Economic Performance of UAE
Global trade has become a great part of the worldwide economy through the globalization different economic industries and business spheres. International commerce development supported by lower logistics costs and telecommunications development ruined a great part of trade barriers that existed previously. As a result, competition among the national and international companies has grown considerably and has led different countries’ authorities to plan more effective ways to becoming leaders on the international markets. International trade has become the vital component of the country’s economic prosperity.
Economic performance of UAE has been known as quite successful, especially during the period since 2005 ant until the global crisis of 2008. The GDP of this country has been gradually growing, and not only the oil industry, but also in the service sector, real estate and manufacturing. There spheres have rather favorable conditions for development. However, the crisis of 2008 influenced the economies of practically all countries, including UAE. Even with the considerable decrease of numerous economic indicators, the situation has begun improving in the past decade. By the means of international trade development and trade barriers decrease, UAE has enormous benefits for business representatives and physical parties.
International Trade Overview
Trade is a crucial activity for the economic development of countries, especially in the rapidly globalized world. In order to trace the tendencies of its development, it is necessary to pay attention to the changes in export and the GDP of the country. The growth of these both indicators is a positive change directed at the entire economic growth of the country. According to the data reported by ECC (2012), the world exports have grown from $5 trillion US to $11 trillion US during 1994 – 2009. This made up the total increase of 120% (ECC, 2012). Nowadays, the UAE has become one of the world’s most popular and widely chosen trade and logistic hubs. According to the Ease of Trading across Borders, UAE has obtained the fifth position among 183 other countries (ECC, 2012).
UAE is known not only as a rapidly developing country, but also as an essential economic center of the Middle East. Primarily the oil industry is the basic source of prosperity and economic growth of the country that attracts a number of foreign investments and workforce. International Trade Center (2014) reports that three quarters of the Emirati population nowadays consists of expatriates. However, during the past decade, the UAE authorities have established the aim to reduce the country’s dependence on oil industry in order to develop such sectors as tourism, construction and booming businesses (ITC, 2014). With the leading export center in Dubai, the country is the third largest exporter in the world. Prosperous sectors are electronic equipment and appliances, precious metals and stones. As for the first and second world places for export, the statistics show Hong Kong and Singapore.
UAE became a member of WTO in 1996 (ITC, 2014). It was the founder of GCC in 1981 (ITC, 2014). Such memberships provide a number of free-trade benefits based on the agreements between GCC -EFTA and GCC – Singapore (ITC, 2014). One more agreement that assists the country trade development is the Great Arab Free Trade Agreement (GAFTA).
In general, the trade regime in the UAE can be defined as open, low-tariffed and with only a few barriers to trade that are not related to the tariffs. The openness of the country’s economy aimed to raise the UAE’s prosperity was initiated before the global crisis of 2008. Its main task is economy diversification, as mentioned above. The investment regime is more restrictive, however. However, foreign ownership apart from the domestic companies are allowed throughout all of the UAE’s free zones.
The main restraining factor for the fast development of the UAE’s economy was the global financial crisis. Between 2009 and 2010, the GDP growth showed 1.4%, while before the crisis it was recorded as 5.5% (see Appendix 1). After the crisis, the reduction of GDP growth was caused by decreased oil prices and disorder in the financial markets. As a result, the authorities made a decision to support banks by the means of various liquidity and deposit guarantees as well as recapitalization (ECC, 2012). The increase of the economic debt of the government-related enterprises also demanded some peculiar decisions and led to the application of special rescue packages for GREs. Fiscal deficit was also reduced due to the increased spending, producer subsidies and transfers. After all, the carefully planned infrastructure of Dubai Trade became a key contribution to the goods and services trade in UAE. All in all, UAE’s trade appeared to be innovative and effective on the way to anchoring easy, fast and cost-effective policies for the international trade infrastructure.
Major International Trade Indicators
International Trade of the UAE has started growing considerably since 2012. Import as well as export indicators of the country have increased (All UAE One, 2013). In general, exports increased by 7.4% ($302 billion) and imports grew by 9 % ($220 billion) (see Appendix 2). Non-oil foreign trade was reported to have grown by 15% in 2012 (All UAE One, 2013). All these indicators opposed the world ones that were falling instead of growing. The world trade decrease in 2012 was 2%, but the UAE obviously avoided such deceleration and uncertainty. The reasons for such success were mostly determined by Abu Dhabi’s energy potential. The oil and gas sector was the most profitable one for the country at the period and comprised 42% of export in comparison to the previous 32 %, while crude oil exports increased by 40.6 % in 2012 (All UAE One, 2013).
