Posted: March 26th, 2023

The Economic Benefits and Challenges of Increasing Trade between Arabian Sea Ports and East Africa

The Economic Benefits and Challenges of Increasing Trade between Arabian Sea Ports and East Africa
1. Introduction
During the past two decades, both the Arabian Sea and East Africa regions have experienced significant economic growth and political stability. As a result, many academic and industry experts believe that the two regions offer significant growth potential and a promising strategic location between Western and Eastern trade routes. The economic stimuli in both regions stem from the increased opportunities in commodities exploitation and a growing demand for consumer goods. For example, the discovery of oil on the Eastern coast of Africa and the vast natural gas and petroleum reserves in the Arabian Sea have led to growing export markets and subsequently increased incomes. Income growth in both regions has led to an increase in the consumption of consumer goods; the more wealthy population seeks to be more westernized in terms of its goods, adopting modern technology and automobiles. Since nearly all goods are now produced on a global scale, consumer nations in these regions are coming to rely more and more on imported goods. In order to be competitive in meeting this demand, both regions seek ways to increase export revenues through expansion of their primary commodity industries and also diversification into new industries, while protecting their local markets from imported competition. In summary, both regions seek economic development through an increase in export revenue and a closing of trade surpluses. A trade surplus being crucial to economic development in today’s world of globalization, these regions seek to trade more with others in their efforts to attain it.
At the same time as attempting to increase their prospective trade, both regions are facing uncertainty in terms of the future of their current trading partners and geopolitical unrest. For example, East Africa has a heavy reliance on its export markets to western nations such as the United States and the UK due to historical trading ties. However, in the wake of increased protectionism of domestic markets and heavy subsidization of industry in the west, many African nations feel that their products are facing discrimination in price. Furthermore, the prevalence of regional conflicts and political instability has hindered prosperity for many nations in both regions. Fearing uncertainty and seeking security, nations in these regions are examining trade with areas which hold less geopolitical involvement and are more likely to provide long-term trading agreements.
1.1 Background
With the dredging of the Suez Canal and the establishment of the Djibouti port, there is a rising interest in trade connections between Arabian Sea ports and the East Africa region. The expanding interests stem from the recent infrastructural developments and rising economies. Not only would an easy connection between the two regions benefit investors through saving time and resources, it carries a vast amount of potential to the development of the East Africa region. The biggest inflow and outflow of goods through any East Africa port is no more than 10 million tonnes. This is in stark contrast with the likes of Singapore whose annual container trade exceeds 20 million TEUs. This suggests that the East Africa region is highly underdeveloped as it lacks the ability to effectively import and export goods. Consequently, practicability and directness of trading can also influence the time and resources invested in trade connection. Time is a vital factor in international trade. The longer it takes to move goods from one place to another, the more expensive it becomes. Thus, seaports that are closer and easier to reach are more attractive as they allow investors to save on transportation costs. For these reasons, the research topic holds high relevance in economic and trade development for both the Arabian Sea region and East Africa.
1.2 Purpose of the Study
The main purpose of this study is to examine the level of economic integration between the Arabian Sea ports and East African countries. The extent of the study is to identify the areas where trade, investment, and economic cooperation occur. The trade between these two regions has a great historical background and is considered to be very beneficial for both regions. The main focal sectors would include trade, which in other words means the exchange of goods and services due to comparative advantage. Investment involves the flow of capital from the Arabian countries to the African ones, and other includes projects such as construction of infrastructure and so on. Economic cooperation aims to promote inclusive and sustainable development that will, in turn, improve the economic well-being of the people within the regions. All these are the ways and means to achieve economic development and improve the standard of living of the people in East Africa through increased trade with the Arabian countries. The study would aim to examine the current trade and areas of cooperation between both regions, and then go on to examine the extent of benefits that it has produced for the East African countries and then compare it with the past decline that happened in between, and finally analyze in those areas what are the reasons for failure. Step by step, it would look at the prospects of those areas and suggest how the barriers can be overcome, and lastly compare it with other development partners and assess the relative advantage that has led to their success. And since the research does not involve just one or two countries, a comparative study would be made amongst them.
