A New Number One

Here’s one for the history books. China overtook the United States earlier this year as the world’s largest exporter to the Middle East. It’s the first time the United States has lost its number one ranking since at least the 1960s, or as far back as there is data available.

I haven’t seen the figure reported in the media. But I don’t expect to wait long. This is the type of easy to understand statistic that will rattle doors in Washington. I can see the cable news stations going into hyper-drive.

The rate at which China’s exports to the Middle East have grown is certainly remarkable. A decade ago, they were worth just $4 billion, but have since rocketed to $60 billion, overtaking the United Kingdom in 2002, Germany in 2006, and now the United States.

It’s also worth remembering that China is exporting mainly low-value clothing and DVD players, rather than high value-added SUVs and Boeing aircraft, so as its manufacturers move further up the value-chain, the $60 billion figure might just grow even larger in the coming years.

The event is yet another milestone in the rebalancing in the global economy.

Still, it’s not all good news. The Middle East’s consumers are certainly spending more than ever with today’s oil prices far above their low of $10 a barrel in the 1990s. But they are also substituting locally made goods for cheaper “made-in-China” alternatives.

This means factory closures.

I’ve earlier noted reports of factory closures in the northern Syrian city of Aleppo, a city with a long history of textiles manufacturing. (Ironically, the city also suffered from the same in the 1860s as a result of competition from steam-powered European textile mills).

The Financial Times is also reporting factory closures in the Palestinian city of Hebron. The city employed 15,000 workers a decade ago. It now employs less than 5,000. Chinese imports are “like a volcano, burning everything in their way”, says one Palestinian lingerie manufacturer.

The collapse of China’s traditional export markets in Europe and the United States has resulted in a huge diversion of trade to the developing world, not just the Middle East. Initially, local consumers were pleased to see the arrival of cheap Chinese goods. But their enthusiasm is likely wearing off as job losses mount.

So, China’s new number one ranking is a mixed blessing. On the one hand, it underscores the growing strength of its commercial relations with the Middle East. One the other, it highlights the risks that sentiment towards China will deteriorate, especially in other low-cost countries such as Egypt, Jordan, Palestine, and Syria.

It’s a tipping point that may well force a change in China’s foreign policy

There are a few likely responses. But I think China is likely to initially run with what I call the “Japanese model”. Japan provides about $1 billion worth of aid to the Middle East each year. This is a small share of its total exports to the region, but it helps to generate enormous amounts of good will with the local population.

China could try the same. It has already provided aid to Africa. But much of this funds infrastructure projects built by Chinese construction companies and workers. I’m not convinced the same is possible in the Middle East―the aid must instead be seen to generate jobs, whether for Egyptians, Palestinians, or Syrians.

So, get ready for a change. China’s new number one ranking isn’t just a figure for the record books.