The economy of several Middle Eastern countries has for long been dependent on the export of natural resources such as oil and gas. However, this richness of natural resources is a double-edged sword, as it has prevented them from strengthening other parts of their economies and broadening their revenue base. In this article, we aim to explore how recent worldwide challenges like trade wars, international conflicts, and pressures to move towards more sustainable forms of energy have highlighted the need for the Middle East to diversify its economy and build stronger trade relationships with key players such as the European Union
Introduction
Since the early 20th century, the Middle East has been economically, socially, and financially largely dependent on the export of natural resources such as oil and gas. Thanks to the discoveries of large endowments of natural resources, many governments of countries in the region were able to significantly increase their welfare, promoting financial prosperity and higher living standards. Namely, countries such as Qatar, Bahrain and the United Arab Emirates are now amongst the countries with the highest GDP per Capita.
However, today most of these countries are still primarily reliant on their revenues from commodity exports, which makes them highly exposed to fluctuations in commodity prices. This vulnerability was first outlined in 2014, following the sharp decline in oil prices. The economic fragility of countries relying on oil and gas exports was exposed highlighting the risks of having a narrow revenue base. In response, most countries revisited and prioritized diversification plans for their economies.
Despite public commitments and strategies, diversification in the region has been slow to implement or ineffective, due to structural reforms being inconsistent or blocked by institutional and political barriers. As a result, very few countries managed to build diversified economies. This ongoing vulnerability highlights a deeper paradox, which states that countries with high levels of natural resources often struggle economically. Instead of driving growth and stability, resource wealth can actually make these economies more fragile. It constantly exposes them to unpredictable swings in prices, sudden changes in demand and supply, and even natural disasters. These repeated disruptions create instability and make it harder to plan for the long term. This situation, also known as the “natural resource curse” often leads governments to neglect other parts of the economy and mismanage public spending.
National Pathways to Diversification
When it comes to economic diversification, one of the leading countries in this aspect is Saudi Arabia, which focuses on three pillars: economic diversification, diplomatic balancing, and energy transition. Their Vision 30 plan is a major driver of diversification, and the country has already managed to increase the percentage of non-oil activities to more than 50% of GDP, with further growth of non-oil sector projects estimated to be 6.2% by 2026. On the diplomatic side, they want to establish themselves as a neutral broker between global powers and have invested more than $770 billion in the US, signaling sustained ties to the West and increasing their diplomatic significance. The country is also moving towards a clean energy transition and positioning itself as a supplier of energy for AI data centers. Significant challenges remain, such as managing fossil fuel dependency whilst expanding into the clean energy sector, and sustaining economic diversification through geo-political headwinds. If it were to successfully navigate these barriers, the country could set a new example for how resource-rich nations can transform themselves in a rapidly changing world.
One of the gulf countries that differentiated itself from the others through a successful attempt to diversify is the UAE. In 2024, they reached 75% of its 4 trillion-dirham non-oil trade targets set for 2031, a major focus of their diversification plan. It has managed to place itself as a regional hub in terms of tourism and business centers by investing heavily in trade, logistics infrastructure, and diversification policies. Key elements of their plan are the Comprehensive Economic Partnership Agreements (CEPA’s), which since 2021, they have signed with several countries including India, Indonesia, Israel, and Turkey. This has allowed CEPA-related exports to rise by 43% year-on-year in 2024 and these exports now account for 25% of the UAE’s non-oil exports.
Furthermore, the country is also making major progress in terms of renewable energy. Thanks to the region’s ideal solar conditions and solar energy becoming cheaper, even cheaper than gas in some cases, Gulf countries such as Saudi Arabia and the UAE want to free up oil and gas for exports instead of using it domestically. This push to diversify energy sources and reduce reliance on fossil fuels is also driven by the future needs of large energy supplies due to AI data centers and producing green hydrogen. Gulf states have the capital required to fund large renewable energy projects. For instance, Masdar, the UAE's global renewables company, announced a $6 billion solar and battery project, currently the largest of its kind. This marks a significant shift towards making renewable energy a reliable energy source. Renewables are expected to supply 30% of the Gulf’s electricity capacity within five years, nonetheless, challenges like outdated infrastructure remain.
