Gulf Under Pressure: Trade Routes, Investor Confidence, and the China Factor

Since February 28th, Gulf states have faced an unprecedented test: blocked shipping lanes, reduced energy production, and a geopolitical risk premium that has shaken investor confidence. How are they holding up and what do they want from a lasting deal? On this episode, Host and TAG Senior Advisor Mira Rapp-Hooper speaks with Ahmed Helal, TAG managing director for the GCC, about how countries like Qatar, the UAE, and Saudi Arabia have leaned on aviation networks, cross-border integration, and sovereign wealth funds to weather the storm. They explore what a "good deal" looks like from a GCC perspective, how Gulf nations are accelerating their energy transition, and how deepening ties with China are reshaping the region's strategic calculus — even as the U.S. security umbrella remains irreplaceable. 

What Comes Next with Mira Rapp-Hooper is produced by Rivan Dwiastono, executive produced by Lauren Dueck, with editorial input from Prashant Jha. It contains music by Cody Martin via Soundstripe. 

What Comes Next is a production of The Asia Group, and is powered by TAG AI, TAG's geopolitical decision engine for businesses.

Transcript

SPEAKER_00 0:00

What is a good deal from the perspective of the GCC?

SPEAKER_01 0:03

A good deal would ensure that freedom of negative navigation in the Strait of Hormuz and the integrity of their energy infrastructure becomes the collective obligation of uh world powers. China and the Gulf have been increasing their interdependency uh in domains other than oil and gas.

SPEAKER_00 0:30

With President Trump's announced blockade of the Strait of Hormuz taking effect and a deal between the US and Iran still elusive, we are not only lucky to be joined by today's guest, but very lucky that Ahmed Halal has just recently joined the Asia Group. Ahmed is now managing director for the Gulf here at the Asia Group, where he advises clients on navigating political economy issues of the Middle East and the many facets of the Gulf Asia relationship. Ahmed is a deep expert on regional fiscal, energy, and security issues and has previously worked for the government of Qatar. Let's give a listen to our conversation. Ahmed, thanks so much for joining us on what comes next.

SPEAKER_01 1:12

Thank you for having me.

SPEAKER_00 1:13

You're coming to us, Ahmed, from the Gulf at a fascinating and critical time for the global economy and so much more. President Trump announced in recent days his plan to blockade or partially blockade the Strait of Hormuz. And of course, that blockade puts Gulf countries in an impossible position. They depend on the strait for their food, their energy exports, and their trade. And of course, uh, living in a world in which the United States and Iran have just a week left on their ceasefire and have not been able to fashion a deal creates a sort of Damocles hanging over this blockade. How do you expect Gulf countries to navigate these incredibly challenging incentives in the week plus ahead as they seek to find a pathway to restore stability and security to their region?

SPEAKER_01 2:09

Sure. Thanks, Mira. The truth is that the Gulf states have been under this blockade effectively since February 28th, when the waters of the Straits become on became unnavigable. And it became worse as the conflict uh progressed. So they've they've had to recalibrate uh their supply chains and the arrival of uh key uh uh commodities. Uh obviously the the energy facilities uh have partially been shut down uh in Qatar and Saudi. There's been reduced production in all of these countries because uh they're unable to uh vessels are unable to leave uh uh to destination uh markets. But uh the the fact that they've built very strong aviation capabilities over the last 10, 20 years means that they've been able to charter flights and use their status as top 10 cargo players. I'm talking about in the case of Qatar and and the UAE, the National Airlines, to make sure that produce, perishables, and medicine uh has been flowing in um into the country with no disruption. And living here in the Gulf as a consumer, we've we witnessed that. And the same goes for food. Uh we've we've we've not not seen any stockouts. There have been um, there's also been support, price support, subsidies for um, because obviously flying this stuff in is much more expensive than bringing it on on ships or by land border. Uh so there's been subsidies to to maintain um uh uh price stability. And there's also been much greater integration between states uh that border each other. So uh to give you an example, Saudi and Qatar have relaxed many of the uh uh border crossing requirements and the custom uh clearance requirements to accelerate the the crossing of trucks uh from Saudi, because in the case of Qatar, it's only got one land border with Saudi. And so that that's been a um the conflict has been a catalyst for um integration uh between Saudi and Qatar, between the UAE and Saudi, and between uh Oman and the UAE uh in terms of regional uh logistics. And so they can uh they can really uh thank uh the efforts that they've made to build logistical hubs, uh whether maritime uh hubs or aviation hubs over the last 10 or 15 years.

