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The conflict in the Middle East casts a long shadow over some of Asia’s largest economies, China and India. The Israel-Hamas war’s potential to disrupt energy supplies, influence global strategies and shape diplomatic relations underscores its far-reaching impact on these nations.
India is the third-largest importer of crude oil, with a significant portion coming from the Middle East. The conflict in the region can disrupt oil supplies, leading to increased oil prices. Experts believe that the surge in oil prices affects India’s trade balance and fiscal stability. It can also lead to a rise in inflation in the country.
Additionally, the Global Trade Research Initiative (GTRI) has expressed concerns that the ongoing conflict in the Middle East may result in delays and complications for the India-Middle East-Europe Economic Corridor (IMEC) project.
IMEC is a proposed economic corridor which would stretch from India to Europe, passing through countries such as the UAE, Saudi Arabia, Jordan, Israel, and Greece. The primary objective of the project is to enhance transportation and communication links between Europe and Asia and is often seen as a response to China’s Belt and Road Initiative (BRI).
“The ongoing Israel-Hamas conflict may disrupt the project’s timelines and outcomes, marking a pivotal juncture in the development of this ambitious economic corridor. While the war’s direct impact remains regional, the geopolitical consequences reverberate far beyond, with potential consequences for the proposed corridor,” GTRI Co-Founder Ajay Srivastava told an Indian media outlet.
India’s close trade relationship with Israel also adds another layer of complexity. The Southeast Asian nation is Israel’s seventh-largest trading partner globally. In the fiscal year ended March 2023, Indian merchandise exports to Israel amounted to $7.89 bn, with Israeli exports to India reaching $2.13 bn, resulting in a total trade volume exceeding $10 bn. Any escalation in the conflict between Israel and Hamas could disrupt this trade, affecting a wide spectrum of industries.
Conflict in the Middle East to intensify energy woes in China?
Similar to India, China has a substantial dependency on oil imports, with around 72% of its oil needs being fulfilled through imports, primarily sourced from Middle Eastern nations. China is the world’s foremost importer of oil from Saudi Arabia.
Also, recent data from analytics company Kpler reveals that the country has significantly increased its imports of Iranian oil over the past two years, culminating in the purchase of 87% of Iran’s oil exports in September 2023. Thus, this dependence on Saudi Arabia and Iran for oil underscores the potential vulnerability China can encounter if the conflict in Israel and Gaza were to escalate in the region.
Furthermore, China’s extensive trade networks can be disrupted by the Israel-Hamas war. The region is strategically important for China’s BRI, which aims to connect Asia, Europe, and Africa through infrastructure development. Ongoing conflicts can delay or disrupt BRI projects, affecting China’s economic interests.
Meanwhile, the Middle East conflict could adversely affect bilateral trade between China and Israel, which has been thriving recently. China is Israel’s second-largest trading partner, with trade between the two countries growing by 11.6% in 2022 to reach $24.45 bn. In 2021, China even surpassed the United States as Israel’s top source of imports, according to Israel’s Central Bureau of Statistics.
However, the Israel-Hamas war is exacerbating geopolitical faultlines and may necessitate a reassessment of the economic ties between the two countries. This is especially because the US has extended its unwavering support to Israel while China has tried to be more neutral. While the East Asian nation has condemned the violence against civilians in the ensuing conflict in the region, it has faced criticism for not denouncing Hamas by name.
“These opposing stances have left a wedge between the U.S. and China…. And with the United States and China representing the world’s two largest economies, each country holds a strong gravitational pull for nations around the world to enter their economic and strategic priority orbit,” says Wells Fargo.
“While alignment could take shape in various ways, the most likely form would be two separate and distinct blocs of countries,” it adds.
Among other countries in Asia, the escalating conflict in the Middle East has also Japan and South Korea worried, as the two nations are heavily reliant on energy imports from the region. High-ranking officials in both countries already issued caution about the potential repercussions of the Israel-Hamas war.
