Trump tariffs ‘pose long-term risk to Gulf’, say economists

• Short-term gains possible
• Uncertainty over oil prices
• High interest rates may persist

Gulf economies could benefit in the short term from a tariff-led trade war between the US and some of its major partners, but they face longer-term risks of lower oil prices, tariffs on their own non-oil exports and high interest rates, analysts have warned.

Although President Donald Trump delayed tariffs on Canada and Mexico at the last minute on Monday, uncertainty remains. Brent and West Texas Intermediate crude oil prices seesawed throughout the day, hovering around $75 and $72 per barrel respectively in the evening. 

“The uncertainty factor goes beyond Trump’s unpredictable behaviour,” says Nader Habibi, a professor of economics of the Middle East at Brandeis University in Massachusetts.

“We are moving toward the risk of trade wars and that in itself increases the risk of a global recession. 

“As we’ve seen in the past, global recessions tend to have adverse effects on GCC economies because they can bring down the price of oil.” 

Much now depends on how Trump will apply levies and for how long, as well as what retaliatory measures they will trigger. In the short term, opportunities might arise for GCC energy exporters to exploit the impact of US tariffs on, say, Canada. 

The White House has said tariffs on Canadian oil, natural gas and electricity – comprising the largest share of US energy imports – would be 10 percent. 

If implemented, these tariffs could push up global energy prices in the short term and create an opening for GCC exporters, “although pipeline infrastructure and refinery configuration means that substitution is difficult,” according to Justin Alexander, director of Khalij Economics.

This, however, is “set against the negative impact on economies and hence oil demand”, Alexander says.

Opening for non-oil exports

Saudi Arabia could benefit from higher prices for chemicals, while Bahrain and the UAE could supply aluminium to the US.

“To the extent that tariffs raise costs of other exporters supplying these markets in the US, there is an opportunity,” Tim Callen, a visiting fellow at the Arab Gulf States Institute in Washington, tells AGBI.

“Canada is a big supplier of chemicals to the US, so that is probably the most obvious.” 

• Frank Kane: Canada oil tariffs could weigh heavily on markets
• Trump’s climate agenda ‘may push UAE investors away from US’
• Turkey becomes a short-term investor haven from Trump

Half of all American imports of aluminium come from Canada. Bahrain, home to Alba – the largest smelter outside China – and the UAE’s Emirates Global Aluminium are potential alternative suppliers.

However, Gulf countries stepping into Canada’s shoes could prompt Trump to set his sights on the region in a tariff “whack-a-mole”.

“If the US wants to really use these tariffs to protect the domestic manufacturing industry, they might spread them across the board for all countries, so the positive impact for the GCC from increased exports would be moderate,” says the economist Habibi.

Cars and currency

The automotive sector is also bound to be roiled by any US tariffs on Canada and Mexico, as the three nations are intertwined in a North American supply chain. 

Morocco, the largest car manufacturer in Africa and a free-trade partner of the US, could benefit from this, but only if levies are in place long enough for procurement channels to change.

Frederic Reglain/Alamy via Reuters Connect

Time is not the only factor that may undermine any benefits for Morocco, according to James Swanston, a senior economist at Capital Economics.

“The constraint is that much of its product goes into the EU, with which it has a free-trade agreement, and much of the auto investment and factories in Morocco are by European firms such as Peugeot,” he says.

Trump also has his eye on punishing the EU through tariffs.

Arguably the greatest challenge to Arab economies, especially those with dollar pegs, could be sustained US interest rates. If Trump’s tariffs drive up inflation domestically, this could prevent the Federal Reserve from cutting interest rates or even force it to raise them.

This would ricochet across the Gulf and Jordan, where currencies are pegged to the dollar.

“If interest rates stay higher for longer it could inhibit credit demand in these economies, weighing on economic growth and, in the case of the Gulf, dent economic diversification hopes too,” says Swanston.