The Foreign Direct Investment and Trade Connection Between China and the Gulf Cooperation Council Countries

Abstract

The growing investment and trade volume between China and the Gulf Cooperation Council (GCC) countries has emerged as a significant development in international economic relations. This paper presents a comprehensive analysis of China’s neo-mercantilism model using foreign direct investment (FDI) strategy in the GCC region and its impact on bilateral trade through a political-economy lens. This framework is particularly evident in initiatives such as the Belt and Road Initiative (BRI), industrial policy in high-tech sectors, and energy diplomacy. We argue that the relationship is best understood as a form of “strategic complementarity” where China’s new state-led capitalism pursuit of resource security and new markets aligns with the GCC’s strategic imperatives for economic diversification. The findings show that cumulative FDI Granger-causes an increase in trade volume. Specifically, each one-million-dollar increase in FDI is associated with an $88,269 rise in Chinese exports to the GCC countries and a $64,760 increase in imports from the GCC. Furthermore, the analysis highlights that the sectoral distribution of FDI plays a critical role. FDI in technology and infrastructure boosts Chinese exports, while FDI in sectors like energy and logistics can have more complex, substitutive effects, reflecting the nuanced goals of both China and its GCC partners.