The study would cover the following specific issues, starting by looking at the historical ties and reasons for trade between the two regions, then the assessment of the current and past trade and areas of cooperation, the benefits produced in those areas and comparing those with other development partners, examination of the specific successful areas and the reasons for success, comparison with other development partnerships, prospects of those areas for future cooperation and means to realize those, and lastly wrapping it up with a conclusion and providing some policy recommendations. By these ways, it would try to provide a good outlook for the economic development integration that it seeks to bring about through changing the ways and means described in the introduction, which it hopes would produce a good and sustainable change to improve the standard of living of the people in East Africa.
1.3 Research Questions
The research questions are set in line with the background mentioned above, which discusses the reasons the world is currently in globalization. The first research question seeks to establish the breadth of impact attributed to globalization. Following the first research question, the methodology will discover links between trade liberalization and the recent increase in economic growth and the reduction of poverty. The link between globalization and economic growth is clear; this study aims to find that its success is due to globalization and determine whether it is successful in reducing poverty. At this point, the second research question will be addressed, focusing on the direction and flow of commodities from and to LDCs. This will be covered in the Latin American case study and later comparisons, which all aim to determine the successes and failures of globalization strategies in the past as to apply them to future scenarios. The second question urges to determine whether globalization is aiding in the processes of development and modernization in such countries and what can be done to improve their current situation. The third question is based on the fact that trade liberalization and globalization cause a displacement for certain industries and workers both internationally and domestically. This, in return, can have both positive and negative effects. The effects that are causing benefit can be expanded, which will enable earlier detection of the first signs of interest in better organizing yourself with a promotional campaign. Displacing workers with unemployment is what the study will focus on for the negative effects in an event seeking that the industry has been pressured to open to international trade. Findings from this objective are expected to come from everywhere in the study and may prove that increased trade and globalization are not always in the best interest of such countries and workers who have lost their previous employment.
2. Trade Relations between Arabian Sea Ports and East Africa
An analytical approach has been taken to the response. The text also excludes the topic, comments, and mention of the number of characters. Trade patterns between Arabian Sea ports and East Africa have changed over time. In the past, as noted by Risso, “the only profitable trade was the carrying of African slaves to Mecca and thence to northern lands,” however, over the past century, the picture has changed. As Arab nations fought for independence from European colonizers, the cultures of many countries in the Arabian Peninsula became decidedly separate from that of Africa’s. A new period of European colonization for East Africa and independence for the Arabian Peninsula led to decreased interactions politically, but the economic prospects between the two spheres remained intriguing. A considerable factor that stimulated economic interaction during the mid-20th century was the industrialization of East African nations. As European countries such as Britain left former colonies, they left behind infrastructure and technology that had been previously unseen in the region. Fishery and mineral resources found in East Africa were also major pull factors, as these resources depleted in the Arabian Peninsula. Although the decades of the 1950s and 1960s saw vast growth and prospect in trade relations, it was short-lived. With the rise of Arab nationalism and subsequent leadership of Arab nations, outward economic focus turned towards western nations and the oil boom of the 1970s. This led to the general stagnation of African-Arab relations and trade to the world’s present view of the region.
2.1 Historical Overview
Historical evidence attests to the existence of ancient trade links between the Arabian region and the East African coastline dating back millennia. Fragments of trade goods found at archaeological sites attest to a vigorous commerce across the Arabian Sea. The earliest written records come from the Islamic Middle Ages. Arab historians and geographers provide abundant evidence for a lively trade with the East African coast, much of which they viewed as ‘bilaad al-Zanj’, the land of the Zanj people. During this time, trade was stimulated by the growth and spread of Islam on the East African coast, as it provided a unifying cultural and commercial link with the Arabian Peninsula. However, the trade centered more on the export of African goods including ivory, gold, and slaves rather than the import of Islamic culture and religion. This era of trade was also the genesis of the Swahili culture which combined elements of African and Arab cultures. During the 19th and early 20th centuries, the arrival of the European colonial powers heralded major transformations in trade patterns, as the coastal territories were drawn into global commodity markets providing raw materials to the industrializing economies of the West. The construction of the Ugandan Railway represents the highpoint of coercive trade in the region, as it was built to provide an outlet to the sea for the landlocked kingdom of Buganda, by forcibly extracting resources from the East African interior and shifting the focus of trade away from the Arabian Sea towards the Indian Ocean and Europe. This pattern of trade has persisted until the present day.