Another notable country that used to lag behind others when it came to economic diversification is Kuwait. The country just passed a new public debt law, which will allow it for the first time in 8 years to borrow up to $97 billion. This move aims to finance major infrastructure projects, such as a new port and airport terminal, and diversify government revenue sources besides oil exports. Despite this, reform is slowed down by political challenges. For instance, the Emir recently had to suspend the parliament to push through legislation such as the debt law. Furthermore, much of the budget of the country goes towards public sector salaries and subsidies, which limits the investment capacity. The road ahead for the economic diversification of Kuwait remains challenging given a lack of a clear and cohesive economic vision.
Challenges like trade wars, continued conflicts around the world, and the growing move toward cleaner energy, have all added uncertainty. For countries that rely heavily on fossil fuel exports, it’s becoming clear that without a marked shift toward diversifying their economies, they risk falling behind, facing lower-value assets, declining income, and less influence in the global market. Given these pressures, expanding trading relationships with key players, such as the European Union (EU), has now become a strategic priority for the region in order to promote economic diversification in the long term.
The Effect of US Tariffs
United States (US) protectionism has altered long-standing relationships and disrupted international trade. The tariffs imposed by the Trump administration create opportunities as well as disruptions in the EMEA region. Thus, EMEA nations are being compelled to look for new markets and fortify regional ties due to the uncertainty caused by US policies.
The EU and Middle Eastern nations have been directly affected by US tariffs, which are justified under 'America First', and are intended to protect domestic industries and address trade imbalances. In April 2025, the United States increased tariffs on steel, aluminum, and cars to 25%, while the tariffs imposed on most EU imports from other sectors were set at 20%. These measures have been described by the European Commission as "unjustified and damaging, causing economic harm to both sides, as well as the global economy". The prospect of their reinstatement, along with the ongoing implementation of other tariffs, created significant instability for EU exporters, even though some of these were temporarily suspended for ninety days to allow for negotiations. However, the EU has made clear that "if negotiations are not satisfactory, our countermeasures will kick in" and that "preparatory work on further countermeasures continues". Certain industries received exemptions, including energy products, semiconductors, lumber, copper, and pharmaceuticals. The EU responded by announcing plans to levy retaliatory tariffs on US goods valued at about $23 billion, but these actions were later put on hold to facilitate negotiations.
Similarly, the United States imposed tariffs on several Middle Eastern (ME) countries in April 2025. Higher tariffs were imposed on Syria (41%), Iraq (39%), Libya (31%) and Jordan (20%), while a 10% tariff was imposed on exports from the Gulf Cooperation Council (GCC) and other countries such as Lebanon. Oil and gas imports were not included. Despite being punitive, these tariffs unintentionally pushed the economies of the EU and the Middle East to seek closer trade relations. As a result, the EU sees the Middle East as a promising market in light of rising US export prices, and the Middle Eastern nations see the EU as a reliable partner that presents chances for expansion and diversification.
The Effect of US Tariffs
United States (US) protectionism has altered long-standing relationships and disrupted international trade. The tariffs imposed by the Trump administration create opportunities as well as disruptions in the EMEA region. Thus, EMEA nations are being compelled to look for new markets and fortify regional ties due to the uncertainty caused by US policies.
