Introduction
The United Arab Emirates (UAE) is a federation formed in 1971 consisting of seven emirates, of which Abu Dhabi is the largest and wealthiest. Since its emergence, the UAE has been an economic powerhouse in the Gulf region and the broader Middle East. UAE is the 5th largest economy in the Middle East with a GDP of 421 billion USD (1.5 trillion AED) in 2020. It also has the highest per capita income in the region at $43,538 (World Bank, 2020). The country’s significant economic growth and nearly consistent financial performance over decades can be attributed to its massive oil reserves. The proven reserves are estimated at 97.8 billion barrels (7.1% of the global total) and the 6th largest in the world (Bahgat, 2012). As major member of the Organization of Petroleum Exporting Countries (OPEC) and a prominent regional power, the UAE has utilized its significant hydrocarbon deposits to become a major and reliable oil producer, while also enhancing its standing as an economic and political power. Oil production and export has been vital to the core existence of the UAE as well as being the foundation to both its domestic and foreign policies.
One of the earliest partners for UAE was the United States, which recognized the state immediately after its formation, established diplomatic relations in 1972, and an embassy in 1974. In 1975, Abu Dhabi decided that the country’s oil industry will be open to outside investment, an element remaining true to this day as the UAE is the only Gulf country to maintain international private sector participation in the hydrocarbon industry. This decision allowed for intimate involvement of US firms in the development of the oil industry. However, alongside the energy firms, many other companies began to invest into the country ranging from hotel chains to car manufacturers. The partnership between the US and the UAE quickly developed into a close partnership, going beyond diplomacy and economic interests, but encompassing regional security and military affairs. The UAE is one of the key defense partners for the US in the region, hosting 3 military bases and purchasing hundreds of millions of dollars in equipment on a consistent basis.
This paper will focus on the economic cooperation between the US and UAE. Originally beginning with the oil industry, the partnership has developed into diverse and bilateral economic relations. The bilateral trade exceeded $17.8 billion in 2020, with the US having a $11.68 billion trade surplus with UAE (Embassy of the UAE, n.d.). The robust trade and investment relationship has now shifted way from petroleum and focuses on a wide range of projects and industries. More than 1,500 US firms have a presence in the UAE across a range of sectors, contributing to hundreds of thousands of jobs across both countries. The UAE has reached $27.6 billion of foreign direct investment into the US economy in 2019. The UAE is the number one trading partner for the US in the Middle East and Northern Africa, and many firms use the country’s strategic geographic location and stability to operate transfer and regional hubs (Embassy of the UAE, n.d.). The two countries continuously enhance their economic relationship including the Economic Policy Dialogue (EPD) as an annual platform occurring since 2012. The economic and other relationships between the US and UAE are expected to strengthen going forward, warranting a discussion regarding the foreign policy objectives and benefits to this long-term mutual partnership.
The paper will seek to answer the following research questions:
- How has the US-UAE economic cooperation developed and what benefits from a foreign policy perspective has this brought to the UAE?
- To what extent does the political and military cooperation play a role in the preferential status of the UAE to American economic interests in the region?
- What areas of partnership are key to future economic partnership between the two countries?
Development and Benefits
While American companies, particularly in the oil industry were present in the UAE from its early days, the turning point in the relationship between the United States and UAE occurred decades later. During the Iraqi invasion of Kuwait, which was broadly condemned by the GCC as well as Western nations, the strategic partnership developed as Abu Dhabi allowed Washington to use its territory for containing Iraq, signing a Defense Cooperation Agreement in 1994. The military cooperation laid ground to the economic partnership. Between 1991 and 2011, the UAE bought over $33 billion in military hardware from the United States, including the latest high-tech aircraft and missiles typically reserved for NATO states (al-Suwaidi, 2011). Furthermore, the trust had reached significantly high levels that the US established nuclear cooperation, helping UAE attain a peaceful nuclear energy program, meaning tremendous investment into the Middle Eastern state at unprecedented levels.
From early on, the UAE pursued an open and market-based economy with an objective of attractive foreign investors and skilled expatriates. Although oil and gas had and continue to dominate the economy, over the years, the country has grown to develop sectors in finance, technology, tourism, and renewable energy. Development strategies have particularly focused on enhancing human capital through improving education and social services. The UAE economy was particularly appealing to the United States because of its 3-pronged approach. The UAE currency adopted a fixed-exchange-rate based on the US dollar, sound financial policies aimed at a balanced budged within a tax-free environment, and oil and gas revenues were invested into generational future through infrastructure projects and international financial assets. Combined with heavy US investment into the regional economy, with a focus on the UAE, the country has achieved a status of economic prominence and leading positions in many indicators among Arab nations (al-Suwaidi, 2011).