2.2 Current Trade Patterns
The countries in the Arabian Sea/East Africa area share a rich history of economic exchange. As mentioned in previous sections, trade between countries in this region was historically prosperous. However, over the last 20-30 years, trade has been declining. At the forefront of this issue is the fact that trade between Arabian Sea ports and countries in East Africa is very unbalanced. Much of East Africa’s trade flows through the Arabian Sea, but very little of the trade from Arabian Sea countries is destined for East Africa. This is largely due to the fact that very few goods produced in Arabian Sea countries are sought by East African countries, while Africa relies heavily on the Arab nations for oil to fuel its developing industries. A second factor is that poor infrastructure in some East African countries limits the access of imported goods to these countries. Often times it is easier for goods to travel past East Africa to another destination. An important example is the increased trade between India and China. As both these countries have rapidly growing economies, an array of Chinese goods are being imported into India. If transporting these goods to Africa is less cost-effective than selling them in India, then trade between India and East Africa could be further minimized.
2.3 Factors Driving Trade Growth
Factor driving growth of Arabian Sea-East Africa trade
There are several factors which have encouraged shipping lines and logistics companies to launch new services between Arabian Gulf ports and East Africa. They include East Africa’s greatly improved economic performance over the last decade and the continuing economic liberalization in many of the states there. Expansion of Gulf-based oil companies, and their increasing involvement in exploration and production activities in Kenya and Uganda has also led to an increase in the level of trade, particularly in the energy sector. The decision by the USA and its allies to finally withdraw from Iraq and the resultant change in regional power dynamics may also have some effect on the location of Gulf oil and gas exports, some of which may be redirected to East Africa.
However, the single most important driver of trade growth is the GCC’s burgeoning economic relationship with China. This has resulted in unprecedented levels of investment in the African continent by both state-owned and private Chinese companies. In 2009, the Chinese government made a commitment of US$10bn in concessional loans to Africa to be spent over a three-year period. This massive increase in capital flows has already led to significant changes in trade patterns between Africa and the Asia-Pacific region. The GCC is well placed to benefit from this due to its strategic location between East Africa and China, and the fact that it is a major re-exporting centre for Chinese goods bound for Africa. The anticipated growth in Sino-African trade is likely to result in significant employment of both Asian and African seafarers while Chinese shipping lines will aim to capture a share of Africa’s rising import and export container trades.
All of these factors are likely to result in an increase in the number of cargo ships moving between the Arabian Sea and East Africa and an expansion of services to ports in Somalia, Kenya, and Tanzania. Although piracy is a significant concern, it will not prevent trade taking place and may, in fact, be a catalyst for further development of the region’s marginal and failing states. This is because piracy is not a response to poverty, rather it is a highly organized transnational criminal activity from which the perpetrators seek to maximize profit. High levels of poverty in Somalia and displaced fishermen from other states have created a situation where piracy provides an attractive career option for some. While piracy presents a major challenge to ports and shipping lines, it also represents a potential cost-saving opportunity for some importers and exporters. Timber imports to the Gulf were one example of cargo which was redirected to ports in Northern Emirates and transhipped via dhow to avoid the Gulf of Aden.
2.4 Challenges to Trade Expansion
Increased trade, no matter how beneficial, is never a straightforward process. The case for expanding trade between Arabian Sea ports and East Africa is no exception. The challenges to trade expansion are both numerous and complex. Obvious initial difficulties are those of a physical nature. East Africa, in many areas, lacks a modern infrastructure capable of handling a large increase in trade volume. This can be seen by the state of its roads, ports, and communication facilities. Improvements are being made in some areas, with aid from the World Bank and the IMF. However, it has been argued that the focus of much infrastructural improvement in East Africa has been on measures that will improve trade with areas outside of the African continent. This presents a major challenge to the expansion of trade between East Africa and Arabian Sea ports.
Another key challenge is that of the balance of trade and the relative competitive strengths of the trading partners. A large increase in imports to East Africa might fuel its economic growth but could also worsen its trade balance and inhibit the development of domestic and export industries. It could also lead to a reliance on imports and foreign investment that would leave East Africa vulnerable to trade embargoes and fluctuations in the global economy. This has been a problem in the past and shows the importance of a diversified export base for East Africa if trade with the Arabian Sea is to be successful in the long term. The relative competitive strengths in some industries of Arabian Sea countries over East Africa could also cause problems. Indian textiles, in particular, are a very competitive market with East Africa, and if an East African industry is to develop, protectionist measures may be required. This could put strain on relations with Arabian Sea trading partners.
