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Sea Transportation and Economics in the UAE Research Paper

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Updated: Jun 16th, 2020

Abstract

The United Arab Emirates has seen unprecedented economic growth in the last five decades. The growth has been fueled by the discovery and exploitation of oil resources. The country has invested heavily in the development of other sectors of the economy, which have further established it not only as an economic powerhouse in the Middle East but also as a major transport and logistics hub in the world. The sea transport and logistics sector has grown tremendously over the years to position the UAE as a major transit hub between Europe and Asia. This paper highlights the importance of sea transportation and logistics sector in the country. Further, the sector’s contribution to the economy through trade and employment has also been discussed. The recommendations offered also provide action points for the future of the sector.

Introduction to Sea Transportation in UAE

The United Arab Emirates (UAE) has grown over the last five decades into one of the most prosperous economies of the world. The discovery of crude oil in the 1960s and 1970s has allowed the UAE to grow from a poor nation into one of the richest and fastest developing countries in the world (Keane & McGeehan, 2008). Issues such as the economic development and prosperity of the UAE have allowed the country to invest heavily in transport, logistics, and trade infrastructure, which have gradually placed it as a major transport hub in the world. The country has invested heavily in air, road, and sea transport where it has the best infrastructures in the three categories of transport and logistics. Indeed, the Dubai International Airport is the world’s second busiest airports by passengers and air traffic in the world. The country’s strategic location between Europe and Asia promotes its status as a chief transport center in the world.

The country’s sea transport plays a very vital role in its economy. Further, the strategic location of the country in between Europe and Asia has allowed it to be a primary sea transport base between the two regions and thus the whole world (Irvine, 2008). In recognition of the country’s strategic location, the UAE has invested heavily in the development of ports to ensure that it can support logistical support for sea shipment in the region (Al-Qaydi & Jamil, 2007). Indeed, Dubai, which is the capital city of the UAE, is the leading logistics hub between Europe and Asia. The country has five seaports that support its status as a logistics base in the Middle East. The ports include Mina Zayed in Abu Dhabi, Jebel Ali and Mina Rashid in Dubai, Mina Khalid and Khor Fakkan, and Fujairah Port. Indeed, Jebel Ali Port, which is located in Jebel Free zone, is the biggest harbor in the Middle East. Besides, it is among the top ten world’s largest container ports (Lam, 2011).

Findings, Evaluation, and Discussion

Growth in the Sea Transport and Contribution to the UAE’s Strategic Objectives

Transport and logistics is a large sector of the UAE’s economy. It accounted for approximately $4 trillion in 2014 (Mounime, Lotfi, & Hajbi, 2014). The transportation of goods or commercial transport services account for the bulk of revenues in the sector. Companies in the commercial transport sector are critical to the economy since they provide a vital link between the extraction of natural resources, process of products, and the distribution of finished products to wholesalers, retailers, and consumers (Rodrigue, Comtois, & Slack, 2013). The significance of the commercial transport sector is evident in the way fluctuations in the demand for transport services are a crucial indicator of economic growth or slowdown. The sector is also highly influenced by the direction and volume of international trade and the levels of globalization in the world.

Various trends and factors influence the transport and logistics sector in the world today. Firstly, the rapid growth in Asia has played an important role in shaping the growth and direction of the sector. In this case, there has been an increase in the volume of exports from Asia to Western markets, as well as an increasing demand for imports in the domestic markets (Al Abed, Hellyer, & Vine, 2006). In response to the growing demand for transport and logistics in the Asian Pacific region, transport and logistics service providers have been rapidly improving the infrastructure and capacity of facilities to meet the demand (Alkaabi, 2014). Another important driver of the growth in the transport and logistics sector is the increasing importance of logistics and transport in the modern world (Katzman, 2010). Global trade is now highly linked to offshore-outsourced manufacturing, which has consequently led to the demand for reliable logistics and transport services in the world.

In the United Arab Emirates, the transport and logistics sector is a vital segment of the economy. It accounted for 10.4% of the non-oil GDP in 2012 as compared to 8% of the GDP in 2008 (Katzman, 2010). The efficiency and size of the UAE’s ports make the country the third largest re-export hub in the world after Hong Kong and Singapore. For instance, the Dubai Port, which is also known as Jebel Ali, is the world’s largest container port between Rotterdam and Singapore with a capacity of 14M TEU. In 2010, the port was the ninth largest container ports globally (Held & Ulrichsen, 2013). The country has dedicated considerable resources to the expansion of its ports. This move has made it attractive to investors and logistics exerts through various economic incentives, which have further cemented the country’s position as a transport and logistics hub in the Middle East and the world. The diagram below shows the growth of UAE ports.