SPEAKER_00 4:51

That's fascinating. And I want to come back to this sort of catalyzation of further integration um later in our conversation, Ahmed. But before I do, um want to just pull on the thread of how this war changes the structural role for the Gulf. Exactly as you've been saying, um, Gulf countries have been investing in themselves as technology hubs, in as financial hubs, as tourism hubs for the last many decades. Uh, but of course, not only has the war itself shaken the region, but Iran's explicit decision to retaliate against Gulf neighbors as part of its horizontal escalation strategy has really shaken some investor and business confidence in the Gulf as that booming hub that we've seen over the course of the last couple of decades. How do you see them working to try to regain investor and business confidence, assuming that some form of ceasefire holds and this conflict can be wound down in the coming weeks?

SPEAKER_01 5:55

Certainly. I I think that the the the Gulf fundamentals remain the same. Uh clearly this disruption is unprecedented, and the geopolitical risk premium attached to the Gulf is much higher after February the 28th. But uh these are uh Gulf states that maintain very robust financial uh buffers. Uh they are extremely credit worthy. Uh they will be able to spend, to grow themselves out of the inevitable economic contraction that will be seen. We're talking about uh an economic contraction of 15 to 20 percent of GDP in some cases, which is which is really material. Um and I and I think that there'll be a natural response to uh rationalize spending and and and look at priorities like defense and security, uh, but it won't, I think they won't, um they've learned from previous crises not to uh uh entrench entirely. I think you'll you you will see them uh they've made progress on on many economic diversification priorities, in some cases uh reached targets, and they they will want to avoid um grounding those to a halt because of uh the crisis. Uh they'll can they're gonna continue to invest in um uh non-hydrocarbon sectors uh like uh AI, uh uh like the EV supply chain, like being being part of the uh life sciences, uh and you know, attracting uh players into their mining and petrochemical industries and moving up moving up the value chain. So has has investor confidence, has investor sentiment been affected? Absolutely, and I and and there will there will be now an expectation that all of these uh companies that have been attracted to the Gulf and the financial services space and that they will have business continuity plans in place uh if if if this uh flares uh back up. But I think the fundamentals are really there. You have uh very strong uh sovereign uh wealth funds that uh are betting on long-term uh long-term technology and long-term uh trends uh such as the the data centers for for for AI. And that will uh continue, and that will there's too much on the table for international partners to leave behind in the Gulf. So I think once you have an enduring ceasefire, uh they uh the there are gonna be a return to normalcy fairly quickly.

SPEAKER_00 8:32

Okay, that that's that's great to hear, and I think a persuasive case. Um again, I want to pull on the thread of either enduring ceasefire or some kind of enduring deal, right? Better than just a ceasefire. Uh, as the United States and Iran are finding it elusive uh to strike some sort of a deal, um, you know, given their talks over the weekend that uh appeared to fall through. What are you hearing Gulf countries prioritizing in a deal? Are GCC nations looking for particular stipulations that they want to see Iran and the United States fulfill that will help them get back to that place of greater stability and investor confidence more quickly? Put differently, what is a good deal from the perspective of the GCC?

SPEAKER_01 9:19

A good deal would ensure that freedom of negative navigation in the Strait of Hormos and the integrity of their energy infrastructure becomes the collective obligation of uh world powers. Uh the uh energy security uh has been affected worldwide. Uh Asian economies have been uh thrown into chaos. Uh the aviation economy globally, you're seeing jet fuel prices and jet fuel shortages uh affecting uh the travel industry and tourism industry. And you have um inflationary effects that are going to hit every corner of the globe. Uh Asia has been bearing the brunt of it immediately, but that's going to migrate to uh Europe and even though the US is an energy abundant and net energy exporter, has been feeling it uh uh uh at uh uh at the level of refined products and fuels and chemicals, and indeed uh the price of gasoline at the pump for Americans. Uh so the the Gulf will use that pressure on the global economy uh to urge uh world powers, East and West, Europe, Asia, the United States, that their energy for infrastructure is critical for global energy security and global price stability and for the for the functioning, the the basic functioning of export industries in in China and and the rest of the world.

SPEAKER_00 10:52

And talk me through just a little bit further, Ahmed, what that means in terms of kind of medium to long-term patterns. I mean, you said very clearly Gulf states want to see the Straits of Ramse remain open and freedom of navigation guaranteed. Do they also want to diversify the Gulf energy architecture to reduce the risk that we see the same type of bottlenecks that have been in place now since February 28th?

