IMEC: The Road That Should Not Be Taken

In the Greek Mythology, a Sisyphean task refers to a seemingly endless and futile endeavour, almost impossible to complete. The inception of the India-Middle-East Europe Economic Corridor (IMEC) reminds me of a Sisyphean task. IMEC, with regards to foreign affairs and diplomacy, is viewed in a high manner, however, it is riddled with obstacles when viewed from the lens of economics and trade.

In September 2023, the European Commission as well as the Governments of Saudi Arabia, India, United Arab Emirates (UAE), France, Germany, Italy and the United States of America announced their plans to create the IMEC, an initiative to integrate the Middle East and South Asia in a shared geo-economic framework.

A year later, in February 2024, India and UAE formalised the corridor arrangement, however despite the optimistic stance taken in the MoU, other countries have not been part of the formal picture so far. IMEC is a project that underscores India’s chance to become more interconnected with the Western and Middle Eastern powers. Yet, that is the view from the rose-coloured lens, the real picture depicts the criticism and scepticism the project has received for its viability waters. More than just a harbour to increase integration and connectivity between nations, it also seems to serve as an ambitious foreign policy tool to counter China’s influence in the Middle East.

The project looks interesting on paper, but from the outlook of a realistic scenario, it encounters significant challenges which it needs to address first, some of which are highlighted below.

What does the economic corridor contain?

Official statements released indicate that there will be two separate corridors: one maritime route, also called the Eastern Corridor, will connect India to the Arabian Gulf – and the Northern Corridor which will be a railway linking the Gulf to Europe. Described as a transcontinental maritime and railway network, IMEC is set to encompass commercial centres and support the advancement and exportation of clean energy and data through the installation of undersea cables. It will also interconnect energy grids and telecommunication networks to enhance dependable electricity access and propel clean energy technology forward.

The primary objective is to establish connectivity between India and European markets. The proposed shipping route starts from India and proceeds to the UAE, where it transitions to a rail network spanning Saudi Arabia, Jordan, and Israel. Subsequently, goods would be loaded onto ships to cross the Mediterranean Sea, ultimately reaching Greece. This network aims to link the ports in India and the Middle East first, and then connect the Middle East together through a freight rail system, which will link it to a European port, from where goods will be further transported to destinations in Germany, Italy, and France.

The corridor’s ultimate success to achieve its objectives thus relies on establishing effective and efficient transport networks through different terrains amid political and geopolitical turmoil.

Can IMEC achieve the Green Hydrogen Goals?

One of the participants’ primary intention for establishing the IMEC is that “[…] the corridor will increase efficiencies, reduce costs, enhance economic unity, generate jobs, and lower greenhouse gas emissions – resulting in a transformative integration of Asia, Europe and the Middle East.”

As simple as it may sound, the question of whether renewable energy can act as an exporting factor will likely depend on a single molecule: hydrogen. The plan to make it one of the foundations of the corridor with new pipelines faces several challenges. First, the cost of producing carbon free (green) hydrogen currently has a significant technology-investment gap of US$ 460 billion from three sides – production gap, transmission & distribution gap and end use applications gap. As of 2023, green hydrogen projects and targets around the globe show that Australia, the US and Spain will lead the market by the end of the decade, followed by Canada, Chile, Egypt, Germany, India, Brazil, and Morocco. India is in the race, and it is likely that the success of IMEC will also depend on India’s capability to scale up its own technologies or import these from other technology leaders to enable the exportation of hydrogen. However despite the strides, green hydrogen projects remain in the construction and operation phase and pre-commercial phase. In 2023, India also initiated talks for export possibilities of green hydrogen to some EU countries, namely France, Italy and Germany (all signatories to the IMEC MoU), however, fulfilling hydrogen’s potential as a decarbonisation tool will require significant infrastructure capabilities and a cost benefit analysis which IMEC countries at the moment do not seem to have in their entirety.

Trade-related costs will be a critical component that influences the development of global supply chains for GH2. According to a recent report, the average applied tariff rate for H2 (all types of hydrogen, including green hydrogen) stands at approximately 5.3 percent across most WTO members, surpassing that of ammonia (4.4 percent) and methanol (5 percent). Another challenge that I see will be the removal of the price and non-price barriers to the transmission of electricity via renewables as a means to realise the potential of zero carbon resources. It remains too early to predict the specifics and timing of the transition, and the absence of a feasibility study on IMEC’s planned pipelines or hydrogen deployment also adds uncertainty to the routes IMEC might choose.

How fast can countries transition to renewables?

