GCC and UK: opportunity beckons

Summary: the UK has the opportunity to deepen trade relations with the GCC states who, even though China beckons, will need a strong counter-balance with the West to fully realise the goal of diversifying their economies away from hydrocarbons dependency.

We thank Paul McGrade for today’s newsletter.  Paul is Senior Counsel at Lexington Communications / FIPRA UK, leading on trade and regulatory issues. He is a former diplomat and policy adviser to two British Prime Ministers and at the Cabinet Office, Foreign Office and European Commission.

The Gulf states can be the Venice of the 21^st century, open to East and West, and drawing prosperity from both. Although the region is uniquely placed to navigate Western ‘decoupling’ from China, this creates challenges; and the UK can help.

If, as most analysts predict, we see an increasingly bipolar global economy, driven by geopolitical rivalry between China and the West, this carries huge risks for Gulf economies, which could not afford to be shut out of either economic sphere of influence. The Gulf States will still need strong relationships with the US, UK, and EU, even as these evolve to balance East and West, and to meet the new challenges.

The region is in a strong strategic position: its economies are buoyed by high global energy prices (the IMF estimates an additional US$ 1.3trn of revenue for the Gulf States over the next four years); China’s rising demand for energy will continue; and there is strong, diversified domestic economic growth across the GCC. Importantly, for the UK and EU – unlike the US – there is no quick or cheap route to energy independence.

But the evolving relationship will still be two-way; on security, tourism, and because UK and Western tech and innovation generally can help make high-skilled, high-tech, post-net zero economies sustainable throughout the region.

The UK-Gulf strategic relationships, in particular, have huge potential in the years ahead, because three big things have happened since the UK left the EU in 2020:

• The limits of the Brexit deregulation agenda have been reached – UK regulation will be more predictable for the foreseeable future;
• War in Europe has refocused London’s strategic attention there, and shown through the resulting energy crisis that the Gulf region is, more than ever, an essential strategic partner; and
• The UK has positioned itself closer to the US than major EU economies on ‘decoupling’ from China.

These provide a context in which strategic and financial investment by the Gulf States in UK partnerships are potentially more valuable than ever.

Political stability and regulatory predictability are returning to the UK, after the upheaval of the Brexit years; that is good news for Gulf investors. For the years since the Brexit referendum have seen a knock not just to Britain’s economy, but also to the country’s long-established reputation for good governance and pragmatic, business-friendly regulation.

After the drama of three Prime Ministers in a year, and a painful lesson learned about the fragility of global market confidence in the country, UK politics is now dominated by leaders and parties determined to restore trust in the public finances and prioritise economic growth and innovation. The high-water mark of Brexiteer ambitions to transform the UK economy through deregulation and tax-cutting has passed. Whoever wins the next UK general election, which must be held by January 2025, the next five to ten years feel a lot more predictable.

Over that time, we are likely to see the UK relationship with the EU become much closer. The UK isn’t going to become a fundamental de-regulatory competitor to the EU, and regulation of major issues such as net zero and digital markets will probably largely follow the EU model, offering predictability to investors.

But the upheavals of the last seven years have left their mark. Investment into the UK has slowed significantly since 2016, putting potential investors in a stronger position. UK assets are relatively cheap. The government in London – of whatever party – will be keen to seek new and deeper partnerships in the Gulf region to help bring innovation to market or scale, and to grow exports.

That should be attractive to Gulf investors and policy makers because the UK fundamentals in innovation remain strong, and the opportunities significant, especially in areas such as health tech, life sciences and net zero tech, alongside traditional strengths like financial services, legal and other professional services, the creative industries and defence. UK innovation is arguably under-priced.

These are areas of potential partnership with Gulf governments, which could help meet some of their economic and social aims for more sustainable long-term growth, based on high-skill industries at home. Such sustainable growth, diversified from hydrocarbons, will be an essential condition of the region’s ability to navigate between East and West over the decades ahead. Gulf sovereign wealth funds are already investing heavily in high-tech, high-skilled sectors in Europe and North America, often bringing some of the business ‘home’ in an effort to stimulate their own growth in these sectors.

A GCC-UK trade deal, which the UK Government hopes will increase trade in the long-term by at least 16%, would be another recognition of the importance of the region to London, post-Brexit.

The Arab Health trade fair  which begins today in Dubai will see a bigger UK presence than ever. And this story is being repeated in every sector.

Working with UK business and the government across economic sectors, we see the interest in the region, and in reorienting UK offers towards its needs.

As the UK returns to a more stable, predictable path, there has never been a better time for the Gulf region to invest in its innovation, and in the partnerships which can help Gulf States deliver the visions for their own 21^st century.

Lexington Communications will be hosting a panel discussion on Driving future healthcare partnerships between the Gulf and UK at the UK Healthcare Pavilion on Wednesday 1^st February from 13.00-13.30. To RSVP, please contact Michael.latham@lexcomm.co.uk.