The Growth of UAE Ports
The Growth of UAE Ports

The development of transport and logistics sector in the UAE is in line with the company’s strategic objectives of developing a non-oil economy where tourism, transport, and other non-oil sectors will contribute to more than 80% of the GDP by 2030 (Branch, 2006). Presently, the GDP of the country is majorly supported by the oil industry. However, the negative consequences of oil fluctuations in the international market to the economy of the UAE and the lack of sustainability of oil as an economic commodity reveal the need for the economy of the UAE to focus on the development of other sectors of the economy (Al Abed et al., 2006). One of the major areas of focus is the establishment of the UAE as an integrated transport and logistics hub that combines all the three areas of transport, namely, air, land, and sea (Fernandes & Rodrigues, 2011). As such, the development of the sea transport and logistics sector in the country is an important step towards its establishment as an integrated transport and logistics base. The expansion of various ports such as the Jebel Ali and Mina Zayed is part of the process of establishing the country as a major transport and logistics (Alkaabi, 2014). Other developments in the air and land transport and logistics sector have acted to ensure that the country meets its objectives of placing itself as a strategic transport and logistics base in the Middle East.

The Contribution of Sea Transportation to the UAE’s Employment

The growth of the sea transportation sector in the UAE has also provided an important avenue for employment in the country for both locals and expatriates. Most importantly, the transport and logistics services that are linked to sea transport form one of the areas that have experienced an increment in the number of jobs created in the country (Fernandes & Rodrigues, 2011). The contribution of the sector to employment arises from different areas, including cargo handling, seafarers, warehouse management, and administration roles in logistics and construction companies among others.

Firstly, through government affirmative action, the establishment of the JAFZA among other free zones around the United Arab Emirates ports has attracted more than 7,000 foreign companies that focus on logistics and transport (Hall & Jacobs, 2012). The transport and logistics sector accounts for approximately 12.4% of the country’s employment. In this case, the sector employs approximately 540,000 people who work in various areas of the sector (Mounime et al., 2014). It is estimated that as the country continues to expand its transport infrastructure, it will attract more companies, which will instead create more employment in the country. With the international trade likely to continue growing due to the increased offshore manufacturing, the demand for efficient and effective transport and logistics will attract more employment in the sector (Samarai & Qudah, 2007).

Secondly, the sea transport sector contributes to indirect job creation in other sectors of the economy. For example, the expansion of port infrastructure means that the demand for construction services will contribute to an increasing avenue of employment in the sector (Hall & Jacobs, 2012). The exemption of international companies from taxation among other benefits means that more companies are likely to establish bases in the various free zones in the country. This move will contribute to indirect employment in the form of construction services that are required for the establishment of offices, warehouses, and other facilities, which are crucial for the companies. The construction sector in the country accounts for more than 33% of all the employment opportunities. Hence, the expansion of the transport and logistics sector will be an important segment that will contribute to more jobs in the country (Fernandes & Rodrigues, 2011).

The graph below shows the growth of employment in the sea transport in the last 20 years.

Growth of employment in the sea transport in the last 20 years
Growth of employment in the sea transport in the last 20 years

The foreign direct investment (FDI) is the backbone of any economy. In the United Arab Emirates, policies that govern foreign direct investment in the country are some of the best frameworks in the world. The policies have led to a rapid influx of foreign companies that are keen on taking advantage of the strategic location of the UAE as a gateway to the Middle East Asia and Africa (Samarai & Qudah, 2007). The advancement of a country’s economy is highly linked to its policies and infrastructure. The United Arab Emirates has focused on creating a favorable environment for both local and international organizations to set base in the country through policies and development of infrastructure that will boost the sea transportation sector.

The country’s foreign direct investment policies are very favorable for companies involved in the transport and logistics sector (Hall & Jacobs, 2012). The establishment of the Jebel Ali Free Zone Authority (JAFZA) in 1980 represents the single most significant effort of the UAE government towards attracting foreign direct investment. JAFZA is an industrial and distribution center that is dedicated to attracting foreign direct investment to the UAE (Yong-An & Kay-Shek, 2013). The country has focused on the establishment of Dubai as a major aviation and maritime transport and logistics hub between Europe and Southeast Asia. The effort of the country to attract FDI led to positive outcomes. For instance, the country’s foreign direct investment grew from $1 billion (1% of GDP) in 2000 to $86 billion (24% of GDP) in 2013 (Mounime et al., 2014). The growth rate of the FDI during the period was 49% per annum, which was the highest among the GCC countries. The influx of the FDI saw an increase in the number of companies that set base in the United Arab Emirates. Consequently, the incoming companies led to a demand for transport and logistics services.

The JAFZA offers favorable policies that have attracted many companies in the logistics and transportation sector. For instance, the country allows companies that set base on the JAFZA and other free zones with a 100% foreign ownership of ventures (Katzman, 2010). In other words, the companies that establish operations inside the free zone are not obliged to have local shareholding. Such a policy is very attractive to companies that are not willing to surrender shareholding to locals. The second policy that the country has put in place for FDI in the JAFZA is a 50-year no-tax guarantee for companies with operations inside the zone (Mounime et al., 2014). Other policies in the JAFZA and other free zones in the area include the lack of restriction on capital inflows and outflows (Yong-An & Kay-Shek, 2013). In other words, foreign companies have no restriction on the amount of capital that they can bring or withdraw from the businesses and operations established in the free zone. Lastly, because of the inexistent labor restrictions, companies are at will to employ locals or expatriates.