The question also arises how quickly will the IMEC countries start to build the renewable infrastructure, needed for decarbonisation of electricity at the time when the inception of the corridor is yet not materialised. The argument for renewable energy transition also widens the gap in understanding how the transition will impact the geopolitical influence of the major oil and gas producing countries. The dynamics between energy exporters and importers will likely change based on the new energy security and geopolitical framework. And it may lead to structural trade imbalances and the weakening of alliances built on fossil fuels. It is to be seen how this will impact the relationship between countries who signed the IMEC. While India’s share of renewable energy in power generation is 23 percent, the share of the UAE and Saudi Arabia stands at 5 percent and 0 percent respectively in 2022. It is not entirely clear what path the UAE and Saudi Arabia will follow, despite aiming to adopt the green agenda by 2023. The EU’s share of renewable energy in power generation is 38 percent in 2022. The EU already adopted a green hydrogen strategy and named several candidate suppliers. Namely the IMEC signatories India and Saudi Arabia are planning to export green hydrogen to the EU market by 2030. However, because the green hydrogen ecosystem is still in its early stages, it is yet to be seen how this will progress.

Green Investments in IMEC: Well, someone has to Pay?!

The main question which arises is who will pay for investments in the renewable energy transmission. It is not entirely clear which countries will be contributing to the infrastructure costs and how these investments will be divided. While it is speculated that the funding might originate from private investors, given the lack of clarity in the absolute costs, political uncertainty and length of project completion, the attractivity of such an investment for the investors is questionable. Yet, at the moment, no funding plans have been unveiled by the countries themselves. This is a significant barrier to the project’s success, as it will traverse multiple jurisdictions and, to add to it, the ongoing absence of standardized regulatory framework, and customs procedures also hinders the project’s viability.

Keep the investments aside, let us talk Corridor Economics and Details

At first glance, observing the IMEC route on a map might suggest it’s a short route. However, upon delving deeper, akin to a lesson in 10th-grade topography, a closer examination reveals the route traverses terrains and desert lands in Saudi Arabia, the UAE, and Jordan. Building a trans-Arabian railway line will thus be an expensive endeavour, and also increase the journey’s length. Yes, geographical connectivity channels trade, and this looks perfect on paper, but IMEC’s quest for connectivity requires connecting 2000 kilometres by railroad. This will also increase energy usage and add more to the project costs, which are only being speculated at the moment to vary from US$ 8–20 billion.

Basic principles of transportation economics suggest that shipping goods by sea is more cost-effective than overland transport. With the Suez Canal, sea transport between Europe and India is already convenient and economical. IMEC should only be conceptualized as an alternative route to circumvent a potential Suez Canal blockade. Further, seen as a competitive stride against the Suez Canal, it risks hurting relations with Egypt.

Moreover, it can likely strain relations with Turkey, as one of the shipping routes passes through waters contested by Turkey, which is not part of the IMEC. President Erdogan of Turkey has emphasized Turkey’s indispensable role, stating, “there is no corridor without Turkey”. Other Gulf States, such as Oman and Qatar, may also feel excluded. The issue at hand is that IMEC represents not just a trade initiative but also a manifestation of power politics. Another concern pertains to Iran, situated at the intersection of the Middle East and Asia. It holds significant influence in the region and serves as one of the vital routes connecting India and the UAE, and any disruptive actions here may adversely affect trade operations.

In the end, it all boils down to how economically viable the routes will be. Gaining access to the market will necessitate establishing financial resources to increase investments and export capabilities. Improved connectivity and collaboration within regions, along with strengthening ties with industries and value chains, will also contribute to productivity and increased trade. The countries will furthermore be required to re-build their technical capacities, which will allow the utilisation of economic resources for growth and hence shift the focus to competitiveness to achieve the corridor’s objectives.

IMEC is being built to integrate Asia, the Arabian Gulf and Europe. Looking at the former, East Asia remains knit with supply chains and strong economic integration, whereas South Asia has low complementarity of trade along supply chains. While progress between the two have been made, there still exists significant untapped potential for economic integration. The project will also depend on how well the geography, availability of economic resources, capital, and financial resources can be integrated with each other to determine the interactions and trade performance between each region.

The entirety of trading via the IMEC requires loading and unloading from India to Middle East, and then from Middle East to Europe. And this will likely increase time and costs. The risks associated with loading and unloading are high, and will also potentially increase the insurance costs. So far, in international trade, rail has been underutilised as a mode of transporting goods between vast expanses of regions, and thus the rail infrastructure has not resulted in significant trade growth, as anticipated. Major physical infrastructure is necessary if the rail system is needed to connect the Northern corridor to Europe. For instance, in 2018, 124.4 million tons travelled between the countries along the Middle Corridor and EU, but only 2.2 million tons travelled by rail. Thus, it is probable that despite the existence of a rail route, bulk freight between India and Europe will still primarily rely on the original shipping routes.