Another factor that had considerable influence on the UAE’s international trade development was “Dubai’s Booming Gold Trade” (All UAE One, 2013). With the strong demand in the wholesale and the retail jewelry segments, Arab world became the top gold market. Trade in this sector was estimated as at least $70 billion in 2012 (All UAE One, 2013). Moreover, the UAE’s healthy trade surplus reached $82 billion in 2012, which became the highest number in the entire history (All UAE One, 2013).
The next year, in 2013, UAE reported a trade surplus that equaled 503694 AED Million (Trading Economics, 2015). The average indicator for the balance of trade in 2000-2013 was 200946.64 AED Million with the highest indicator in 2013 of 503694 AED Million and the lowest one in 2001 of 40840 AED Million (see Appendix 3). As reported by the Central Bank of the UAE, trade surpluses since 2000 has mostly been predetermined by shipments of oil and natural gas. These sectors covered 40 % of the country exports (Trading Economics, 2015). At the same time, major import industries included precious metals and stones producers, machinery manufacturers and transport vehicles makers.
Among the main partners of the UAE, India accounts for 14% of total exports and 17% of imports (Trading Economics, 2015). In addition, UAE closely cooperates with Japan, South Korea, China, United States and Iran. Appendix 4 shows the distribution of UAE export throughout the partners.
As for the relations with the US, United Arab Emirates can be defined as one of 30 greatest partners. In 2013, the total of the traded goods between the two countries was $26.9 billion. Within this number, $24.6 billion accounted for imports and $2.3 billion – for exports (Trading Economics, 2015). Among the main categories for export in 2013, aircraft, vehicles, electrical machinery, machinery, precious stones and metals may be distinguished. The US exported to United Arab Emirates such agricultural products as tree nuts, hay, and fresh fruit. The largest import categories in 2012 included special other (returns), aluminum, mineral fuel and oil, fertilizers and precious stones (mainly diamonds).
Economic Challenges and Opportunities
On the international market, competitively priced products experience a number of barriers. Typical challenges for the firms may vary from the transparent tariffs and taxes to opaque non-tariff barriers. This issue was especially disturbing one for the WTO. However, it appeared to be quite a difficult task to free the foreign prices of such impediments. Doha Round that has started in 2001 has not been successful in making this progress. Therefore, the FTAs became the aims of the countries oriented towards export and import development.
Trade barriers for the UAE are quite low, as the country’s authorities have put maximum efforts into decreasing them. Among the advantages that have become common for Emirati business one can point out improved access to international markets and various imported technologies, possibility to obtain competitively priced goods and services. Moreover, high competition on the local level is a possibility to improve and accelerate structural transformations and overall attractive business environment for the foreign investments. It is obvious that the high trade level has become effective in opening new market opportunities.
Public debt is probably the main challenge on the way to trade development of the UAE. In 2013, it was recorded at 16.70 % of the country’s GDP (Economic Trade, 2015). It also varied from 2.7% to 23.40 % during the 2001-2009 period (see Appendix 6). Even though such indicators are not high in comparison to the world average, they need to decrease in order to raise the UAE government bond yields and raise the future borrowing costs of the country. Even though it is difficult to count the exact impact of trade on political stability, trade development has obviously caused a great impact on the growing welfare of the country. For instance, in 2009, it has saved 17% of the UAE’s GDP (ECC, 2013).
The growth of international trade indicators of the country is obvious. In 2008, the World Bank ranked the UAE as the 24th out of 183 countries. In 2012, this rank was improved to the 5th place. (ECC, 2013). Economists have put great efforts into analyzing the reasons and policies that contributed to such changes.
Above all, the geographic location of the country has provided it with the competitive advantage since the beginning of its economic development. As the central country in the Middle East, the UAE has a strategic competitive advantage. Therefore, the government of the country has developed an invaluable infrastructure that has provided UAE with a possibility to become a serious international trade player. Generous investments in world-class infrastructure, including the Emirati roads, state-of-the-art airports, cargo hubs in such big centers as Dubai, Abu Dhabi and Sharjah, and seaport conveniences at Port Jebel Ali, became the key contributions on the way to trade’s growth (ECC, 2013). Such infrastructure was the initial step on the way to UAE’s competitive advantage strengthening. “Trade enabling” environment made imports and exports less time-consuming and more profitable for any kind of business and encouraged partners to choose a more trade-friendly country (ECC, 2013).
