UAE: Diversifying trade will yield economic benefits

UAE: Diversifying trade will yield economic benefits

11 March 2024, Emirates NBD

Trade has played an increasingly important role in the UAE economy over the course of the past two decades. The UAE has experienced a sharp rise in the absolute value of both merchandise and services trade, as well as the value relative to GDP.

There have been two notable developments in the UAE’s trade patterns in recent years. The first is that there has been a sharp reduction in the share of oil exports in total exports since 2010, highlighting the increasing diversification of the UAE economy away from hydrocarbons. And secondly, the share of services exports has risen from just 4% of total exports in 2005 to almost 23% in 2022.

As of 2022, the top three markets for UAE goods exports (including hydrocarbons) were India, China, and Japan. Outside of the top three, the UAE’s exports predominantly go to other countries in Asia, as well as other GCC nations. In contrast, the UAE’s imports stem from a mix of markets, including Asia, the USA and Europe. China does however play an outsized role, accounting for 18.5% of the UAE’s imports in 2022.

Reducing the UAE’s reliance on hydrocarbons is a key approach to building a more stable and resilient economy. But an additional prong in making the UAE economy more resilient to macro-economic shocks is also to reduce reliance on individual countries as key trading partners.

Consistent with this, the UAE has made strides in negotiating a host of Comprehensive Economic Partnership Agreements (CEPAs). Five of these CEPAs are currently in force, including agreements with India, Israel, Indonesia, Turkey and Cambodia. Negotiations are ongoing with at least another 16 nations.

While the exact terms of each CEPA differ, all ensure the elimination or gradual reduction of tariffs across a variety of goods. In addition, the current CEPAs also cover several non-tariff issues, including ensuring that technical standards are not used as a mechanism to limit market access. And the current CEPAs with India and Indonesia, include a provision that UAE businesses will be given a 10% price preference in government procurement tenders.

It is arguably too early to assess the economic impact of these trade agreements, with many coming into force less than 12 months ago. Nonetheless, some evidence can be found in a recent announcement by His Highness Sheikh Mohammed bin Rashid Al Maktoum on UAE trade in 2023. He noted that non-oil UAE trade rose to a value of AED 3.5 trillion in 2023, and also highlighted that non-oil trade with the country’s top 10 partners had risen 26% y/y. Dr. Al Zeyoudi, Minister of State for Foreign Trade, further highlighted the importance of the recent CEPA agreements, noting that non-oil foreign trade with countries with whom CEPAs have either been implemented or are nearing implementation rose 24.5% y/y in 2023.

We can also look to a selection of studies to provide an indication of the likely scale of the impact. Work by the IMF suggests that the reduction of tariffs on intermediate inputs, as part of 11 CEPA agreements considered by the authors, could increase competition, quality of inputs and the transfer of technology, and thereby raise the level of real GDP by up to 2% over the medium-term.

The signing and implementation of this volume of trade agreements is therefore likely to support UAE trade activity, FDI and ultimately GDP growth.

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