SPEAKER_01 11:16

Certainly. And and that train had had left the station. And that the the energy transition, you know, mo most of the most of the world thinks of uh petrostates as you know, the Gulf states are entirely reliant on hydrocarbons. And of course, that you know, between 60 and 80 percent uh or 50 and 80 percent of fiscal receipts um uh oil and gas is responsible for for uh uh much of much of fiscal receipts in in these governments. But they recognized uh a long time ago that A, this is a finite resource, and B, uh burning natural gas, burning crude oil in the case of Saudi to generate uh power, generate electricity, to uh expand grid capacity for data centers is uh uh you know needs needs to stop uh for environmental reasons, but also to free up uh those commodities for international export and to generate more income to invest in in other industries. So the MV transition is very much in motion, although from a low base in the Gulf. And indeed, the UAE and Saudi outside of China are the fastest deployers of uh solar and wind capacity globally. And uh if if you know if if you can look at you look at the irradiation levels, the solar irradiation levels in the Gulf, um, you can get some of the lowest unit costs uh for operating a solar farm uh in the world. Uh you do you you have to find the technology, however, to deal with the humidity and the and and the uh sandy conditions in the Gulf, but they are working on optimizing that technology every day. And it has to be said, they're working primarily with the the superpower of this domain, which is uh China. Um and that was the subject of is the subject of many uh uh G2G engagements between the Gulf and China.

SPEAKER_00 13:10

So I want to pull on that thread, Ahmed. This is something um that we've been thinking about at the Asia Group over the course of the last few weeks. Uh, we of course know that China has dominance in manufacturing various grid components and certainly in the solar industry. So while this conflict with Iran has exposed the energy security risk of reliance on Middle Eastern oil and gas, and Gulf nations are seeking to diversify their own power mix, does this inevitably result in a sharper turn towards dependence on China and partnership with China from those Gulf countries?

SPEAKER_01 13:51

Yes, but I think it's a two-way street. Uh I think the the hyper competition in this industry uh from A to Z in China, from small components to uh turbines to uh uh solar PV is uh it's a hyper competitive space, and the the term for that has become famous now involution. Um and so the the Chinese exporters to survive, innovators to survive, have to internationalize. They have to access new markets. And the Gulf has always been a soft landing market for them. They've always tended to grow to grow with the Gulf as as the proof of concept. And the the the the revolution for that we observed with Huawei's Huawei taking over 5G hardware globally started with partnering uh with Saudi Arabia and uh and and providing a reliable um uh a reliable technology at a competitive price, and and we're that's where we are today with with with Huawei's dominance of that uh space globally. So on one hand, the Chinese are are are going to be very persistent and uh uh adamant to dominate the market in the Gulf, and and they have an edge over the rest of the world already. And uh the the the Gulf and China are already big trading partners. China surpassed uh the entire advanced economy uh uh Eurozone and US and UK combined as a trading partner uh with with the Gulf some years ago, I think in 2023. Uh uh yes, that's dominated by hydrocarbons, but increasingly it's it's capital going from the Gulf into cutting-edge Chinese industry, uh, including uh life sciences, including uh chip design, uh social, social media and e-commerce. Uh so you you've got uh national champions like uh QIA and G42 in the UAE uh buying stakes and and and companies like Byte Dance, and we can talk about that uh in terms of the sensitivity that creates vis-a-vis vis-a-vis the US. Uh but the the uh China and and the Gulf have been increasing their interdependency uh in in domains other than oil and gas considerably. And that's going to that's going to continue. And we see the evidence of that. The crown prince of of the UAE, Shacharad Ben Zaid, uh, is is is in the midst of a two-day or three-day trip uh to China. He's being hosted by the president, by a president C. Uh and uh they're talking about these very sectors. They're talking about enhancing the comprehensive strategic partnership that they have through uh welcoming uh Gulf Capital into the areas that are prioritized in in the five five-year plans of China, which is to say robotics, um the uh energy transition, uh, and uh electric vehicles, and uh and of course AI and chip design, semiconductors, which is a pain point for uh for China. And by the way, China has also become, to my point about two-way street, has been an exporter of capital to the Gulf. They they're they're not just bringing expertise and technology, they're also uh through their investment banks and their uh the state-backed banks, they are financing big infrastructure projects across the Middle East, including in in NEOM and the big uh uh vision projects in Egypt, transportation infrastructure. They are uh part of the Belt and Road Initiative. You know, the Gulf is a very important node in the Belt and Road initiative, particularly in maritime assets uh from uh in Egypt to uh Jabal Ali and and and uh uh the the rising uh coastal uh ports of Saudi Arabia. So it's a two-way street and it's it's going to really intensify.

SPEAKER_00 17:48

That's a great explanation, Ahmed. Um, and I think you know you you've laid out a good case for why we should um see that two-way street kind of intensifying as Gulf countries hopefully begin to recover from this conflict. I do want to um take you up on a seed you planted in that great answer and have you tease out for us how Gulf countries think about managing political risk between the United States and China, in particular when they are making explicit decisions to invest in strategic sectors that China has identified in its five-year plan, and in particular, sectors that are so known to be at the heart of US-China competition, like semiconductors. How do they calculate how to keep their very important security relationship with the United States intact and protected at a moment like this, while also leaning forward, as you said, um, you know, the crown prince with Xi Jinping right now, talking about some of these very types of deals, particularly with a Trump Xi summit upcoming. Um, one might imagine this gives a little bit more maneuvering space to Gulf countries who um may find themselves a little bit more easily able to play both sides. But how do they make that geopolitical calculation in a particularly perilous moment like this one?