Ports, Customs and Free Zone Corporation (PCFC) was the Dubai agent that managed the trade chain before the Dubai Trade. PCFC originated the idea of relevant government and private entities unification in order to strengthen the trade process. As a result, the independent network, or a “single window”, was created (ECC, 2013). This entity has become crucial for supporting businesses’ and customers’ understanding of the existing challenges. PCFC contributed to the possibilities of red-tape efforts reduction, various procedures simplification and the possibility cutting down the need for physical documentation (ECC, 2013). Hence, one can see that the government of the UAE has put considerable efforts into supporting the cooperation of all trade-related entities. In order to accomplish the integrated network, two key steps were taken: agreement of the entities to share data and IT platform to modernize the trade process. By 2006, Dubai Trade has become a great network linking traders from all parts of the world. Moreover, by 2013, it has unified 52 000 traders and companies of diverse sectors (ECC, 2013). The most outstanding benefits of such system are the following: transparent administration, cost-saving, no duplication of information, revenues increase for the government entities and reduction of time spent for trade that increased the global export trade together with GDP. Appendix 7 represents improvements in trade system before 2012.
The UAE trade regime is quite liberal with a few limitations put on foreign investments. The country is an active player in the Doha Development Agenda. It is also one of the Gulf Cooperation Council (GCC) founders (WTO, 2015). Therefore, it benefits from all free-trade agreements between GCC and EFTA, GCC and Singapore, and others. The UAE is also a member of the Pan Arab
Free Trade Agreement (PAFTA).
The Emirati free trade regime is different from the investment environment. According to the new Investment Law, foreign investments are subject to economic limits. All investment projects must consist of at least 51% domestic capital (WTO, 2015). Moreover, it is obligatory to use local agents in the business. Although such policies complicate foreign investments and profits, they obviously support the domestic economy and UAE citizens.
Migration and FDI
During the latest decades, the region of GCC, and mainly the United Arab Emirates, has become the most popular destination for labor migrants in search for the temporary employment. The salary level, political stability and high standards of living have made this region the 5th biggest international migrant stock with 7.8 million migrants (Malit & Al Youha, 2013). Such number is a great one considering the total population of 9.2 million (Malit & Al Youha, 2013).
The immigration levels do not fall regardless of the oil prices drop or the skills of the laborers, who find the UAE attractive anyway. Moreover, the government supports guest workers with a special living program called Kafala Sponsorship System (Malit & Al Youha, 2013). Even though this system has some challenges, it has become extremely popular since the end of the 20th century. During the past years, some of the issues dealing with abusive practices or passport confiscations were reformed, but some alarms are still under governmental attention. Many concerns are also related to various adjudication issues and other possible conflicts between employers and their workers. Moreover, illegal practices of recruitment agencies are widely spread and the creation of stronger economic competition for domestic workers is a disputable issue. Among the responses of the government to such issues, Malit & Al Youha (2013) emphasize some governmental regulations. Firstly, special court offices were established in order to deal with labor disputes. The Wage Protection System was introduced in 2009. Since its initiation, approximately 2.9 million employees and 205,000 UAE’s registered businesses were enrolled, and approximately 600 employers were penalized (Malit & Al Youha, 2013). As a result, more than $14.2 million was paid in wages to the foreign workers. In such away, governmental policies together with the statistics of the workers on the territory of the UAE show the openness to international cooperation and supporting world labor standards.
Restrictions on the illegal immigration were supported by the two-month amnesty programs focused on the permit for illegal workers to leave the country without any punishment during this period. Since December 2012 till January 2013, 20,400 migrants got help through such amnesty (Malit & Al Youha, 2013). Over the previous decade, the UAE government has offered many state programs in order to improve employment prospects and work standards. The Absher Initiative, Injazat and Abu Dhabi Islamic Bank have also contributed to sustaining long-term growth of the Emirati economy by supporting foreign workers.
At the same time, there are reasons to emphasize connection between the UAE’s growing FDI and migration. In 2013, the FDI inflow was $10, 488 million (Trading Economics, 2015). The main countries that invest to UAE are UK, India, France, US, etc. (see Appendix 9). Regardless of some complications that may exist, the advantages of such investments are related to taxies, the lack of exchange control regarding funds repatriation, profitable banking sector, favorable geographical situation, good infrastructure, cheap foreign labor force and access to energy. The most popular sectors for investments are real estate (26.6%), trade and car repairs (21.8%), and finance and insurance (21.5%) (Trading Economics, 2015). These spheres attract a number of foreign professionals into the country. Moreover, the majority of temporary employees also work in the service and tourist sectors that are have been developed during the past decades.
International Trade Agreements
The growing UAE marketplace provides a number of possibilities to the potential business partners. Primarily the Free Trade Agreements are the basic documents that predetermine these possibilities and decrease possible trade barriers to the minimum. As it has already been mentioned above, the UAE government provides numerous trade, economic and investment agreements that make cooperation beneficial for both sides of the trade. Lowered tariffs and eliminated double taxation are the main achievements provided by the signed agreements.
