Nader Habibi Crown Center for Middle East Studies Brandeis University GCC Trade Patterns: Market Shares of Leading Exporters in GCC Imports of Manufactured Goods and Machinery Nader Habibi Crown Center for Middle East Studies Brandeis University

Growing Significance of the Arab Import Market Source: IMF DOT (MENA-annual-imports from world)

Key Topics & Questions 1) Recent trends in market shares of the US, European and Asian countries in GCC countries 2) Determinants of market shares in GCC Countries (Economic and Non-economic factors.)

Economic Factors Cost Quality Market Power Bilateral Trade Agreements (Made in China = Cost Effective, Inexpensive) Quality National Reputation (Made in Japan=Quality) Market Power Commercial Aircraft Market, Supercomputers USA, Germany, Japan Bilateral Trade Agreements

The US trade policy towards Middle East (Arab countries) Free Trade Agreements Negotiations Started Negotiations Concluded FTA Entered into Force US-Jordan FTA   Oct. 2000 Dec. 2001 US-Morocco FTA Jan. 2003 Oct. 2004 Jan. 2006 US-Bahrain FTA Sep. 2004 Aug. 2006 US-Oman FTA Mar. 2005 Jan. 2009 US-UAE FTA Not yet

Role of non-economic factors in Market share Diplomatic relations Trade leverage (Use of trade to promote non-economic goals) Popular sentiments about an exporting country’s image

EU4=UK + Germany + France + Italy

Market shares as shares of the total exports of USA, EU4 and Asia4 Market shares represent shares of the total exports of nine countries to each Middle Eastern country. (These nine countries are: China, Japan, USA, UK, France, Germany, Italy, India and Korea.

Market shares represent shares of the total exports of nine countries to each Middle Eastern country. (These nine countries are: China, Japan, USA, UK, France, Germany, Italy, India and Korea.

Market shares as shares of the total exports of USA, EU4 and Asia4

Statistical Analysis Impact of non-economic factors Importing Countries : Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE, GCC, Arab= (GCC+ Morocco, Libya, Egypt, Tunisia, Algeria, Syria, Jordan) Exporting Countries: -France, Germany, Italy, the UK, (EU4= FRA+GER+ITA+UK) -China, India, Japan, Korea , (Asia4 = CHN+IND+JPN+KOR) -USA Data: UN COMTRADE: Import-Export data (US$) 1969-2008

Seemingly Unrelated Regressions (aggregated model) A three-equation SUR model for each importing country (One equation for each export partner) 1)Asia4 (China, Japan, India, Korea) 2)EU4 (UK, France, Germany, Italy) 3)USA

Strong conclusion: US gained market share after liberation of Kuwait Strong conclusion: US gained market share after liberation of Kuwait. Week Conclusion: US lost market share after Sept. 11 and invasion of Iraq. Four European Countries (EU4) United States (USA) ASIA (Asia4) Direction of change for significant coefficients for SURE model with Difference Equations Bahrain Kuwait Oman Qatar Saudi Arabia UAE GCC Arab (13) Dummy 2001-02 (Intifada, September 11) USA EU4   EU4* EU4, Asia4 Asia4 USA* Dummy 2003-04 (Iraq war II) Dummy 2005-08 (Oil Boom) Dummy 1991-92 (Gulf War I) Dummy 1998-99 (Asian Financial Crisis) Blue Font: A Positive and Significant Coefficient, Red Font: A Negative and Significant Coefficient, *: P-value close to 0.1 (weak significance) Underlined abbreviations: The Coefficient is significant but it comes from an equation that is not statistically significant.

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Source IMF (Mena-annual-importsfromworld)

Determinants of market shares: Competitive Price, Diplomatic Relations, National Image Economists: Economic forces and relative prices matter most (Cost, quality,..) Political Scientists: Diplomatic relations and strategic considerations are equally important. (Culture, diplomatic relations, attitude,..) Relative weight of these factors for Arab importers?

