New Silk Road: The Surge In Trade Between The Middle East And Asia

Chris Mayer - Fri 25 May, 2007

There is a Silk Road revival, though, at least metaphorically. The old trading posts worked in storied cities such as Samarkand, Kashgar and Meshed. The new Silk Road weaves through Dubai, Riyadh, through Mumbai and Chennai in India, to Kuala Lumpur, Singapore, Hong Kong - even as far as Tokyo. Like the old Silk Road, the new one is not a road either. But it is a useful metaphor to describe the surge in trade between the Middle East and Asia. Between 1995- 2005, trade between these two regions increased fourfold...

"To follow the Silk Road is to follow a ghost. It
flows through the heart of Asia, but it has
officially vanished..."

- Colin Thubron, Shadow of the Silk Road

In importance and influence, the new Silk Road may stand
to rival its namesake. As with the old Silk Road, the new
one will make some investors rich.

The old Silk Road was not even a road in the normal sense
of that term. It was, as travel writer Colin Thubron
describes it, "a shifting fretwork of arteries and veins,
laid to the Mediterranean." Thubron recently covered
7,000 miles in eight months following the old trails of
this fabled trade route.

The Silk Road ended, or began, in Antioch, Turkey. It
stretched all the way to old Changan, or what is today
known as Xian, in China. For a long time, it had no name.
A German geographer coined the term "Silk Road" only in
the 19th century.

Yet traffic along the Silk Road goes way back into the
slipstream of humanity's past. Thubron writes: "Chinese
silk from 1500 B.C. has turned up in tombs in north
Afghanistan, and strands were discovered twisted into the
hair of a 10th-century B.C. Egyptian mummy."

Archeologists found silk dating from 1100 B.C. lying in
the grave of a prince in Germany. The stuff got around.
The Silk Road carried much more than just silk across its
rugged landscape. From China, the West got jade, lacquer,
ceramics, the first roses, azaleas. Also, oranges,
peaches, mulberries, apricots and rhubarb. Coming from
the West to the East came glass, gold, silver, Indian
spices, gems and linen. Also, fig trees, flax,
pomegranates, jasmine, dates and olives.

Back and forth went vegetables, fruits, furniture,
artifacts of all kinds, musical instruments - even
slaves. Even weapons. The crossbow, a Chinese invention,
made its way across the old Silk Road to arm the
Norman and Capetian kings in their battle with the
dreaded English longbow at Crecy (in which they were
famously defeated).

The old Silk Road seemed to embrace almost every national
and ethnic group from Arabia to Japan - Persians, Turks,
Sogdians, Syrians, Indians and many others. (Often called
the greatest traders of the Silk Road, the Sogdians were
an Iranian people. The Chinese believed them born
traders. Myth held that "their mothers fed them sugar to
honey their voices, and their baby palms were daubed with
paste to attract profitable things," writes Thubron.)

None of them made the journey the whole way through. No
Roman ever walked the streets of Xian or visited the tomb
of the Yellow Emperor. No Chinese trader ever gazed upon
the pillars of imperial Rome or dipped his toes in the
Mediterranean Sea. Or perhaps it would be safer to say
such journeys must have been extremely rare.

Instead, the Silk Road was more like a long relay race.
Only luxury items could generally make the whole journey
- the jade and the silk, for example - or perhaps
incidental items people carried with them, like a flute
or an old trader's pipe. It was simply too expensive to
ship most things the whole distance, except those things
people were willing to pay a heavy price for.

Still, the old Silk Road was the dominant trade route in
human history for over a thousand years. Its importance
only diminished sometime in the 16th century, when ships
replaced the harrowing journey overland and transported
goods much cheaper and faster.

There is a Silk Road revival, though, at least
metaphorically. The old trading posts worked in storied
cities such as Samarkand, Kashgar and Meshed. The new
Silk Road weaves through Dubai, Riyadh, through Mumbai
and Chennai in India, to Kuala Lumpur, Singapore, Hong
Kong - even as far as Tokyo.

Like the old Silk Road, the new one is not a road either.
But it is a useful metaphor to describe the surge in
trade between the Middle East and Asia. Between 1995-
2005, trade between these two regions increased fourfold,
according to McKinsey & Co. Projections call for trade
between the six members of the Gulf Cooperation Council
(GCC) - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and
the United Arab Emirates - and East Asia to explode from
$59 billion to $300-500 billion by 2020.

Why is this happening? Short answer: The GCC has cash
and Asia has huge investment needs.

Rapidly growing Asian economies have, at least in part,
driven demand for oil. Higher oil prices in recent years
mean overflowing coffers in the GCC. They need to put
that treasure to work. More and more, it is winding up
in Asia. McKinsey reports: "Recent interviews with more
than a dozen Gulf investors who collectively control
more than $300 billion in assets revealed that they
are set to shift their portfolio asset allocation
toward Asia by 10-30%."

It's a feedback loop. More growth in Asia means more
demand for oil - with more and more coming from the
Middle East. By 2030, estimates put half of China's oil
imports coming from the Middle East. Asia - including
India - could account for half the increase in the
world's demand for oil. That means more cash for the
GCC and more investment in Asia - in real estate
development, in banking, in communications, in
infrastructure. And on it goes.

In the meantime, Chinese, Indian and other Asian
companies are active in the Middle East. They bring low-
cost consumer goods (Dubai is already home to
Chinamexmart, which McKinsey describes as a "mini-city of
Chinese companies distributing their products throughout
the region"). Asian companies also bid on major
construction projects in the Middle East.

Another interesting barometer of economic activity: As
late as 2000, there were only seven daily flights between
the Gulf states and China. Today, there are more than 48.
Thubron notes on his trip how the influence of the old
Silk Road flowed into even remote hamlets. "The nervous
system of the Silk Road radiated into the poorest
extremities," he writes. "It traversed minor ecological
divides, as well as empires." Likewise, this new
surging trade between these regions will have ripple
effects in the patterns of world trade and in financial
markets everywhere.

Owning the assets the new Silk Road demands and investing
in businesses with ties to the region should prove
profitable. Nabors Industries is active in the Middle
East and also has a joint venture with a Chinese rig
manufacturer. Companies with valuable oil and gas
properties, such as Canadian Natural Resources, are
also positioned to be an indirect beneficiary of
Asian consumption.

Such feverish growth in trade will have its pauses. Even
the hummingbird must sleep. But remember, the old Silk
Road dominated trade for a thousand years and made many a
fortune. Perhaps the new Silk Road will do the same.

Regards,

Chris Mayer
For The Daily Reckoning 

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