Among the main agreements, an economic agreement among the GGC members (UAE, Saudi Arabia, Qatar, Kuwait, Bahrain and Oman) is probably the largest contract. This document simplifies the relations among the abovementioned countries. Another agreement is the Greater Arab Free Trade Area Agreement that contributes to the profitable terms of cooperation among such countries as Syria, Lebanon, Iraq, Morocco and Jordan (WTO, 2015). As for the membership in WTO, since 1996 it has provided the UAE with strong business links with 12 Asian countries, 8 European and African countries, 2 countries of South America and Australia.
Among others, UAE business is supported by the trade agreements with Singapore, EFTA, Switzerland, Norway, Iceland, Liechtenstein and New Zealand. Moreover, there is discussion regarding the new free trade zone creation. This zone should include the countries-members of the European Union, Argentina, Australia, Brazil, China, India, Japan, Korea, New Zealand, Pakistan, Paraguay, Turkey and Uruguay (WTO, 2015).
With regard to all of the conditions that the UAE offers, many businesses consider this country as the perfect one for work, cooperation and re-export. The proper choice of the priorities and understanding of the basic needs of international trade are the key to UAE’s success. Tariffs confirmed by the agreements comprise several rates: zero, 5%, 50% and 100% applied on alcohol and tobacco (WTO, 2015). In addition, alternate duties can be applied to 0.3% of all tariff lines. No other charges are applied on imports.
In addition to the terms that free trade agreements provide, the role of the UAE in supporting the developing countries by becoming a prospective founding member of AIIB should be emphasized. Aimed to support the Asian infrastructure projects, AIIB membership is a contribution to the new regional and international cooperation (Gulf News Economy, 2015). It also aims at the development, administrative burdens minimization, trading performance maximization and attracting new capital supported by the ADB trade. In addition, the MIF reports do not mark any economic growth reduction for the UAE, but estimate its position as leading in the Middle East due to sufficient oil reserves. At the same time, the World Bank reports the growth of the country’s GDP in 2014. To prove the financial abilities of the country, foreign banks have opened branches in the UAE since 2010 (WTO, 2015).
The Political Economy of Trade Policy and China Silk Road Implications
Free trade is mostly positive for the UAE and is partners. However, together with the terms and conditions prescribed by the trade agreements, the country’s government needs to implement additional inner control functions. In the UAE, the laws that regulate trade include Commercial Agencies Law, Control Law, Companies Law and Electronic Transactions Law. All the laws are primarily based on the GCC standards.
Nationality restrictions are crucial for the domestic economy, as UAE requires imports to be processed by the trade agent with a trading license which is provided only to UAE nationals or companies with 51% Emirati ownership (WTO 2015). In the UAE, there is no singular central organization that would manage control decisions. The Emirates Standardization and Metrology Authority (ESMA) is in charge of the drafts preparation e devised by the Ministry or accepted by the Cabinet’s decision (WTO, 2015).
Competition restrictions in the UAE are not prescribed by specific legislation. However, there exist restrictive agreements that mostly refer to position or acquisitions abuse. Up until now, this law has been a draft under the review of the Ministerial Cabinet.
In addition to the domestic policies, one should pay attention to the global situation that influences the world trade. The newly appeared Chinese influence on the Middle East deserves particular attention. With the global economic influence of China, its connection is far from being based only on oil demand. Kazemi & Chen (2014) emphasize strong interconnection between the two countries that is based on trade relations. From 2005 to 2009, the trade volume between China and the Middle East has increase by 87% and has reached almost $222 billion in 2012 (Kazemi & Chen, 2014).
Economic and trade relations between the two countries have increased considerably during the past decade. The volume rates between the counties have increased by 35% yearly (Kazemi & Chen, 2014). The geographic position, infrastructure and terms of cooperation have made the UAE a highly beneficial point for the Chinese import, export and re-export. This dimension of the China-Middle East relationship has existed previously along the ancient Silk Road. For China, the road to Europe and Africa has always been through the Middle East as the obligatory geographic bridge.
The UAE is a valuable example of mutually beneficial terms for the cooperation in the world market. The local laws based on free trade agreements, including GSFTA, GCC-EFTA FTA, GAFTA and GCC, have provided unique opportunities for the country and its neighbors and partners. Minimal trade barriers have become the basis for considerable imports, exports, migration and investments increase in the country. Its geographic position, infrastructure and terms of cooperation have made the UAE a beneficial destination for import, export and re-export.