Once in office, Qaboos reversed the isolationist policy of his father and started establishing relations with most Arab and Western countries. By 1987, he had even developed ties to countries of the Eastern bloc, including the USSR and People's Republic of China. Oman, however, has maintained a very pro-Western tilt in its foreign policy. Oman was one of the only two Arab states that endorsed the Egypt-Israel Peace Treaty of 1979. In June 1980, Oman concluded an agreement with the United States granting access to Omani air and naval facilities, thus making Oman a base for U.S. activities in the Persian Gulf. The agreement was revised and renewed in 2000. Oman has pursued its U.S. policy despite concerns expressed by fellow members of the Gulf Cooperation Council. The outbreak of the Iran-Iraq war further underlined Oman's strategic importance, particularly with regard to the Strait of Hormuz, which is a narrow waterway at the mouth of the Persian/Arabian Gulf between Oman and Iran. About two-thirds of the world's oil traffic passes through the strait.
The Omani government has pledged to provide support to the United States in its War on Terror, initiated by U.S. president George W. Bush in response to the 11 September 2001 terrorist attacks that targeted the World Trade Center in New York and the Pentagon in Washington, D.C.
Most of Oman's foreign policy concerns are regional. When Qaboos took control, the rebellion in the Dhofar province of the country affected his relations with other states in the region. South Yemen and Iraq proved to be unfriendly neighbors at that time because they supported the rebels. Since a reconciliation summit in 1982, relations with Yemen have improved and have culminated in completion of a cooperation pact between the two neighbors in October 1988. Border disputes with Yemen were settled in 1992, two years after the merger of North and South Yemen (May 1990) into the Republic of Yemen. The countries now share cooperative relationships.
Despite its close relations with the West, Oman has tried to maintain a balanced regional policy. In early 1989, it restored diplomatic relations with Chad. In 1990, negotiations with the Palestinian Liberation Organization (PLO) indicated a desire to pursue a foreign policy that was in line with regional sentiment.
By 1999, Oman held to a middle-of-the-road stance of conciliation and compromise in Middle Eastern politics. In January 1999, Oman's foreign minister met with his counterparts from Egypt, Saudi Arabia, Syria, and Yemen at a closed meeting in Cairo to forge a position on the question of Iraq for the upcoming meeting of the 22-member Arab League later in the month. In February 1999, Qaboos attended the funeral of King Hussein of Jordan, a gesture that expressed the close ties between Oman and Jordan. U.S. Defense Secretary William Cohen included Oman in his tour of Persian Gulf allies, which was aimed at allaying concerns regarding extended U.S. actions against Iraq. Newly enthroned King Abdullah of Jordan, accompanied by his prime minister and foreign minister, met with Qaboos in April 1999 to cement the good relations between Jordan and Oman. Oman was alone among the Gulf states in refraining from criticizing Jordan for its non-oppositional stance toward neighboring Iraq during the Gulf War. Also in April, Qaboos signed an agreement with the president of the UAE defining the borders between Oman and the emirate of Abu Dhabi.
Throughout 2002 and into 2003, the United States, allied with the United Kingdom, led a diplomatic drive to remove Iraqi president Saddam Hussein from government, for his alleged possession of weapons of mass destruction (WMD). The UN Security Council passed Resolution 1441 on 8 November 2002, calling on Iraq to disarm itself of all WMD and WMD capabilities, to allow for the immediate return of UN and International Atomic Energy Agency (IAEA) weapons inspectors (they were expelled in 1998), and to comply with all previous United Nations (UN) resolutions regarding the country since the end of the Gulf War in 1991. France, Germany, and Russia (among others) opposed the U.S. and British position on the possible use of force as a last resort to oust Hussein.
At the end of 2002 and into 2003, the United States and the United Kingdom were amassing troops, aircraft, naval vessels, and weaponry in the Persian Gulf region: by February 2003, there were 3,600 U.S. military personnel, 100 elite British special forces, and approximately 40 aircraft in Oman. The number of U.S. and British troops stationed at bases in Kuwait, Qatar, Saudi Arabia, Oman, and Bahrain grew to 250,000 by March 2003. On 19 March, the United States launched air strikes against Baghdad and war began. Baghdad fell to U.S. troops on 9 April (British forces had secured Basra and regions of southern Iraq).
The war suppressed the economies of Persian Gulf states, as tourism and air travel diminished, oil prices rose sharply, trade with Iraq stopped and foreign direct investment was halted. The end of the war saw a rise in all Arab stock markets and hope that several companies in the region would be likely to benefit from reconstruction contracts in Iraq. Observers have speculated that substantial political and economic reforms throughout the region could result from the consequences of regime change in Iraq. Oman would be included in such a scenario.