The EU and Middle Eastern nations have been directly affected by US tariffs, which are justified under 'America First', and are intended to protect domestic industries and address trade imbalances. In April 2025, the United States increased tariffs on steel, aluminum, and cars to 25%, while the tariffs imposed on most EU imports from other sectors were set at 20%. These measures have been described by the European Commission as "unjustified and damaging, causing economic harm to both sides, as well as the global economy". The prospect of their reinstatement, along with the ongoing implementation of other tariffs, created significant instability for EU exporters, even though some of these were temporarily suspended for ninety days to allow for negotiations. However, the EU has made clear that "if negotiations are not satisfactory, our countermeasures will kick in" and that "preparatory work on further countermeasures continues". Certain industries received exemptions, including energy products, semiconductors, lumber, copper, and pharmaceuticals. The EU responded by announcing plans to levy retaliatory tariffs on US goods valued at about $23 billion, but these actions were later put on hold to facilitate negotiations.
Similarly, the United States imposed tariffs on several Middle Eastern (ME) countries in April 2025. Higher tariffs were imposed on Syria (41%), Iraq (39%), Libya (31%) and Jordan (20%), while a 10% tariff was imposed on exports from the Gulf Cooperation Council (GCC) and other countries such as Lebanon. Oil and gas imports were not included. Despite being punitive, these tariffs unintentionally pushed the economies of the EU and the Middle East to seek closer trade relations. As a result, the EU sees the Middle East as a promising market in light of rising US export prices, and the Middle Eastern nations see the EU as a reliable partner that presents chances for expansion and diversification.
Re-birth of EU-ME trade relations
It is important to stress that the EU and the GCC had been negotiating a comprehensive free trade agreement for years. Nonetheless, conflicts over human rights provisions, export taxes on petrochemical goods, differing economic systems, and the EU's insistence that the GCC establish a customs union first, caused the 1990-started negotiations to stall in 2008. Additionally, growing economic ties with China lessened the urgency of a deal with Europe, and smaller GCC states were afraid of losing sovereignty to Saudi Arabia in a more integrated framework.
Both the EU and Middle Eastern nations have moved toward bilateral trade agreements in response to the prolonged deadlock and increasing instability caused by US protectionism. More focused and specialized collaborations are possible with this strategy. The EU's renewed interest in bilateral agreements is a calculated move to broaden its trading partners and obtain a competitive edge in an area in which the US has significant interests as well.
The UAE-EU Example
On April 10th 2025, the UAE and EU formally agreed to launch negotiations toward a Comprehensive Economic Partnership Agreement (CEPA). This decision was announced following a phone call between UAE President Sheikh Mohamed bin Zayed Al Nahyan and European Commission President Ursula von der Leyen, who described the move as "a step towards a more dynamic and robust phase in their economic cooperation".
Currently, the European Union is the UAE's second-largest trading partner, accounting for 8.3% of its total non-oil foreign trade. In 2024, bilateral non-oil trade reached $67.6 billion, marking a 3.6% year-on-year increase from 2023. Notably, the UAE is also the EU's largest investment partner and export destination in the Middle East and North Africa region.
The growing trend of bilateral agreements between the EU and Middle Eastern countries carries major strategic implications. For the EU, it diversifies trade partners and reduces dependence on the US. For Middle Eastern countries, it facilitates diversification, attracts foreign investment, and expands export markets. These agreements also strengthen the geopolitical standing of both sides, providing a counterbalance to other global influences.
The EU-UAE CEPA represents perhaps the most significant concrete step in this direction. If successful, it could serve as a template for similar agreements with other nations in the region, potentially transforming a crisis imposed by US tariffs into an opportunity for more diversified economic integration across the EMEA region.
As negotiations with the US continue during the 90-day tariff suspension period, both the EU and Middle Eastern nations are proceeding with their own economic diplomacy initiatives to ensure they have alternatives regardless of the outcome of talks with Washington.
The UAE-EU Example
On April 10th 2025, the UAE and EU formally agreed to launch negotiations toward a Comprehensive Economic Partnership Agreement (CEPA). This decision was announced following a phone call between UAE President Sheikh Mohamed bin Zayed Al Nahyan and European Commission President Ursula von der Leyen, who described the move as "a step towards a more dynamic and robust phase in their economic cooperation".
