Intra-regional trade within the Red Sea region is improving but still falls behind other regions, according to research published by the Red Sea Foundation.
The report showed that intra-regional trade flows between Red Sea member countries have increased significantly as a share of total merchandise exports over the past 15 years, roughly doubling from 8 percent in 2000 to 16 percent in 2015. Nevertheless, the Red Sea’s intraregional share of trade still ranks well behind other regions, such as the EU (63 percent), NAFTA (52 percent) and East Asia & Pacific (45 percent).
Intraregional trade in non-oil merchandise is higher, at 35 percent, still well behind the shares of the EU, NAFTA and East Asia & Pacific trading blocs.
Regional trade within the Red Sea is heavily weighted toward GCC countries, with over half of intra-regional Red Sea non-oil exports originating from the UAE (40 percent) and Saudi Arabia (16 percent). The largest bilateral exports flows of merchandise goods are UAE to Oman, UAE to Iraq, UAE to Saudi Arabia, Saudi Arabia to UAE and Oman to UAE. Kenya, the largest sub-Saharan African exporter to the Red Sea region, accounts for only 2% of the total.
“The Red Sea Region will be a crucial theatre of global history in the years ahead. It deserves extensive attention from the global community,” said Dr. Lawrence Summers, Charles W. Eliot University Professor and President Emeritus at Harvard University and former US Secretary of the Treasury. Dr. Summers is a member of the Red Sea Foundation Board of the Trustees.
“The Red Sea region’s mix of wealth and low cost base, as well as diversity in endowments and production capabilities, should generate strong incentives for intra-regional trade,” said Dr. Maliha Hashmi, Executive Director of the Red Sea Foundation. “This study suggests that more should be done to help the region better integrate with the world economy and, like other economically dynamic regions, take full advantage of the potential benefits of international trade.”
One explanation for the lack of intra-regional trade is the similar resource endowments, production capabilities and export structures among the Rea Sea economies. GCC exports focus around energy-intensive industries and hydrocarbons. Sub-Saharan experts are weighted more toward agriculture and minerals.
However, the report notes that the spread of per-capita GDP across the region should generate incentives to engage in trade driven by product differentiation. For example, around 30% of Sub-Saharan Africa’s non-oil exports are food products and GCC countries are relatively large importers of food. Yet GCC countries source the majority of their food from outside the Red Sea region despite the fact that transport costs should be lower importing from neighboring Red Sea countries.
Equally, the GCC countries import a significant amount of manufactured goods and machinery & transport equipment, yet no Red Sea economy has developed the industrial capabilities to meet this demand.
“For the Rea Sea region, regional trade integration is a logical first step towards greater global trade integration beyond commodities,” said Dr. Hashmi. “Understanding the dynamics, opportunities and challenges that characterize this diverse market is key to informing the policies and initiatives to encourage that integration.”