A way forward for regional trade: Geopolitical shocks including the war in Ukraine and Red Sea disruptions have shifted and destabilized regional trade patterns highlighting the importance of policies to handle such scenarios, according to a recent report (pdf) by the International Monetary Fund (IMF). Regional economies could curb risks and double down on gains from shifting patterns by reducing trade barriers, boosting regulations, and developing infrastructure. Red Sea disruptions can be remedied by diversifying trade routes and investing in alternative logistics corridors, the report says.

Red Sea disruptions have hit hard: Since the onset of the war in Gaza, rates for shipping 40-foot containers from China to the Mediterranean have surged four-fold, from USD 1k to USD 4k, the report says. Regional economies that are highly reliant on Red Sea trade were disproportionately affected, with volumes at Jordan’s Aqaba Port halving between November and February. KSA reshuffled trade from Jeddah on the Red Sea to Dammam on the Persian Gulf. Continued disruptions could still have more profound effects, with persisting disruptions for 2024 forecasted to lead to a 10% drop in exports from MENA countries bordering the Red Sea, the report said. Moreover, disruptions have seen trade mediated via the Suez Canal drop 50% between November and the end of February.

What to do? Regional economies should double down on supply chain management and boost air freight capacity to tackle the Red Sea crisis. Longer term, MENA must develop multimodal logistics corridors to safeguard against disruptions, the report says.

Not all geopolitical shocks spell disaster for trade: Regional hydrocarbon exporters saw a boom following the EU’s decision to switch away from Russian energy in the wake of the Ukraine war. MENA’s share of EU energy imports surged from 2.3% in 1Q 2022, to 5.8% in 4Q 2023, with most of the gains attributed to KSA and Algeria.

The report considers three scenarios for global trade fragmentation: The first scenario sees the Western bloc isolating Russia, while continuing to trade normally with our region. The second scenario sees international trade divided into three blocs — a Western bloc, an Eastern bloc, and a neutral bloc which includes MENA. The third scenario does away with our region’s neutrality, aligning them with the Western or Eastern trading blocs based on their UN voting patterns.

How does MENA fare across the different paths? In scenario one, our region will benefit from rerouted trade flows, experiencing modest gains to trade volumes and GDP. Scenario two sees the greatest gains for us, with substantial boosts to trade volumes and GDP as neutrality permits MENA to mediate trade between rival blocs. The third scenario sees economic declines in trade and economic growth across the region, with the notable exception of the GCC, which sees modest gains in trade due to lower tariffs, the IMF says.

Where do we go from here? The report suggests that economies improve digitalization and customs regulations to double down on potential gains for shifting trade patterns. On a medium term outlook, the IMF prescribes regulatory reforms and investments to fill “gaps” in infrastructure and relieve “infrastructure bottlenecks.”

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