Currently, the European Union is the UAE's second-largest trading partner, accounting for 8.3% of its total non-oil foreign trade. In 2024, bilateral non-oil trade reached $67.6 billion, marking a 3.6% year-on-year increase from 2023. Notably, the UAE is also the EU's largest investment partner and export destination in the Middle East and North Africa region.
The growing trend of bilateral agreements between the EU and Middle Eastern countries carries major strategic implications. For the EU, it diversifies trade partners and reduces dependence on the US. For Middle Eastern countries, it facilitates diversification, attracts foreign investment, and expands export markets. These agreements also strengthen the geopolitical standing of both sides, providing a counterbalance to other global influences.
The EU-UAE CEPA represents perhaps the most significant concrete step in this direction. If successful, it could serve as a template for similar agreements with other nations in the region, potentially transforming a crisis imposed by US tariffs into an opportunity for more diversified economic integration across the EMEA region.
As negotiations with the US continue during the 90-day tariff suspension period, both the EU and Middle Eastern nations are proceeding with their own economic diplomacy initiatives to ensure they have alternatives regardless of the outcome of talks with Washington.
Regulatory Alignment
Economic diversification in the Middle East requires a predictable, transparent and clear regulatory framework, as it represents a key factor to attract foreign investments and particularly European investments. It also has the potential to influence local competitiveness, innovation, and the success of free trade agreements.
In a series of annual reports investigating the regulations that enhance business activity, countries such as Iran, Libya and Iraq appeared at the bottom of the “Doing Business 2019” ranking. On the other hand, the GCC countries (Emirates, Saudi Arabia, Bahrain, Qatar) are approaching the standards of western countries. Indeed, one thing that is important to mention at first is that there are real regulatory disparities between GCC and other ME countries. While in GCC countries: business reforms, stable regulations and competition laws are well-established (creation of the Labor Court in 2018 in Saudi Arabia or the SME regulation in the United Arab Emirates), in the other ME countries, regulatory frameworks are unpredictable and inefficient. In these countries investor protection is weak, contracts are difficult to enforce, and often unattractive to foreign investors. For instance, in Iraq, foreign companies have faced major obstacles due to unclear investment laws, frequent changes in licensing terms, and bureaucratic hurdles that delay projects and deter long-term commitments. Therefore, convergent regulations are a must to making ME-EU trade agreements work.
Economic diversification in the Middle East requires a predictable, transparent and clear regulatory framework, as it represents a key factor to attract foreign investments and particularly European investments. It also has the potential to influence local competitiveness, innovation, and the success of free trade agreements.
In a series of annual reports investigating the regulations that enhance business activity, countries such as Iran, Libya and Iraq appeared at the bottom of the “Doing Business 2019” ranking. On the other hand, the GCC countries (Emirates, Saudi Arabia, Bahrain, Qatar) are approaching the standards of western countries. Indeed, one thing that is important to mention at first is that there are real regulatory disparities between GCC and other ME countries. While in GCC countries: business reforms, stable regulations and competition laws are well-established (creation of the Labor Court in 2018 in Saudi Arabia or the SME regulation in the United Arab Emirates), in the other ME countries, regulatory frameworks are unpredictable and inefficient. In these countries investor protection is weak, contracts are difficult to enforce, and often unattractive to foreign investors. For instance, in Iraq, foreign companies have faced major obstacles due to unclear investment laws, frequent changes in licensing terms, and bureaucratic hurdles that delay projects and deter long-term commitments. Therefore, convergent regulations are a must to making ME-EU trade agreements work.