3. Economic Benefits of Increasing Trade
The expansion and opening up of the sea to East Africa is likely to lead to a decline in employment in many labor-intensive primary produce industries as they will be outcompeted by cheaper products from other regions. This may be detrimental to port countries if the industries concerned are important for foreign exchange earnings.
Impacts arising from the expanding of port activities may have mixed influences on employment. It can potentially create employment directly in port activities as well as in industries supporting port-based activities, such as transport, storage, and a range of service industries. Employment may be generated for Mombasa and Dar es Salaam as well as for other areas in the countries linked to the markets accessed by the East African ports. The net effect on port countries will depend on a number of factors including the expected growth in volume and changes in the types of cargo handled at the Arabian Sea.
Section 3 studies the economic implications and analyzes the sustainable benefits through issues such as employment, economic developmental growth through the GDP indicator, technology transfers, and lastly the infrastructural development of seaports. As a base, it identifies the importance of sustainable development for the benefit of future generations through the development.
3.1 Employment Opportunities
The increase in trade and foreign investment with Africa and the Middle East is seen to bring employment opportunities for people in East Africa. This, in part, is due to the elimination of restrictions on trade, particularly in primary goods, although there is also the likelihood of employment gains in secondary industry and in transport and related services. Employment opportunities arise through increased demand for goods and services, and a shift in demand towards goods in which particular countries have a comparative advantage. This, in turn, will lead to an increase in production which will require more workers. The extent to which employment will be generated will depend on the price elasticity of demand for the particular goods. For example, countries who are able to increase their market share for products which have a price elasticity greater than one will increase the level of employment. The pattern and composition of employment will also change. As economic development and structural change occur in the African economies with increased trade, it is likely to see a shift in the nature of employment from agriculture to industry and services. This has positive implications for practical skills and income levels for many households in East Africa. This potential increase in employment in industry and manufacturing is likely to provide an alternative for the ever-increasing numbers of graduated students from the African education system who are currently faced with very limited employment prospects. This often results in a brain drain from Africa to more developed countries in search of employment.
3.2 Economic Growth and Development
Another dynamic theory is the “export-led growth hypothesis” which suggests that there is a causal link running from net exports to growth and that countries should specialize in the production and export of goods that use relatively large amounts of their abundant factors of production. This would be beneficial for East African countries as it uses a comparative advantage to promote development.
It is argued that if East African countries were to increase exports to Arabian Sea countries, which currently heavily protect their markets (e.g. India), there would be substantial economic growth and also growth in the level of economic development. This is because trade liberalization is a common condition of loan approval by the IMF and World Bank and also a condition of SAPs. Once loans are approved and SAPs are implemented, exports to these markets are in higher demand due to the fact that these countries are trying to earn foreign currency to repay loans from the World Bank and IMF. This situation has recently been seen with the highly controversial trade agreement between the USA and African countries. The AGOA agreement is said to be a major tool for export-led growth in Africa. This increased demand for exports can help to alleviate balance of payments problems in East African countries and create foreign currency which can then be used for debt repayment. Foreign currency can also be used to import goods and technology, which can act as a catalyst for development in the long run. Development is also sped up through the process of “import substitution”. Once the level of development is increased, these countries could sustain a higher growth rate through exports in a variety of goods and services.
Economic growth implies a sustained increase in aggregate actual income of a country and is commonly associated with improvement in the general standard of living in a country. Generally, an increase in trade is considered beneficial for economic growth and development. Countries involved in trade are able to specialize in the production of goods and services which they are best at. Specialization leads to trade, which enables countries to consume and produce a more diverse range of goods and services. Trade is also said to encourage competition, which has been shown to increase productivity and economic growth. Trade can act as a “stimulus” for further trade as the wealth created by increased production and the new and cheaper products are often used to purchase further goods and services from abroad.
