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Qatar Crisis Impacts China’s Ambitious Foreign Policy

What some have called the Middle East’s most severe diplomatic crisis in years recently shook the Gulf Cooperation Council (GCC) when Saudi Arabia, the United Arab Emirates, Bahrain, Egypt, and several other Sunni Muslim-majority countries cut off diplomatic and economic ties with Qatar. The three GCC states taking action against Doha shut off their land, maritime, and air links with the emirate and told their nationals in Qatar that they had two weeks to depart the targeted country.

The reasons for this dramatic step against Qatar are rooted mainly in Doha’s support for Sunni Islamist movements and prominent figures in the Middle East; the emirate’s ownership of al-Jazeera and other media platforms which numerous Arab governments perceive as propaganda networks seeking to stir up unrest; and Qatar’s cordial relationship with the Islamic Republic of Iran, with which the Arab Gulf country shares the world’s largest natural gas reserve. These pillars of Qatari foreign policy have long left the Bahrainis, Egyptians, Emiratis, and Saudis with the belief that Doha’s actions have fueled extremism and terrorism across the Arab world.

The Trump administration’s relationship with Saudi Arabia and the UAE is key. The move against Qatar came two weeks after U.S. President Donald Trump’s state visit to the Kingdom, during which he called for a grand alliance against Islamist terrorism and its alleged supporters, most prominently Iran. The Deputy Crown Prince of Abu Dhabi and Deputy Commander of the UAE Armed Forces Mohammed bin Zayed visited the White House days before Trump’s trip to Riyadh, and Saudi Deputy Crown Prince Mohammed bin Salman paid a visit to Washington in March. Feeling emboldened and empowered by the new American leadership, the Saudis and Emiratis are now acting more assertively against their enemies and rivals.

Media pundits have been discussing the reasons behind this move and its broader political and economic consequences for Qatar. Given that the Arab Gulf country depends on food imports, fuel exports, and regional and global flight connections, Qatar is in a serious squeeze. How long this abrupt and thorough isolation of Qatar will last is unclear. Yet even if the GCC members and their U.S. protector reach an agreement and things return to normal, it will not be business as usual for Qatar moving forward.

China has particularly high stakes in the outcome of the Qatar crisis. Officials in Beijing are focused on how this rift within the Sunni Arab world will impact their country’s geo-economic development with regard to China’s “One Belt, One Road” (OBOR) initiative. China’s ambitious plan is to connect various regions, including the Middle East, through economic corridors stretching from China to the Mediterranean. Given the geo-economic shift from West to East, connectivity to these New Silk Roads is crucial for the Gulf states’ enduring productivity and even survival.

The New Silk Roads Connecting China to the Gulf

Sino-GCC trade has grown rapidly since China became a net-oil importer (1993) and joined the World Trade Organization (2001). Energy has dominated Sino-GCC trade, as well as trade between China and Iran (and to a lesser extent China and Iraq). China’s oil imports from the Gulf constitute approximately half of its total. Exports of Chinese manufactured goods to the region have strengthened interdependence between China (and other Asian countries) and the Gulf.

Bi-directional investment flows have also risen. Chinese energy and construction companies have won numerous contracts in all GCC states. Chinese banks in the Gulf have followed in the wake of these growing financial ties. Conversely, Gulf energy and petrochemical companies have invested in China. More diverse capital flows and joint ventures are mushrooming in sectors such as aviation, Islamic finance, and real estate. The GCC states’ highly liquid sovereign wealth funds are also underpinning these growing business ties.

The New Silk Road has been a popular label for several years now to characterize these “South-South” economic networks. Yet it was Chinese President Xi Xinping’s multi-dimensional OBOR initiative that boosted its use. The project, which aims to re-connect countries and economies across the Eurasian landmass by investing in roads, railways, and pipelines, also has a crucial maritime component. The large bulk of China’s trade with Europe, Africa, Southern Asia, and the Middle East, including its energy imports, is shipped across the Indian Ocean. The Gulf states were quick to join China’s newly founded investment vehicles for this giant ambition – The Silk Road Fund and the Asian Infrastructure Investment Bank.

Qatar itself is an eager participant. Rich in vast hydrocarbon resources, the emirate is China’s number one foreign source of natural gas, enjoying a 20 percent share in that particular Chinese market. Qatar also imports a large number of Chinese consumer goods. Sino-Qatari ties have deepened also in financial and monetary terms, with Doha having set up a clearinghouse for the Chinese renminbi in 2015. Qatar is unquestionably competing with other GCC members to establish a future status as a regional business hub, eager to attract Chinese, Asian, and global trade, investment, and tourism.

