The United Arab Emirates (UAE) has become one of globalization’s most prominent economic success stories thanks to its diversified economy. Oil profits and long-term pro-business policies have allowed UAE to create a robust infrastructure that supports the development of non-oil sectors like manufacturing and transportation and more fruitful participation in international trade (Mishrif 16). As of 2018, UAE’s total non-oil exports are valued at 637.6 billion AED, while imports are worth 898.5 billion AED. Compared to 2017, those figures show an increase of 9.7% and a decrease of 5.1%, respectively. UAE’s chief importer, China, accounts for 15.5% of imports and 2.5% of exports; chief exporter Saudi Arabia receives 15.3% of exports and provides 3.1% of imports (United Arab Emirates Ministry of Economy 30, 32, 34). By diversifying its trade partners and sectors, UAE has enhanced its position as a leading regional and international trade hub.
UAE’s monetary policy plays an equivocal role in its success. In 1997, the nation’s central bank introduced a fixed exchange rate of 3.67 dirhams to 1 US dollar (Al Sadik 41). This move, explained by the fact that oil is priced in USD, was intended to make the dirham more stable. While requiring constant direct intervention in the foreign exchange market, the dollar peg has succeeded in encouraging economic activity by reducing uncertainty, making it easier for businesses to make plans. This benefit came at the cost of flexibility, as UAE now had to keep its interest rate close to the United States interest rate. For example, UAE raised its interest rate by 25 bps in 2018 after a similar hike by the US Federal Reserve, discouraging investment (Jumaa and Tawdrous 21). Additionally, the dirham has been rising in value against the non-dollarized currencies of UAE’s trading partners since 2014, making imports cheaper and exports more expensive (Central Bank of the UAE 34). Though conducive to economic growth in some ways, the fixed exchange rate can hinder it in others.
The increase in international trade over the last few decades has been a mixed blessing for many resource-rich countries. While bringing prosperity, it also encouraged them to overspecialize in exporting natural resources. Although it owes much of its initial success to oil, the UAE has been substantially more effective in diversifying its economy than other oil-exporting countries (Mishrif). One of its member states, Dubai, has reduced oil’s share in its GDP from almost 55% in 1981 to less than 1.5% since 2011 (Al Sadik 27). The federation derives 30% of its GDP from the oil sector (United Arab Emirates Ministry of Economy 26). UAE’s GDP has grown dramatically over the last few decades, from roughly 40 billion USD in 1980 to 400 billion USD in 2014 (Jumaa and Tawdrous 23). By 2018, UAE’s GDP per capita has exceeded 66,000 USD per annum, indicating considerable social improvements (Mishrif 1). Overall, the effect of international trade on the UAE has been very positive.
UAE’s pursuit of diversification seems prudent in the light of ongoing oil price volatility. Although oil offers a comparative advantage that makes exporting it more profitable, this advantage is unsustainable in the long run (Mishrif 2). By focusing on alternative sectors and increasing productivity, UAE can ensure long-term success. As its revenue stream continues to become more diverse in the years to come, it may be wise for UAE to review the dollar peg that was originally introduced to reduce oil-related volatility. By freeing its exchange rate, UAE would be able to take control of its monetary policy, making its economy more flexible and resistant to international shocks.
Works Cited
Al Sadik, Ali Tawfik. “Macroeconomic Overview.” The Economy of Dubai, edited by Abdulrazak Al-Faris and Raimundo Soto, Oxford University Press, 2016, pp. 19-48.
Central Bank of the UAE. Annual Report 2019. 2019. Web.
Jumaa, Muhamad Abdul Aziz Muhamad Saleh, and Maher Ibrahim Mikhaeil Tawdrous. “Impact of the Monetary Policy on the UAE Economic Growth (Post Financial Crises).” China-USA Business Review, vol. 18, no. 1, 2019, pp. 16-32.
Mishrif, Asharf. “Introduction to Economic Diversification in the GCC Region.” Economic Diversification in the Gulf Region, Volume I, edited by Ashraf Mishrif and Yousuf Al Balushi, Palgrave Macmillan, 2018, pp. 1-26.
United Arab Emirates Ministry of Economy. Annual Economic Report 2019. 2019. Web.
Responses to Classmates’ Posts
Coronavirus Pandemic Impacts All of Us
Although China and the United States are each other’s biggest trade partners, their economic relationship has taken two major blows in recent years. The trade war was the first blow, but the coronavirus pandemic that followed it caused even greater damage, interrupting the effort to repair the relationship. Loss of trade with China harms both consumers and small businesses in the United States, causing further damage to the economy and government revenue. It also increases unemployment, which causes deterioration of human capital. As China’s economy faces similar disruptions, the loss of trade is likely to cause severe damage to the entire world economy.
I agree with the assertion that it is essential for Chinese-American trade to recover as quickly as possible. However, as the author acknowledges, this recovery cannot take place until after the pandemic is over. Unfortunately, there is no way to predict when a vaccine will appear. Additionally, there are political obstacles to trade, including the blame sometimes placed on China for its handling of the crisis. Since it may take some time for trade to recover, I think that alternative policies need to be considered. Those policies can include unemployment programs that will help preserve human capital during the crisis and payroll tax cuts to encourage job creation afterward.
United States International Trade BB Discussion
While I agree with the author about the positive effects of globalization on the United States economy, I disagree with the proposition that raising tariffs will amplify those effects. By redistributing wealth away from individual consumers to a few producers, tariffs increase inequality and reduce buying ability, hindering growth. They also discourage international trade, both directly by making it more expensive and indirectly by lowering buying ability worldwide. The United States’ trade war with China, its chief trade partner, illustrates the drawbacks of protection. While the benefits to producers are difficult to measure, the consumers and those businesses whose supply chains depend on China have suffered. Some jobs may have been saved, but others were lost or not created.
Although tariffs may be justified in some cases, such as when it is crucial to protect developing industries, they usually do more harm than good to the economy. Anyone who suggests raising tariffs should prove that this measure is really necessary. Given the damage that the coronavirus pandemic has already caused to international trade and the American economy, I think the contrary course may be wiser. By reducing tariffs, the United States government could help encourage an economic recovery after the pandemic is over.
Deutsche Wirtschaft
I agree with the thesis that growing the car industry would be a rational and beneficial course of action for the German economy. As a well-established industry that plays to Germany’s strengths, including local know-how, a highly qualified workforce, and an efficient supply chain, it offers a considerable competitive advantage that should not be overlooked. The car industry is an iconic part of the German “economic miracle” and has a strong global reputation. It is essential for maintaining the country’s high trade surplus and rate of employment.
However, it would be interesting to consider the exact form that support for this industry should take. At the moment, like many other industries, the German car industry is suffering from the disruption of its supply chains by the coronavirus pandemic. The same pandemic has closed off its external markets, most notably China. Even before this, the industry suffered due to changes in consumer preferences in favor of more modern, eco-friendly cars. In this situation, I think it may be warranted to introduce widespread export subsidies for car manufacturing companies. This measure would help them weather the crisis and modernize production to meet changing demands, allowing Germany to retain its competitive advantage in the future.