3.3 Infrastructure Development
Adam Smith suggested that the division of labor is limited by the extent of the market, and improved market access is an objective of trade. Infrastructure directly improves market access by reducing transport costs and increasing the capacity to export goods. Wacziarg and Horn (2004) estimate that a 1% increase in infrastructure stock would raise around a 2% increase in GDP and a 6% increase in trade for the median country. This is partially due to the fact it takes a higher share of GDP to maintain infrastructure, and this spending on infrastructure creates an efficient form of government spending and a good source of employment. The marginal impact of infrastructure expenditure on growth is higher than that of any other form of public expenditure. This makes it a potentially very cost-effective way to boost development in East African nations. High transport costs and the fact infrastructure shortages inhibit the use of landlocked countries’ potential for trade are often cited as a reason for the low international trade of the sub-Saharan nations and a cause of Africa’s declining share of world trade, which has fallen from 3% in 1950 to just 1% today.
The infrastructure is taken to mean structural, institutional, and economic facilitation. The physical infrastructure is the necessary roads, ports, airports, warehousing, and telecommunications to move goods from one location to another. The quality of the infrastructure has a pronounced effect on trade, and poor infrastructure is often cited as a reason for high trade costs in developing nations. The relatively low cost of capital compared to that of labor in developing nations suggests they should have high comparative advantage in infrastructure projects, but a lack of resources often demands help from external donors or the private sector.
3.4 Technology Transfer
As people come into a new environment, there will always be cultural differences. Some of these differences are not visible but affect the way in which business is run. An example of this can be seen from a comparison between the Arabian Sea coastal countries and East Africa. The Arabs (especially those from the Gulf) have a high-context culture, in which emphasis is put on deeply engaging relationships that will last a long time. In their business environment, it is reflected with a more family-based and personal approach. In comparison, East Africa has a very low-context culture, which is a lot more egalitarian in terms of society and focuses primarily on getting tasks done. A large influx of Arabs into East Africa from increased trading will most likely result in some elements of their culture being transferred over in society and business. The effects would be both positive and negative, but it is likely that the host culture would have to adapt in order to deal with the newcomers.
4. Challenges of Increasing Trade
Infrastructure limitations: Despite recent improvements, many East African ports remain outdated and facing varying degrees of inefficiency and congestion. These limitations are particularly pronounced in capacity constraints due to the strong growth in demand for transport services. It is estimated by the World Bank that in the next 15 years, services will need to double in most African ports to meet the growing demand for trade movement. The inability to effectively cope with increasing trade levels has serious ramifications with respect to opportunity costs and the attractiveness of East Africa as a trade partner. The cost of prolonged and uncertain delays due to congested ports that cannot handle traffic from increased trade can be viewed as a type of implicit tax on trade and investment. This stunts the potential economic gains from trade and makes the current low level of trade with the Arabian Sea less attractive than it should be for both East Africa and its foreign investors.
Trade imbalances: Trade partnerships between the Arabian Sea and East Africa have historically been characterized by a persistent imbalance of trade. The Arabian Sea region currently imports more goods from East Africa than it exports products in the other direction, worsening its already sizable trade deficit with Africa as a whole. In 2014: 2024 – Essay Writing Service. Custom Essay Services Cheap, the Arabian Sea imported over US$172 billion from East Africa, which was 61 percent more than the previous year. This current trend is largely due to the 2014: 2024 – Essay Writing Service. Custom Essay Services Cheap spike in oil prices. Not only does the Arabian Sea rely on East Africa for raw materials, but it is also becoming an increasingly important market for Arabian Sea products, resources, and investment. This imbalance means that any increase in trade will likely be to the detriment of East Africa’s future trade balance, and the Arabian Sea will be no closer to the trade relationship it desires, whereby East Africa can become a viable long-term economic partner for the Arabian Sea by exporting manufactured goods and services of a similar value to the Arabian Sea.
4.1 Trade Imbalances
Trade imbalances can be a given when considering international trade. However, with inequality and disparities in the respective earnings of trading between developing countries and more developed countries like the USA, many problems are presented. Usually, the less developed countries are the ones in a deficit as the value of their imports exceeds the value of their exports. Factors that can cause this include the unstable value of the products of developing countries because of price fluctuations and the income elasticity of the goods. With basic products like tobacco, the demand will be around the same regardless of the income of the countries involved. However, with superior goods like cars, the demand from the developed country will take business away from the developing country with a lower income, thus decreasing potential export and increasing dependence on imports. This can lead to a decrease in national output and income in the country exporting the good. Foreign competition increases and therefore the less developed countries will have to reduce costs to stay in the market, this can lead to workers getting lower wages, or the firm reducing the amount of workers in order to cut costs. Costs may also be cut by reducing health and safety and bypassing environment regulation in the country, doing harm to their people and environment. Lower costs will only be able to increase competitive power if efficiency is increased and productivity is increased. This is a difficult task, and often it will result in little change whilst attempts are made, and then a large reduction in the quantity of the good being produced. All of this has a damaging effect on a less developed country as it will increase their dependence on a certain good and will leave them in a larger deficit when the good in higher supply is finally imported from another country.