Enduring Political Risk in Qatar

What are the implications of the Qatar crisis for China’s plans vis-à-vis OBOR and Sino-GCC relations? It is certainly too early to predict Qatar and the GCC’s next moves, let alone medium- to long-term developments. The only forecasting possible at this stage is to prepare for Qatar making no swift change to its foreign policy, along with the Bahrainis, Egyptians, Emiratis, and Saudis remaining consistent with their demands for Doha. If such a stalemate scenario persists for a few months, the prospects for Qatar establishing itself as the Gulf’s dominant business location will suffer. But even if this cut-off policy is lifted tomorrow, the damage has already been done. All of Qatar’s important diplomatic and economic partners will remain highly wary of what from now on constitutes an enduring political risk in trading with, or investing in, Qatar.

In other words, even if Qatar’s ties with Saudi Arabia, the UAE, Bahrain, and Egypt are re-established, Qatar’s credibility in its regional standing as a business partner and its reputation as a diplomatic partner have taken a huge and lasting hit. Whether or not Qatar is to blame for this escalation and possible future situation is, for now, irrelevant in terms of the consequences.

In terms of China’s OBOR project, there are three big consequences of the Qatar crisis.

No Regional Business Hub in Qatar

Qatar is now highly unlikely to develop into a leading Gulf business hub. The UAE has a substantial head-start in that respect anyway and currently enjoys hub status due to its advanced infrastructure, its business-friendly regulatory environment, its diversified economy, its vast international human resource pool, and its level of touristic attraction. The Chinese have long realized this, which is why most of their exports to the GCC, wider West Asia, and even Africa and Europe, go through the UAE.

Qatar’s odds of catching up have now been diminished. Without this prospect, Qatar will certainly not be able to rival the UAE (or even Saudi Arabia or Oman) as the “red dot” on Beijing’s West Asian Maritime Silk Road map. With its sudden diplomatic isolation from its direct neighbors and supposedly close GCC allies, and with land, sea, and air barriers in place, Qatar cannot possibly hope to be of regional economic centrality.

Despite the ongoing GCC diplomatic row and its inevitable aftershocks, China is likely to continue, and probably further advance, its bilateral trade and investment with Qatar. Beijing is successfully walking other far more dramatic tightropes in the Gulf. If it is possible to maintain equally strong diplomatic and economic relations with the region’s main antagonists, Saudi Arabia and Iran, then surely this approach would easily apply to China’s foreign policy regarding Qatar. Nevertheless, the Qatar crisis will certainly impact the emirate’s regional trade prospects.

No Immediate China-GCC Free Trade Agreement

The second major economic impact will be felt by the entire GCC. The long-held and recently revitalized plan to negotiate a China-GCC free trade agreement will encounter more problems unless Qatar is ejected from that club. Finding a GCC-wide consensus as long as diplomatic and economic ties remain strained, let alone fully cut off, seems impossible. In that respect, Qatar’s only hope lies with the strong mutual interests the other GCC members share in signing trade deals in general, but especially, in the New Silk Road age, with China, the world’s second largest economy. In other words, it is important to underline that Riyadh, Abu Dhabi, and Manama have accepted to pay a hefty price, since their move will harm the GCC’s overall economic interests.

No Enhanced Gulf Role for China

The third major consequence of the Qatar crisis for Sino-GCC relations is not economic, but geopolitical. Since the end of the Mao era, China’s foreign policy, up until now, has largely shied away from promoting assertive political agendas in foreign countries. Its “sovereignty max” approach, by which Beijing detaches itself from other countries’ domestic politics, or indeed from hard security matters overseas, applies globally. This policy vis-à-vis the Gulf has been of particular importance to Beijing. Given the Middle East’s geopolitical and ideological volatility and security crises, China has consciously refrained from following the path of the diplomatically and militarily engaged and overstretched Western powers. Its “freeriding” on the American security umbrella in the Gulf has directly benefited China’s OBOR plans by saving the Chinese large amounts of money and possibly blood, and by ensuring friendly diplomatic relations and lucrative economic ties with all regional countries.

Given the GCC’s overwhelming security dependence on the U.S. as the Council members’ energy exports to America rapidly decline, the Arab Gulf states have increasingly, yet unsuccessfully, sought to diversify their political and even military alliances. While looking east to China and India, the GCC states have expressed interest in both Asian powers playing a more pronounced role in the Gulf’s security environment. Yet up until now, Beijing has largely resisted this due to its sheer lack of both necessary military capability and political will in China. Now, with longstanding tensions among GCC members reaching unprecedented heights – which raise the possibility of a military confrontation among Arab Gulf states – China is unlikely to change its mind soon.

This article was originally posted in Gulf State Analytics.