Moreover, Multimodal freight transport (MFT) is also characterized by lower reliability due to the necessity of switching modes at terminals, where various unforeseen events such as resource shortages, accidents, adverse weather conditions, and operational mismanagement may occur. Shipments changing transport at the MFT terminals will require fast information flows and collaboration between railway operators, and port authorities, which also includes cargo handling companies and customs. Momentarily, there are no advanced IT applications, and this can likely cause operational delays and challenges. It’s also unclear whether the rail infrastructure will incorporate electric or diesel trains, but choosing the former would likely enhance operational efficiency, cost advantages and reduce emissions in intermodal rail transport, particularly aligning with one of the objectives of the proposed IMEC, which aims to promote sustainable practices.

Wait, there are more problems?

An analysis indicates that the countries which signed the MoU are already engaged in significant trade activities. For our study, let us look at the top exporting partner countries focused on industries related to energy and basic materials such as chemicals, coke and refined petroleum, mining and quarrying, metal ores, and basic metals. The results indicate that the IMEC signatories already have a high level of economic integration and cooperation between each other. For 2021, an overview of the top exporting partner countries for Saudi Arabia included China, EU27, India, Turkey, Egypt, Jordan. In 2022, the UAE’s top exporting partner countries were composed of China, Saudi Arabia, India, EU27, Egypt, and the US. For India, it was the US, EU27, UAE, Turkey and China. While the majority export shares for the EU remained intra-EU, the biggest extra-EU export-partners were the US, China, Turkey and UAE. What one can see is that these countries already belong to the top partner list. They could always export more to increase trade and it does not necessarily need to be via a corridor because other trading routes already exists between countries. While IMEC may fulfil the ambition to link India to trade more with the EU, let us also consider the India-EU Free Trade Agreement talks. The negotiations seem to be continuing but they are also facing difficulty in completion, largely stemming from regulatory and environmental issues.

In today’s age of geo-economics, trade rivalry is more prominent than trade harmonisation, and not treading carefully will very likely result in more problems pertaining to economic competition, security concerns, and power struggle to control the infrastructure in maritime trade.

The MoU also suggests a 40 percent reduction in trade costs. While there may be decreases in time and distance, there’s still no indication from the candidate countries regarding any feasibility assessment on the cost impact. Furthermore, this doesn’t guarantee an actual increase in trade between the involved countries. The present trade patterns between countries are already constrained by the various tariff and non-tariff barriers, which is to say that even if IMEC does reduce direct costs of trading the products, other barriers will still remain in place.

To spur trade and increase access to new markets, the reduction needs to be sought through reducing constraints to export competitiveness. The flow of resources between countries or within a network relies on the strength of the connections within that network. It remains uncertain whether the movement of resources will be enhanced specifically through IMEC or not. Regional cooperation for transport and economic corridors and their development is for the economic, social and political good. However, the sea route-rail freight channel alone will not facilitate the intraregional trade between Asia, the Gulf, and Europe. The need is to engage more effectively with the already existent trade policies, practices, standards, and technical as well as legal developments.

Oh, I Did Not Exactly Focus on the Non-Trade Issues Before, Kidding, I Did, But Here’s More!

There is also ambiguity surrounding whether IMEC will face similar hurdles as India’s prior corridors. Numerous Chinese analysts have voiced doubts regarding the infrastructure ventures proposed under IMEC, citing a track record of unmet assurances from the United States. In juxtaposition to China’s well-established Belt and Road Initiative (BRI), which has operated for over a decade and extends across about 150 nations, IMEC appears to be closely linked to the United States’ strategy of friendshoring. Such an association may only empower select few nations which remain technologically and financially capable.

The MoU also remains non-binding. Israel and Jordan have not even signed it, and given the present geopolitical turmoil with the Israel-Gaza conflict, it seems unlikely that Jordan will do so anytime soon. The Israel-Hamas war also shows fundamental risks in the region, raising doubts on the security of investments that are supposed to connect multiple regional powers with diverging political agendas.  Alternatively, Saudi Arabia has said it will not open any formal diplomatic relations with Israel, unless an independent Palestinian state is recognized according to the 1967 borders with East Jerusalem as its capital. While geopolitics is at play, national politics are also significantly involved. It’s probable that IMEC will become entangled in further political considerations. The initiative has already sparked unease among other regional allies of the United States who perceive themselves as marginalized. Let us not also forget that tensions between Saudi Arabia and the UAE have continued to persist due to their own regional disputes that concern politics, human rights and border disputes.

Overall, there is a looming risk that IMEC could result in significant sunk costs, both geopolitically and economically. Unlike China, which has made substantial investments in the Belt and Road Initiative (BRI) over the past decade and also has deepened its financial ties with the Gulf nations over the years, the West and other IMEC countries may find themselves entering the initiative too late. The future of IMEC currently depends in the short term on the Israel-Hamas war and, in the long term, on the normalization of talks between Saudi Arabia and Israel.

One can see that the list of challenges to encounter is long. Most importantly, the actual financial costs and trade-enhancing effects of the corridor are yet to be analysed and it will take several years for the plan to be realised.

Considering the myriad obstacles encountered during the planning phase of IMEC, pursuing the project appears to be an unwise path forward.