Why the Gulf is set to be a bigger player in global supply chains despite geopolitical risks

Sovereign funds and foreign companies are pouring money into ports and free zones, betting the region can keep trade moving amid tariff uncertainty

The bulk carrier Eternity C sinks after being attacked in the Red Sea off Yemen in July. Houthi attacks in the waterway have not deterred investment into Gulf-based logistics. EPA

German delivery giant DHL’s move to acquire a stake in Saudi logistics group Ajex last month underscored a paradox at the heart of global trade.

Even as Houthi attacks and rising insurance costs threaten shipping in the Red Sea, some in the logistics industry are doubling down on the Middle East.

The Gulf is emerging as a vital hub connecting Asia, Europe and the US. Sovereign funds and foreign companies are pouring money into ports and free zones, betting the region can keep trade moving despite the turmoil nearby.

For DHL, the tie-up offers access to Saudi Arabia’s booming e-commerce market, which even on cautious forecasts is set to grow around 12 per cent a year.

Yet that optimism jars with recent headlines. Several undersea internet cables near Jeddah were severed weeks ago, disrupting connectivity in countries including the UAE, while missile strikes on Red Sea container ships have left one of the world’s busiest waterways looking increasingly fragile.

Internet in parts of Middle East slows after Red Sea cables severed

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The Red Sea, the stretch of water between Africa and the Arabian Peninsula, carries about 12 per cent of global trade.

Yet rather than pulling back, some global companies are investing more money into Gulf logistics.

Some firms I work with hope that by sending parts through the Gulf for final assembly, they might lower the duty to the 10 per cent US base tariff instead of paying the much higher levies charged on direct imports from China and other nations.

Goods exported directly from Gulf states to the US generally face the 10 per cent base tariff.

But in reality, US rules of origin demand substantial transformation, not just light assembly, so it is unclear how much they will really gain from this strategy.

That said, we have already seen this pattern elsewhere: Chinese exporters are sending more goods to the US through South-East Asia to get around Trump’s tariff wall. However, imports routed through Gulf hubs have not yet shown the same surge we see in Vietnam or Malaysia. Trade between China and the Gulf is rising fast, but much of it is oil.

Still, non-oil trade within the region itself is expanding, giving logistics groups reason to see wider opportunities. In the second quarter, Saudi Arabia’s non-oil exports rose almost 18 per cent to $23.5 billion. Re-exports – goods passing through the kingdom for sale elsewhere – jumped 46 per cent, pointing to stronger demand for warehousing and distribution.

Logistics groups are betting that free zones in Dubai, Dammam and Abu Dhabi – with their lighter taxes and customs rules – could become safe places to hold, assemble and re-export products bound for markets like the US and Europe.

Investment is flowing in. Dubai-based DP World is putting $2.5 billion into its logistics network this year, including upgrades at Jebel Ali – the region’s biggest port – while Abu Dhabi’s AD Ports reported a 15 per cent rise in second-quarter revenue to $1.3 billion, driven by its ports and free zones.

Both moves reflect a wider push to position the Gulf as more than just a transit point – instead as a hub linking Asia, Europe and the US.

Sovereign wealth funds are helping drive the push. In Saudi Arabia, the Public Investment Fund is investing heavily in Neom’s port and industrial zones. In Abu Dhabi, wealth fund ADQ is the majority owner of AD Ports, which is expanding industrial parks like Kezad that is adding more than 250,000 square metres of warehousing this year.

Not smooth sailing

However, security risks are rising in the region.

The Red Sea is one of the world’s main trade routes, linking Asia to Europe through the Suez Canal. But Houthi attacks on ships and damage to undersea cables near Jeddah have exposed the risks along that corridor. Many vessels are now taking the longer Cape of Good Hope route, adding weeks and costs to journeys.

Houthis parade missing crew of Eternity C cargo ship after sinking it in Red Sea

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The impact has been sharp on some Saudi ports: OceanMind data shows ship traffic along the kingdom’s Red Sea coast down about 45 per cent since 2023, with volumes at King Abdullah collapsing by more than 80 per cent in 2024 – and volumes at Jeddah, its biggest Red Sea port, falling by about a third.

Looking ahead, it is not just disruption that is shaping trade. Big new projects are also starting to change the map.

Saudi Arabia is building out the port of Neom – formerly Duba Port – as part of its $500 billion Vision 2030 megacity. There have been hiccups – efforts to bring in foreign logistics partners have stumbled: a planned $10 billion joint venture with Denmark’s DSV was delayed after regulators withheld approval.

There are business risks too. New ports only work if enough cargo passes through them. If volumes fall short, the projects could end up half empty – the “white elephants” analysts warn about.

Even with those risks, the Gulf is pressing ahead. Its logistics push is a long-term bet, with rising tariffs, strong e-commerce and changing supply chains all pointing to more demand for storage and rerouting.

For shippers, the message is to act early: warehouse and fulfilment space will only get tighter and more costly as the region positions itself as a key meeting point for global supply chains.

Carlos Cordon is professor of strategy and supply chain management at IMD