Trade corridors

The Red Sea crisis highlights need for alternative transport routes

The attacks on shipping vessels in the Red Sea are a stark reminder of both the importance and the volatility of some of the trade routes in the region. Around 15% of global trade, worth over $1trn, including about 8m b/d of oil, previously passed through the Bab al-Mandab strait. Now most of that trade has been rerouted around Africa, adding about two weeks and significant costs. This includes much of the trade between the GCC and Europe.

The current Red Sea crisis has reduced Egypt’s vital revenue from the Suez Canal by more than half at a time when it has been facing severe external financing challenges (although these eased after it secured investment from the UAE and additional IMF loans).

Aside from the Red Sea, there are other significant bottlenecks around the Arabian Peninsula including the Strait of Hormuz, which most of the region’s hydrocarbon exports have to pass through, and the Suez Canal, which was obstructed when the EverGiven container ship ran aground in 2021.

New routes proposed

The risks, duration and costs of the existing maritime route have resulted in several proposals for alternatives. The two major ones proposed in recent years are the India-Middle East-Europe Economic Corridor (IMEC) and Iraq’s Development Road. Both have challenges and advantages.

The plan for IMEC was announced at the G20 in Delhi in September 2023, signed by the US, EU, India, Saudi Arabia and the UAE. The formal document was light on details, including the precise rail route, which is assumed to run from Dubai to Haifa. It added a new component, a green hydrogen pipeline (potentially fed from facilities being developed at NEOM in Saudi Arabia, in the UAE and possibly Oman) and electrical and fibre optic cables along the route. Longstanding challenges with proposals for gas pipelines to both Europe and India suggest this could be difficult to commercialise. The overland portion would build on Saudi Arabia’s existing North-South railway and plans to connect the Saudi network to the UAE’s Etihad Rail. This leaves only a relatively short 300km route from al-Haditha to Haifa to build, which would only be possible in an integrated region.

Iraq’s Development Road stems from the idea of a Berlin to Basra railroad, conceived at the dawn of the 20th century but never fully implemented because of the world wars. The 21st-century concept has its roots in the development of Iraq’s Grand Faw Port, which is being built by Korea’s Daewoo. The idea was floated in 2022 as the UAE and Turkey were negotiating a trade agreement and was expanded further at a conference in Basra in December 2022, under the earlier name of the “Dry Canal”. The official project announcement came in May 2023 with an estimated cost of $17bn, for a corridor across Iraq with road, rail, pipelines and fibre optics, and a target completion date of 2029. It has been framed as a core element of economic diversification for Iraq, akin to Saudi Arabia’s Vision 2030 giga projects.

The future of trade

As trade flows within and through the Middle East continue to increase, the impetus is to develop quicker, cheaper, greener and more secure trade corridors.

Progress on either initiative is unlikely until there is a political breakthrough on the ongoing Gaza conflict, something which may also be required to end the Red Sea disruptions. As trade continues to grow, there could be scope for both of these routes to develop and also for an expansion in the Suez Canal, with Egypt currently conducting a feasibility study to convert the single-lane sections into double lanes capable of hosting ships moving in both directions.

Meanwhile, there is scope to develop the eastward section of the trade route from the Gulf. IMEC has been seen in part as a challenge to China’s Belt and Road Initiative (BRI). However, Chinese trade with the region and Europe would also benefit from it, or from the Development Road, particularly as China completes its trade corridor through Pakistan. China is a major trade partner directly with most Middle Eastern countries, and they are already involved in the BRI in various ways, including through participation in the Asian Infrastructure Investment Bank, a major source of capital for the BRI.

Concurrently, the region's trade with India continues to expand. The UAE signed a free-trade agreement in 2022, while Oman is reported to be on the cusp of agreeing one. As well as these regulatory measures to facilitate trade, there is also cross-border investment and agreement on trade infrastructure, including Abu Dhabi Ports signing MoUs in February with Gujarat Maritime Board and Indian transport company RITES, and DP World signing MoUs in January to develop new container terminals in the India state.

Trade routes to Europe from India via the Middle East

Source: Middle East Eye