The reincarnation of what was once the world’s dominant trade route may reshape the face of the global economy.

The headlines from the Middle East understandably focus on the war in Iraq, the nuclear ambitions of Iran, and the Palestinian peace process. But 50 years from now, historians may say that one of the region’s most important stories was a profound economic shift: the development of strong ties between Asia and the Middle East.

The flow of goods, capital, and people between the oil-rich Gulf States and the fast-developing nations of Asia experienced a marked rise at the beginning of this century and may go on to reshape the world economy. We first explored this prospect last summer;1 since then, traffic along what we called “the new Silk Road”—the reincarnation of what had been the world’s dominant trade route during the Middle Ages—has increased dramatically.

The volume of trade between the six members of the Gulf Cooperation Council (GCC)—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—and east Asia roughly quadrupled between 1995 and 2005. Bilateral trade between those regions’ two largest nations—China and Saudi Arabia—increased 30 percent between 2005 and 2006 alone. Total cross-border capital flows between the council and the rest of Asia may climb from an annual $15 billion today to $300 billion by 2020.

Asia’s huge and growing appetite for oil remains the principal driver. Imports of Gulf oil by Asian nations (including China and India) are projected to rise at a rate of 3.7 percent annually until 2030, accounting for almost half of the world’s increased demand for oil. By 2030, China will buy more than half of its oil from the Gulf region.

There has also been a significant rise in the pace, scale, and scope of interregional investments. Alongside huge petroleum projects, such as the historic agreement that China Petroleum and Chemical (Sinopec) recently struck with Iran to invest as much as $100 billion to secure long-term supplies of oil and gas, there has been a flurry of big deals in other industries as well. Emirates Telecommunications (Etisalat), the UAE’s partially state-owned telecommunications group, paid $2.6 billion for a 26 percent stake in Pakistan Telecommunications (PTCL); and Egypt’s Orascom bought 19 percent of Hong Kong’s Hutchison Telecommunications for $1.3 billion.

At the same time, the UAE’s property developers are placing sizeable bets. Damac Holding is building a $2.7 billion residential, office, and leisure complex in Tianjin, China. Dubai-based Emaar Properties, one of the world’s largest property developers, is investing even more to develop entire townships as well as hotels in Pakistan and India.

A host of other indicators—from the new buzzword, “Chime” (denoting the trade zone comprising China, India, and the Middle East) to a more than six-fold increase in direct flights between the Gulf States and China (from 7 flights a week in 2000 to 48 over the same period in 2006)—point in the same upward direction. Most important, there is no shortage of optimism in the region. “We want to go global by going east, not west,” declared Mohamed Ali Alabbar, chairman of Emaar. “The West has got aging populations and aging economies. The East is where the true glamour lies.” In recent interviews with McKinsey, more than 20 top Asian and Arab business leaders seemed to share that outlook.

In spite of the enthusiasm, there are many challenges to overcome. Several senior executives from the Gulf States confessed they feel more comfortable doing business with India than with China, largely for bureaucratic and cultural reasons. There is also a language gap and a shortage of interpreters. To ensure the new Silk Road reaches its potential, politicians need to continue striking bilateral trade accords, such as the November 2006 deal between China and Pakistan. Final agreement on a regional free trade accord between the Gulf States and Asian nations, expected this year, is critical. So too are reforms to improve financial transparency and corporate governance.

Creating new government-backed investment agencies, modeled on the US Overseas Private Investment Corporation, would multiply private investment flows. China and India should also press ahead with plans to channel a portion of their large foreign currency reserves into new government investment agencies that would operate according to market principles, along the lines of Singapore’s Temasek.

If current trends hold up (and if existing potholes are filled in) the new Silk Road should soon emerge as a formidable corridor for global commerce. Between 2005 and 2020, for example, McKinsey estimates that trade flows between the Middle East and China could soar from $59 billion to between $350 billion and $500 billion in real terms—at least a six-fold increase. Moreover, India’s GDP seems likely to double by about 2020.

Growth of this magnitude will fulfill today’s vision of a vast, prosperous commercial region. Along with business opportunities, it will present increasingly complex geopolitical challenges for the United States and Europe, which have long dominated the trade and investment flowing to and from the Middle East. Yet if business and government leaders take action now, they will ensure that the development of the new Silk Road will make both headlines and history.

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