Evidence on role of non-economic factors Summary(1989):The volume of US trade is sensitive to political factors and it trades more with countries that are considered more (politically) friendly . Dixon W.J. and Moon B.E. (1993) “Goods are differentiated by the nation of origin and demand for them is substantially influenced by the relations between nations” p.22 Summary, R.M. (1989, February) “A political-economic model of US bilateral trade”. Review of Economics and Statistics, v. 71, i.1. pp. 179-182. Dixon W.J. and Moon B.E. (1993) “Political Similarity and American Foreign Trade Patterns” Poltical Research Quarterly V.46, i.1. pp.5-25

North Korea’s Imports from China and Former Soviet Union Lim &Kim (2002) Korea’s diplomatic relations with two communist rivals affected their relative market share in some basic commodities such as fuels. Aggregate imports were insensitive to political factors. Lim,Kang-Taeg and Kim, Jae-Young, “Economic and Political Changes and Import Demand Behavior of North Korea”, Journal of Economic Development, Vol.27, Number 1, June 2002

Impact of Diplomacy on Trade: Evidence James M Lutz (1995) Eastern European countries followed the lead of Soviet Union in trading with Developing Countries (Correlation analysis) When USSR expanded trade with a developing country the Eastern European countries followed with a one year lag. James M Lutz , East European trade with the developing world: soviet diplomatic partner or economic self-interest. James M. Lutz Pages 333 – 362 vol.9 , No.3, 1995

Impact of Diplomacy on Trade: Example in the Arab World

Market shares of four European countries in Arab Countries (3-year averages of annual market shares)   1988-90 1991-93 1994-96 1997-99 1998-00 2002-04 2005-07 Saudi Arabia 0.27 0.28 0.26 0.24 0.23 0.22 0.21 UAE 0.25 0.32 Kuwait GCC Arab Countries (b) 0.31 0.30 0.29 Middle East 0.33 0.36 0.34 Latin America 0.14 0.13 0.12 0.11 0.10 0.09 Africa 0.42 0.40 0.37 0.35 Developing Countries 0.19 Source: Nominal Import Data from UN Comtrade; b) The Arab countries in this analysis are : GCC countries, Morocco, Libya, Egypt, Tunisia, Algeria, Syria, Jordan Data reflects the aggregate market shares of United Kingdom, France, Italy and Germany

Market shares represent shares of the total exports of nine countries to each Middle Eastern country. (These nine countries are: China, Japan, USA, UK, France, Germany, Italy, India and Korea.

Market shares represent shares of the total exports of nine countries to each Middle Eastern country. (These nine countries are: China, Japan, USA, UK, France, Germany, Italy, India and Korea.

Results based on Three-equation SUR models Four European Count. (EU4) United States (USA) ASIA (ASIA4) Direction of change for significant coefficients for SURE model with Difference Equations Bahrain Kuwait Oman Qatar Saudi Arabia UAE GCC Arab 13 2001-02 (Intifada, September 11)   ASIA4 USA 2003-04 (Iraq war II) EU4 ASIA4, EU4 1991-92 (Gulf War I, Kuwait) 1998-99 (Asian Financial Crisis) Blue Font: A Positive Impact, Red Font: A Negative Impact Underlined abbreviations: The Coefficient is significant but it comes from an equation that is not statistically significant. Asia4: China, Japan, India, Korea, EU4: France, Germany, Italy, UK

Based on 6-equation SUR (USA,EU4,China,Japan, Korea and India) for each importing country/region Four European Count. (EU4) United States (USA) China (CH) Japan (JAP) Direction of change for significant coefficients in SURE model with Difference-Log Equations Bahrain Kuwait Oman Qatar Saudi Arabia UAE GCC Arab 13 2001-02 (Intifada, September 11)   2003-04 (Iraq war II) JAP EU4 US 1991-92 (Gulf War I, Kuwait) EU4, USA USA USA, JAP CH 1998-99 (Asian Financial Crisis) Blue Font: A Positive Impact, Red Font: A Negative Impact Underlined abbreviations: The Coefficient is significant but it comes from an equation that is not statistically significant. EU4: France, Germany, Italy, UK

Question: Are Arab import markets sensitive to diplomatic relations? Intifada, September 11 and invasion of Iraq led to a loss of market share for the United States in Saudi Arabia and in the aggregate imports of Arab countries (No conclusive result for other Arab countries. ) Although the US and European powers both participated in liberation of Kuwait, the corresponding period (1991-92) is associated with higher market share for the US only. Asian exporters (China in particular) have steadily increased their market share in Arab countries since 2001. Appreciation of euro against dollar has not benefited the US. It has benefited China.