on Middle Eastern trade partners, Turkey, Egypt, and Israel are the only major partners that will be affected by the higher shipping costs that come from rerouting ships from the Red Sea route to travel around Africa's Cape of Good Hope. Together, these accounted for an annual average of 17 percent of all goods trade between China and the Middle East from 2018 to 2022. China is likely to face additional costs through reduced use of the ports and other transit facilities in which it has been investing in Egypt and the Suez Canal area. These costs will likely be temporary, however, with shipping likely to return to the efficient Red Sea–Suez Canal route when Houthi attacks on shipping through the Bab al-Mandab gateway to the Red Sea cease.

Focusing strictly on China–Middle East goods trade, Chinese goods exports to the Middle East have grown in recent years, generally more rapidly than overall Chinese exports. In contrast, while China usually runs a goods trade deficit with the Middle East and relies on the Middle East more for imports than as an export market, China's imports from the region are more volatile. In both cases, despite the efforts of the region to diversify, these trade patterns depend on oil prices and are likely to do so over the medium term. Exports also rely on the role of the Gulf countries as an entrepot for shipments to other destinations. With Chinese exports likely to keep rising, the level going to the Middle East should also increase. Notably, between 70 percent and 75 percent of China–Middle East trade is with the members of the Gulf Cooperation Council, Iraq, and Iran, all unaffected by Red Sea shipping disruptions. Furthermore, the onward trade to Africa is unlikely to be affected directly by Red Sea shipping disruptions.

Chinese goods exports to the Middle East have grown in recent years, generally more rapidly than overall Chinese exports.

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Background Facts

  • This memo uses data from the United Nations Comtrade database, specifically Chinese goods imports from the Middle East and Chinese goods exports to the Middle East for each year from 2018 to 2022 and for the first nine months of 2022 and 2023.
  • The 20 countries and economies of the Middle East constitute only about 5 percent of world GDP, but China's trade with them as a share of total Chinese goods trade is much higher, reaching 7.95 percent in 2022 (6.28 percent for Chinese exports and 10.16 percent for Chinese imports).
  • The high Chinese import share is driven almost wholly by imports of oil and natural resources, and so the value fluctuates with oil prices. The export share is driven in part by high incomes in several regional countries and the fact that the Gulf serves as an entrepot for Chinese exports en route to Africa and elsewhere.
  • Chinese goods exports rose steadily from $140 billion in 2018 to $226 billion in 2022, and from $164 billion in the first nine months of 2022 to $179 billion in the first nine months of 2023.
  • Chinese goods imports fluctuated with oil prices, starting at $167 billion in 2018, falling to $131 billion in 2020, the first year of COVID-19, and then jumping to $277 billion in 2022, the first year of Russia's war on Ukraine, when the Russian invasion boosted already-rising oil prices. Chinese goods imports hit $207 billion in the first nine months of 2022 but fell to $173 billion in the first nine months of 2023.
  • Exports are highly concentrated by country, but imports are even more concentrated. From 2018 through 2022, the top three countries—always Saudi Arabia, Turkey, and the United Arab Emirates — received about 50 percent of all Chinese exports to the region. The top five received between 64 percent (in 2019) and 71 percent (in 2021 and 2022). Egypt was always one of the additional two countries, while Iran was the fourth in 2018 but fell out of the top five the next year, with Israel replacing it. In fact, China's share of exports to the Middle East that went to Iran fell steadily from 9.9 percent in 2018 to 4.2 percent in 2022.
  • From 2018 through 2022 the top three countries from which China sourced imports accounted for between 53 percent (2018) and 59 percent (2019 and 2022) of all of China's Middle East imports. These top three always included Saudi Arabia, the region's major oil producer, and Iraq, into which China has made significant investments in oilfields and oil infrastructure.
  • Iran had been in the top three in 2018 among sources of Chinese imports but was replaced by Oman in 2019 and 2021 and by the UAE in 2020 and 2022. In fact, Iran's share fell from 12.6 percent in 2018 to 2.3 percent in 2022—at least in official statistics. Iran's oil exports have actually been rising in quantities and values since 2020, and Iranian oil has been labeled as coming from Oman and the UAE. In 2022, China's trade statistics (as reported in U.N. Comtrade) showed that 28 percent of its imports from the region came from Saudi Arabia and 13 percent came from Oman. This is surprising given that in 2022, Saudi Arabia produced 12.1 million barrels of crude oil per day, whereas Oman produced 1.1 million barrels per day.
  • The sectoral distribution of China's exports to the Middle East is almost exactly the same as the sectoral distribution of China's exports to the world. From 2018 through 2022, China's exports of manufactured goods, machinery, and transport equipment ranged from 86.5 percent to 89.6 percent of its total exports to the Middle East. China's exports in these three sectors to the entire world the same year ranged from 85.2 percent to 87.9 percent of its overall exports.
  • In contrast, China's imports from the Middle East are highly concentrated in hydrocarbons and industries that rely on hydrocarbons. Imports of Middle East hydrocarbons as a share of China's total Middle East imports ranged from 73.0 percent in 2020 to 83.8 in 2022. Combined with imports in the chemicals industry, which includes petrochemicals, the share ranged from 88.5 percent (2020) to 92.4 percent (2022). In contrast, hydrocarbons constituted between 13.2 percent and 19.7 percent of China's worldwide imports, and hydrocarbons and chemicals constituted between 23.5 percent and 29.5 percent.
  • As of 2023, even with Middle Eastern countries attempting to diversify their economies, economic relations with China remain highly dependent on China's consumption of hydrocarbons and oil prices. While this relationship is likely to remain in the medium term, changes might occur.