SPEAKER_01 19:08

I think the trip from the the Crown Prince of Abu Dhabi is highly symbolic and it's signaling to the US that uh they will uh the UAE's foreign policy is going to be uh independent and it's going to maintain strategic optionality. And that's been a that's been true to the character of the UAA, both in its foreign policy regionally and in its its um proactiveness in in and in in the SEPA program, that they have the comprehensive economic partnership agreement program. They've signed uh uh really large trading deals with some of the biggest Asian economies and some of the African economies and and and European economies, from Turkey to Indonesia to Israel to uh uh South Korea uh to India. I mean, the gold standard of that program is the Indian trade deal, two partners that were already doing a lot to with each other and uh are are going to expand and have been lowering tariffs and non-tariff barriers between them. So um it's it's it's highly symbolic in telling the US that uh the uh the US isn't the only game in town, and the the the reliability of the US has now been called into question as a as a security partner for having dragged the Gulf as a as a as a collateral in this in this uh war of choice, um and in the demands that they make of uh uh Gulf countries and who they who they work with and who they partner with. Um Huawei and and stripping uh Huawei hardware from uh telecom networks. Um that was uh done as a concession uh from the UAE to uh be able to partner with the likes of NVIDIA and to uh secure shipments of of the latest uh AI chips from from NVIDIA. Um they also divested from from ByteDance uh their stake in ByteDance in order to uh again please the Trump administration and and give them comfort that they are all in uh uh with American AI uh know-how and uh with with partnering. They're they're in an AI marriage with the United States. Um but I I uh I I think it's a difficult balancing act, and it's going to be more difficult after this conflict because they uh want to keep their options open, and uh China is a willing and capable uh partner in all the ambitions that the UAE, that the Saudis, and that the Qataris have in uh the post oil uh i economy. So um it's there are some clearly you know America's loss isn't automatically Asia or China's uh gain. It's this is not it's not a it's not a zero. Sum binary thing. Because the these the strategic partnership with the US has been built over 80 years. And the footprint that America has militarily in the region cannot be rivaled, it cannot be replaced. And indeed, American patriot patriot systems and THADs and the defensive equipment that they've got from the US has performed remarkably well. Most of the threat has been averted, and of course, there have been uh there's been some impact, there's been huge impact on energy energy infrastructure, but things could have been much, much worse. And so the the reliability of those systems has been tested, but uh the commitment of the US to to Gulf security has been thrown into question. So they'll continue uh to diversify their their uh alliances, knowing the red lines that America has, uh that the US has. Um and those will those will be a you know a handful of things. One obviously is is um uh uh dual use technology, so uh drones and uh surveillance uh technology, and also working on things like ballistic missiles and having Chinese bases in in the Gulf. That's going to be a real red line from a US uh perspective. Uh so the and I think the Gulf as middle powers have have gained um a lot of noose in in uh balancing that uh in playing that balancing act. Again, I went on for a long for for for a little while there, but it's it's uh it's been a real uh really played out in the US Gulf relationship over the last two years.

SPEAKER_00 23:44

No, I think this is an incredibly useful um and detailed picture that you've laid out for us, Ahmed, and you've given us so much to think about and to watch for as Gulf countries continue to watch and wait uh around the dynamics of this conflict and to position themselves, not just to be resilient and recover from an incredibly turbulent last couple of months, but to position themselves over the medium and long term to accelerate their own economic and development ambitions through partnerships with both the United States and China. Thanks so much for being with us here today.

SPEAKER_01 24:22

Thank you so much.

SPEAKER_00 24:24

In reflecting on my conversation with Ahmed, I am struck by the fact that this two-way street of investment and diplomatic connection between the Gulf and China may only accelerate as a result of the US and Israel conflict with Iran. Gulf countries are clearly incredibly strategic when it comes to the way they're positioning themselves with China and thinking not just in the short or medium term about how to get past this conflict and re-establish stability, but thinking in the long term about how to establish themselves as critical partners to Beijing. Particularly as a formal peace settlement remains elusive, I'll be watching to see how Gulf China relations continue to evolve and solidify. Today's episode was produced by Refund Dewey As to know, executive produced by Lauren Dewick, and with editorial input from Prashant Jaw. It contains music by Cody Martin via Soundstripe. What comes next is a production of the Asia Group and is powered by Tag AI, Tag's geopolitical decision engine for business. We'll see you on the next episode.