The strategic alliance between the US and UAE also brought about expanding economic and trade ties. UAE had actually never been a major oil supplier for the US, but rather seen cooperation in other fields. As the UAE domestic economy grew combined with a construction boom, the UAE imports rapidly increased particularly in the sectors of arms sales, construction materials, and electronics and technology. The UAE served as an attractive investment for US firms, as it has no income tax or federal level corporate tax, while also maintaining open markets and preferential trade agreement with the United States (Sadjadpour, 2011). Major US firms from a range of sectors such as defense and aviation (Lockheed Martin, Boeing, Northrop Grumman), healthcare (Mayo Clinic, Cigna Health), technology (Microsoft, General Motors), industry, tourism, leisure and many more have regional headquarters in Abu Dhabi and Dubai as the two major hubs in the region. As much as 66% of UAE economic activity stems from non-petroleum sectors, indicating tremendous diversification and continuing opening of opportunities (UAE USA United, n.d.). The political, economic, and legal environments in the UAE are generally favorable, following international conventions and have reduced requirements over the years for foreign firms operating in the country, offering similar opportunities for foreign entities as it does to its citizens.
The bilateral economic relationship is leading to multibillion foreign direct investment (FDI) between the two countries into each other’s economies. The US FDI into UAE is at $17.2 billion, primarily into mining, trade, and manufacturing. Meanwhile, the UAE FDI into the US is at $5.1 billion. The US greatly supports the Economic Vision 2030 pursuit in the UAE and emphasizes diplomatic, political, and economic stability which are tremendously beneficial for its regional foreign policy (U.S. Department of State, 2021). The countries share numerous platforms for trade development, trade agreements, collaborative policy development, and other foreign policy and economic policy tools to develop and solidify bilateral ties (Office of the Spokesperson, 2021).
The economic partnership with the US based on its strategic alliance has greatly advanced UAE’s foreign policy in the region. Being the primary trading partner provides the UAE with economic influence to its surrounding states, and helps to establish the UAE as the central hub for travel, tourism, technology, and innovation, promoting the brands such as Emirates airlines, Expo 2020, and other initiatives that are predicted to contribute to the country’s GDP (Mogielnicki, 2021). The tight relationship with the US, places UAE in the leadership position geopolitically from a regional perspective. In recent years, the UAE has been driving its interests in organizations such as OPEC and the GCC as a major economy. US policy has for decades focused on the myth of authoritarian stability, where authoritarian governments such as the tribal authoritarianism present in the UAE, is accepted as long as it protects American interests. Armed with the advanced weaponry and practically a blank check from the US, the UAE is able to pursue its interests abroad in the region and international community, sometimes even contradictory to US foreign policy (Hoffman, 2021).
Since the start of the US-UAE growing partnership in the 1990s, the UAE has shifted its foreign policy approach to being more proactive on issues of global governance. It had joined various international organizations, including the newly formed World Trade Organization (WTO) having previously avoided such commitments. It also worked with regional partners to make the GCC interests heard on the international stage. The UAE reformed domestic policy and institutions to become friendly to international financial and investment sectors. Meanwhile, policymakers took a robust approach to rebalance power and influence within relevant international institutions for the country (Ulrichsen, 2017).
Preferential Status
As described above, the US and UAE have maintained a decades-long strategic and geopolitical close relationships. The examination of history has also shown that the strategic ties contributed to the development of economic ties as well. However, the question of foreign policy that is highly relevant is whether this strategic and military relationship provides UAE with a preferential status for close economic ties that the US shares with few other countries to such an extent? In other words, is the US-UAE economic partnership based solely on the strategic interests, or would the bilateral economic relations be in place regardless of strategic cooperation?
It may be relevant to briefly examine other countries of similar trading capacity with the US to determine the strategic involvement. One of the first relevant examples is UAE’s next-door neighbor, Saudi Arabia. Although having a larger economy, GDP, size, and population, Saudi Arabia remains relatively similar to the UAE in terms of economic development and trade associations with the US, having $38.7 billion in total trade in 2019 (Office of the United States Trade Representative, 2019). Saudi Arabia is a larger oil exporter to the US, but similarly to the UAE has significant arms and aviation imports alongside with attracting investment from multiple US firms. Similar to the UAE, Saudi Arabia has become a strategic and military partner for the US, being an ally in regional conflicts and allowing for the use of its territory for military operations.