The country has invested heavily in the development of the important infrastructure to support the sea transport and logistics sector. For instance, the country has focused on the expansion of the ports of Jebel Ali and Khalifa to increase their container-handling capacity. The country has dedicated more than $8 billion to the expansion of ports to segment its position as an outstanding transport and logistics hub (Mounime et al., 2014). The expansion of the port is in line with the government’s goal of ensuring that the transport and logistics sector contributes immensely to the economy of the country. When completed, the Khalifa Port alone will contribute to 15% of the GDP of the country (Irvine, 2008; Rodrigue et al., 2013; Grant, Golawala, & McKechnie, 2007). Further, it will handle more than 15 million TEUs, the same as Jebel Ali Port in its current capacity. The ports will create more than 100,000 jobs when the current expansion programs are completed, thus effectively making them Mega Sea ports in the world (Held & Ulrichsen, 2013).

Economic Openness and Impact on the Sea Transport Sector

One of the major drivers of economic development in the UAE is the economic openness of the country. Through various policies and development of infrastructure and other related services, the country has developed within a short time to one of the world’s biggest economies. The promotion of free trade in the UAE has resulted in a significant impact on the development of the sea transport sector.

The country is a member of various international trade organizations and agreements that indicate its commitment to free trade (Rodrigue et al., 2013). Firstly, the country has various Free Trade Agreements with other GCC countries. This involvement allows goods and products produced in the member countries to be charged little or no customer taxes. The country is also a member of the World Trade organization (WTO) and thus an indication of its commitment to international trade and its obligations under the multilateral trade policy regime (Irvine, 2008).

The openness of the UAE is evident in the fact that it has some of the lowest tariff charges in the world at 5%, which is lower than the maximum tariff of 15% that is permitted under the WTO regulations. The establishment of Free Trade Zones is also a great indicator of the country’s dedication to free trade (Keane & McGeehan, 2008). The UAE has also been keen on negotiating bilateral and unilateral trade agreements with other countries such as the European Union, Turkey, Australia, China, and the United States among others (Rodrigue et al., 2013). Such measures will ensure that the country continues to uphold its obligations under the WTO towards the development of a free, competitive, and open trade policy.

The sea transportation sector has benefitted from free trade and the openness of the UAE’s economy. For instance, with the establishment of more than 40 free zones in the country, many transport and logistics companies have established their Middle East operations in the UAE. The favorable policies that are in place to promote free trade and foreign direct investment have paid off with more than 7000 companies being already in the JAFZA zone alone (Held & Ulrichsen, 2013). The bilateral trade agreements that are in place in the country have also allowed major international companies to set base in the UAE. The move has led to prosperity of the UAE’s sea transport and logistics sector (Held & Ulrichsen, 2013). The free trade has also led to an increased traffic of goods into and outside the UAE. This situation has also led to an increased demand for sea transport and logistics services.

Conclusion

The emergence of the UAE as a major transport and logistics hub can be attributed to many factors such as economic advancement and investment in the country. The country has experienced exponential growth of its economy since the 1970s following the discovery of oil. However, the uncertainties in the oil industry due to fluctuations in the international oil prices have pushed the UAE to seek alternative activities to support its economy. Among the activities, the development of the country as an integrated transport and logistics hub that incorporates sea, land, and air transport has been a priority. The country has dedicated considerable resources to the development of sea transport and logistics sector to be a competitive and a major source of income to the economy. Its policies, infrastructure, and free trade policies among other factors that have been discussed above prove that the country has performed well in ensuring the development of sea transport and logistics sector. The sector has also contributed to employment of more than 54000 people, both locals and expatriate. The establishment of free zones and favorable policies for FDI has allowed more than 7000 companies to set their operations in the country. This situation has led to more demand for logistics and transportation services in the country. Concisely, the sea transport and logistics sector is a major segment of the economy. It has provided important services to aid the transportation of goods and services in and outside the UAE, consequently linking the country to the rest of the world.

Recommendations

The current UAE government’s approach to the development of the sea transport and logistics sector is appropriate because of the benefits that have been received so far. The government policy towards the establishment of free zone is one the best approaches that have allowed the UAE to attract a large number of companies in the transport and logistics sector. Further, its focus on the infrastructural development of the sector has allowed the capacity of the ports to increase drastically. This progress has allowed the sector to support the ever-growing transport and logistics demand in the region. However, there are several recommendations that the country should put into considerations. Firstly, there is the need to focus on the development of local labor force that can guarantee sustainability of the transport and logistics sector in the country. Currently, just like other sectors of the economy, the UAE’s sea transport and logistics sector is highly dependent on unsustainable foreign labor force. The second recommendation is the building of local capacity of firms to be key players in the sector. In this case, majority of the companies that use the sea and transport sector services are foreign and hence unsustainable for the country and the sector as a whole. The adoption of these recommendations will ensure that the sector is even more beneficial to the economy.

Reference List

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