4.2 Infrastructure Limitations
Africa’s infrastructure is considered to be one of the greatest impediments to the viability of increased trade with Arabian Sea countries. Currently, the majority of infrastructure in East Africa is not sufficient to meet the needs of the region or of potential trading partners. Transportation from the ports is difficult, unreliable and expensive. The average cost of importing a container from abroad is $1410, and it takes 41 days (World Bank, 2006 – Write a paper; Professional research paper writing service – Best essay writers). This makes it twice as expensive and taking 50% longer than Asia. Air freight is similarly exorbitant with fuel costs being the primary driver. The transport industry will also potentially face the loss of protection which it currently enjoys from the government, in a liberalised market. This has sparked fears of a flood of cheap imports which will further deepen the trade gap. Included in infrastructure issues are barriers to communication. ICT is essential to international trade. The potential for incorporating IT into value chains can be a powerful means for developing countries to leapfrog steps in the development process and to improve their participation in the global economy. However, there are still many remote areas in East Africa that need to be connected to the wider world, and even in major cities bandwidth can be very limited. This can greatly inhibit the ability of local firms to access global value chains, or for the African region to emulate the success of the Asian tigers.
4.3 Political and Regulatory Barriers
This state of affairs is most beneficial to the least developed nations of East Africa trading with Arabian nations of a similar level. Lower income and non-reciprocal preferences may be possible to attain from the Arabian nations and grant some form of assistance to the higher cost and less efficient industries in these African nations. This would be a useful tool in offsetting the effects of tariff reduction and promoting increased trade, albeit though perhaps at the expense of the more efficient, more developed African nations.
Middle Eastern nations have previously been committed to efforts of strong regional integration, employing various customs unions and common markets amongst each other. An early sign of this in relation to the East African nations would be a hindrance on their efforts for increased trade. It is imperative that the benefits of liberalized trade to both parties are recognized and a mutual agreement for decreased protectionism is reached. However, this will be a long and difficult process due to the imbalance in bargaining power between the Arabian and East African nations.
Political and regulatory barriers have often been a significant constraint on efforts to liberalize trade. Trade restrictions, import licensing, and tariff and non-tariff barriers have been the traditional methods employed by most countries in order to protect their domestic industries. However, there exist stark differences in the levels of development and thus the comparative advantage between the Arab States and the East African nations. As such, increased trade would be expected to largely benefit the East African nations. The difficulty lies in convincing the Arabian nations that liberalization is, in fact, a beneficial process for them. With their current advantageous position in trading with the African nations and given that tariffs and trade restrictions are reversible, it is logical that the Arabian nations may attempt to maintain the status quo of trade through implementation of traditional methods stated above or through regional trade agreements at the expense of the East African nations.
4.4 Environmental Impacts
Trade between the countries bordering the Arabian Sea and East Africa has developed using many sealed trade paths, some of them dating back to the days of the spice trade between the Far East and Europe. However, it has only increased significantly in the past fifty years. The last twenty years have seen the most significant increase in trade with the globalization of the world economy, advancement in transport technology, and also trade liberalization.
The strongest environmental impacts posed by trade are as a result of increased transport needs. This can result in damaged environments from the construction and maintenance of new transport infrastructure. For example, Indian coastal regions are experiencing significant pressure on their environments from port development. In addition, there are the effects of pollution from increased vehicle activity or from accidents spilling hazardous materials. This can have local effects on the health of people or wildlife, and in some cases can have global effects, such as ozone depletion or climate change. In the worst-case scenarios, trade can lead to the transboundary movement of hazardous waste to avoid stringent health and environmental regulations. This has occurred in the Asia Pacific region, where waste has been dumped on a number of resource-poor Pacific Island countries.

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