Alternative Scenarios

Scenario 1: Chinese Manufacturing Exports to Mideast Expand

Chinese exports of manufactured goods to the Middle East might increase at a rate faster than they have grown before, taking advantage of the region's central location that allows it to serve as an intermediary station for goods exports beyond. Faced with a growth slowdown and an inability to gain further growth from real estate investment, as it had through much of the 21st century, China is likely to increase its investment in and subsidies for manufacturing. Since Chinese consumption is unlikely to rise as much as production, the new production will need to be exported, and the Middle East provides an excellent way station.

Scenario 2: China's Imports of Hydrocarbons from Mideast Fall

Through its expansion of the use of coal, nuclear, solar, and wind energy, and the fact that Russia has become much more dependent on China as a market for its hydrocarbons since Moscow's full-scale invasion of Ukraine in February 2022, China's imports of Middle East hydrocarbons may fall. This would dent regional current accounts and lead either to regional exporters needing to redirect their exports elsewhere, lower prices, or both—neither of which are favorable outcomes for the region. Such a scenario provides further encouragement for diversification.

Scenario 3: Red Sea Tensions Lead to Permanent Disruption

A third, low-probability but high-impact scenario might emerge if disruptions to the Red Sea are prolonged and bring about permanent reluctance to use the route. China has made significant investments in the Suez Canal area, specifically in the China-Egypt TEDA Suez Economic and Trade Cooperation Zone. TEDA is the Tianjin Economic Development Authority, the zone's operator. By mid-2023, this zone had attracted more than $1.6 billion in investments and hosted more than 140 companies. Any dependence they have on shipping routes through the Red Sea will prove negative to them, at least in the short term. However, by late January, businesses were already starting to adjust, with smaller Chinese ocean carriers starting new Red Sea routes on the expectation that because they are Chinese, they will not be attacked by the Houthis.

Conclusion—Most Likely Scenario

Over the medium term, the Middle East's goods trade relationship with China is unlikely to change a great deal.

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Over the medium term, the Middle East's goods trade relationship with China is unlikely to change a great deal. Even at reduced growth rates, China's economy is still expanding, and China will continue to need hydrocarbons. It will also want to balance imports from Russia against those from the Middle East, not becoming overly dependent on either. In terms of China's exports to the region, even with economic diversification within the region, trade patterns are likely to remain the same, with the region buying Chinese manufacturers' goods. China's cost and quality advantage is high. Regional diversification, if successful, may be as much about service sectors such as tourism—which will lead to increased demand for manufactured goods—as it is about manufacturing, such as the food products industry. Furthermore, attacks on shipping in the Red Sea are likely to cease at some point, and the economics of the route will bring back robust trade and a return to normal, although exactly when cannot be projected.


Howard J. Shatz is a senior economist at RAND and a professor of policy analysis at the Pardee RAND Graduate School. He specializes in international economics and national security and in international development. His research has covered China's role in the developing world, technology development in China, great power competition in the Middle East, and socioeconomic policy issues in several Middle Eastern countries.