There isn't a spot of shade, for trees would obscure the sightlines of the surveillance cameras. Guards patrol the streets, almost empty but for the Hasidim in their overcoats and black fedoras, and the Gujaratis in suit jackets. Above their heads, banners fly from lampposts declaring Antwerp's diamond heritage, since 1447. But make no mistake: the world's diamond capital is on the defensive. In an increasingly globalized business, where a diamantaire can shatter his prize on the cutting wheel in one misspent moment, new rivals have arisen to challenge all facets of the city's centuries-old dominance--first India, then China and now brash Dubai.

Antwerp's stranglehold on the diamond industry has been loosening for decades--and may be irreversible. The decline began in the mid-1970s, when Indians from Gujarat joined the Antwerp scene. In a trade built on trust, the new Indian businesses were family-run, just as the traditional Jewish ones had been. Today there are twice as many Indians as Jews in Antwerp's diamond world, and they run a majority of the city's biggest companies. "In diamonds today, you have to be everywhere," says Peter Meeus, managing director of Antwerp's Diamond High Council, "and the Indians' strong, traditional families are a big competitive advantage."

So is the vast store of cheap labor back home. Over the years, Gujaratis have outsourced much of Antwerp's diamond-cutting business to India. Antwerp had 25,000 cutters and polishers in the mid-1970s. Today only 1,700 remain, cutting only stones so expensive that labor costs don't matter. And young Belgians are turning away from diamond cutting. Old-school Jewish traders are telling their children to find other professions. Meanwhile, India's estimated 800,000 processors cut and polish 90 percent of the world's diamonds.

As a diamond-trading center, Antwerp's supremacy remains relatively unchallenged--for the moment. Fifty-five years ago all of the world's diamond exchanges were located in the city. Four still are, but 20 others have since sprung up around the globe. Antwerp still trades 80 percent of all rough diamonds (half of the world's polished stones pass through the city) and its $36 billion annual business accounts for 7 percent of Belgium's annual exports. But other rivals are rising, along with India.

In recent years China has emerged as a manufacturer, with 30,000 polishers. Now comes audacious Dubai, a gateway to India. The Dubai Metals and Commodities Centre recently announced construction of the 65-story Almas Tower--almas means "diamond" in Arabic--which promises to be the tallest office building in the region and will be the new home of the emirate's fledgling Dubai Diamond Exchange. Space in the building sold out instantly. One reason is the incentives Dubai offers to diamond merchants willing to relocate--among them a 50-year tax holiday.

That has Antwerp nervous, for Dubai offers just the sort of freewheeling business climate that long ago made the Dutch city the world's diamond center. European regulators, by contrast, have put Antwerp under the loupe. "Antwerp has been a tax safe haven for many years, in the sense that there was a consensus between the authorities and the diamond business to be flexible," says one longtime Antwerp dealer. But thanks to recent crackdowns on money laundering, those days are fading. To preserve its place, Antwerp needs to meet the competition head-on, says Andre Gumuchdjian, a rough-diamond trader: "We need a responsible tax policy--not no taxes, but reasonable and responsible taxes."

Dilip Mehta, CEO of Rosy Blue, Antwerp's largest Indian-run company, doesn't see things quite that way. "We are in a global village," he says. "The losers are always going to complain about the winners." Antwerp is missing a big opportunity, he suggests, by failing to tap into the rising consumer potential of the new Indian and Chinese middle classes. As for rivals like Dubai, traditional Antwerp firms should look at the upstart in the same way that Rosy Blue does. With operations in 15 countries, Mehta thinks of the emirate as "just another international hub." And maybe, before too long, that's just what Antwerp will become.

With Eric Pape in Paris