In fact, this seems to be a trend for many of the countries in the Middle East and Northern Africa. Countries with which the United States has close strategic associations through its military via operational bases, strategic cooperation (either NATO or anti-terrorism), and massive arms sales, the likes of UAE, Saudi Arabia, Qatar, Israel, and Turkey – these are typically the nations seeing increased economic partnerships and foreign direct investment stemming from the United States. Virtually all countries in the Middle East have high petroleum reserves and exports. However, excluding Iran, the countries with which the US has deep strategic ties, military presence, and arms sales, are typically performing higher in terms of total GDP and GDP per capita rather than the countries with weak ties or adversaries to the US. This is the principle of strategic alliances, referring to entities such as organizations or countries to access the strengths and capabilities of others (Link & Antonelli, 2018). From a foreign policy perspective, it is extremely vital and profitable to establish strategic alliances with the United States. At the start of its growth as a state, UAE did not have the military capabilities for a full-scale war against militarized states such as Iraq or Iran, nor did it have the expertise to jumpstart its economy and diversify its resources. With a strategic alliance, it was capable of achieving both, strong defensive capabilities in an unstable region and a rich, flexible market economy that does not rely solely on petroleum profits.
Areas of Future Partnership
Given the strong inter-economic US-UAE relationship, there are many areas of future collaborative partnership where it could expand for the benefit of both nations. The trade relationship already has a foundation for high value trade and investment, including in areas of aviation, hi-tech, and energy. Westinghouse is participating in the application of commercial nuclear power, building 4 reactors to be online in the near future, while General Electric has invested $8 billion in high tech projects. Aviation is a major sector of cooperation, with Boeing being the primary plane manufacturer for the UAE major airlines and regional powerhouses, Emirates and Etihad. With partnership between AMD and ATIC, GlobalFoundries opened a semiconductor manufacturing facility in the US, along with financing some industrial infrastructure and stakes in major companies (Embassy of the United Arab Emirates, n.d.).
The major area of economic-strategic cooperation is security. The UAE continues to remain one of the largest importers of US military goods for regional security guarantees in strategic collaborations such as localized conflicts, anti-terrorism, and suppression of aggressive states such as Iran. The UAE may benefit from participating in the manufacturing or R&D of said goods or various associated parts, as often occurs within NATO countries. That will require greatly improving and introducing high-tech manufacturing processes to the country, a long but realistic prospect.
The next area of collaboration is technology. The UAE is investing heavily into the digitization of its public services and platforms alongside offering private enterprises subsidies for doing the same. Given that the majority of large software developer firms are in the US and there will be an increased need for both software and hardware as the UAE futurizes its economic sector, there is significant value for cooperation. Furthermore, given the global and internal demand for semiconductors, this is a sector where the countries could collaborate in development and manufacturing to ensure stable supply for the economy of the future. In the government plan for the next decade, there are clear objectives of creating a resilient, modern, high-tech economy that will rely on revolutionary technologies ranging from virtual reality and 3-D Printing to Artificial Intelligence, all of which improve efficiency of business, finance, and governance. There is potential for cooperation in extreme high-tech areas such as space exploration, as the UAE government has the objective to develop and send a rover to the moon by 2024 (Government of UAE, n.d.).
Finally, partially stemming from technology, the area of collaboration between US-UAE economies that will be critical in the next decades is energy security. Given the reliance of the world on hydrocarbons, UAE will continue to remain a major player and exporter in this sector for the foreseeable future. However, as a high-tech economy that is seeking to avoid reliance on fossil fuels, the UAE is investing heavily in alternative energy sources, particularly solar and nuclear. The UAE is currently constructing Mohammed bin Rashid Al Maktoum Solar Park which is the largest single-site solar park globally, with expected generation of 5000 MW by 2030. As part of the Dubai Clean Energy Strategy 2050, the share of clean energy of the total output in Dubai must reach 75% by 2050, which is an ambitious but realistic goal (Government of UAE, n.d.). Meanwhile, as the UAE continues to invest in US domestic projects such as hydroelectric plant and other clean energy initiatives and start-ups, it could also increase the share and development of these technologies on a massive scale.
Conclusion
The UAE and US economic collaboration is shown to be extensive and deeply interconnected as it grows over decades of the two countries’ diplomatic relations. It is evident that the partnership has developed from UAE’s petroleum industry and became stronger in light of strategic and military cooperation that the US shares with the Arab state. The resulting collaboration has led to tremendous economic growth, diverse trade and investments, and shared global objectives between these two states. With the support of US investments, the UAE has become a regional powerhouse both economically, diplomatically, and militarily. It has also shifted away from petroleum reliance and highly diversified its economy, with the extensive presence of Western firms and projects in the region.
Therefore, it can be argued that the foreign policy trajectory undertaken by the UAE to pursue an open economy with highly favorable environments for partnership and foreign direct investment has paid off in addition to aligning itself with the US as a key strategic ally despite differences in worldviews and governments. There are significant opportunities for the US-UAE partnership to grow, particularly in vital and strategic sectors of high-tech, space exploration, and renewable energy. The level of inherent trust and economic ties between the two nations are at a level that few nations share, contributing to positive outlooks across a wide range of industries and foreign policy collaborations.
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