Critical Areas
European companies are particularly attentive to certain international standards: data protection (GDPR compliance), tax transparency, anti-money laundering standards (AML), legal predictability, and contractual security. The strategic sectors under tight regulation are: finance, technology (with AI), health, and energy. In the finance sector, both Saudi Arabia and Egypt’s central banks strengthened AML policies. Regarding technologies, since AI could generate $320 billion in the Middle East by 2030, many states are implementing emerging regulations to reconcile innovation and ethics. The Saudi Data and Artificial Intelligence Authority (SDAIA) published the “the AI Ethics Principles," in 2023 to develop ethical governance of AI. As for healthcare, the sector is very closely supervised, in the Emirates, the ADHICS (Abu Dhabi Healthcare Information and Cyber Security Standard) sets out 692 requirements relating to confidentiality, cybersecurity and secure storage of healthcare data. Finally, the energy, oil and gas industry is also characterized by a reinforcement of regulation, in Saudi Arabia, the government has introduced stricter compliance and reporting standards for Aramco’s (the national oil company of the country) upstream and downstream operations, especially regarding environmental impact and transparency in crude oil exports. One of the reasons is to ensure compliance with international standards regarding environmental requirements.
For Middle Eastern countries, aligning their regulations with EU standards is therefore a challenge and a strategic necessity. The EU's strict rules on environmental, social and governance (ESG) practices, are increasingly becoming an imperative for cross-border investment and trade. This is driving governments in the region to modernize labor laws, improve transparency, and implement green standards in line with the European Green Deal.
Critical Areas
European companies are particularly attentive to certain international standards: data protection (GDPR compliance), tax transparency, anti-money laundering standards (AML), legal predictability, and contractual security. The strategic sectors under tight regulation are: finance, technology (with AI), health, and energy. In the finance sector, both Saudi Arabia and Egypt’s central banks strengthened AML policies. Regarding technologies, since AI could generate $320 billion in the Middle East by 2030, many states are implementing emerging regulations to reconcile innovation and ethics. The Saudi Data and Artificial Intelligence Authority (SDAIA) published the “the AI Ethics Principles," in 2023 to develop ethical governance of AI. As for healthcare, the sector is very closely supervised, in the Emirates, the ADHICS (Abu Dhabi Healthcare Information and Cyber Security Standard) sets out 692 requirements relating to confidentiality, cybersecurity and secure storage of healthcare data. Finally, the energy, oil and gas industry is also characterized by a reinforcement of regulation, in Saudi Arabia, the government has introduced stricter compliance and reporting standards for Aramco’s (the national oil company of the country) upstream and downstream operations, especially regarding environmental impact and transparency in crude oil exports. One of the reasons is to ensure compliance with international standards regarding environmental requirements.
For Middle Eastern countries, aligning their regulations with EU standards is therefore a challenge and a strategic necessity. The EU's strict rules on environmental, social and governance (ESG) practices, are increasingly becoming an imperative for cross-border investment and trade. This is driving governments in the region to modernize labor laws, improve transparency, and implement green standards in line with the European Green Deal.
Conclusion
Due to volatile oil prices and the increasing pressure for a global energy transition, countries in the Middle East are becoming aware of the need to diversify their economies and attract foreign investments.
In this context, the trade war started by the US, and the imposition of new tariffs have surprisingly strengthened Middle Eastern countries and EU’s economic relations, showing advantages for both Europe and the Middle East. For the EU, it allows to reduce its dependence on the US but also to diversify trade partners with initiatives like the EU-UAE Comprehensive Economic Partnership Agreement. For Middle Eastern countries, it encourages their diversification and attracts investments from abroad.
However, this diversification requires Middle Eastern countries to impose regulations to be able to align their legal frameworks with European standards. Therefore, during the past few years, Middle Eastern nations, especially the GCC ones, have witnessed advances in tax transparency, data protection, anti-money laundering and the strengthening of ESG standards.
Eventually, the Middle East, due to its geographical proximity, its resources and its desire to align itself with European standards, appears as a key partner in the current restructuring of international economic relations.
By Andrea Botero Herrer, Annaelle Pater and Lilas Spitzer
Sources:
- Reuters
- Financial Times
- KPMG
- Middle East Council on Global Affairs
- European Commission
- PwC
- Deloitte
- The Economist
- Abu Dhabi Department of Health
- Doing Business
- Legal 500
- Product Life Group