Gulf is not immune to Trump’s tariff threats

Reuters/Kevin Lamarque

Trade policy and protectionism are likely to be a centrepiece of the Trump 2.0 White House, after threats of tariffs of up to 25 percent made throughout his presidential campaign.

Initially it was thought the tariffs would be targeted at specific countries such as Mexico, Canada and China, but it is likely that they could affect all companies that supply international customers, or are reliant on global supply chains. 

This means the GCC economies will not be immune. 

The Brics countries, which now include the UAE and Egypt, have recently come into Trump’s view. The President-elect posted a warning on social media that Brics nations looking to move away from the US dollar could face tariffs of 100 percent and “should expect to say goodbye to selling into the wonderful US economy.” 

With the UAE joining the Brics organisation – the original core of Brazil, Russia, India, China and South Africa, with later additions Iran, Egypt and Ethiopia – earlier this year, and Saudi Arabia still holding an invitation, this could have direct implications for the region, as well as indirect ones stemming from the impact of more generalised tariffs on powerful trading countries such as China.  

Regarding the specifics of Trump’s latest threat, the way countries might seek to move away from the dollar could take on many different forms, but is still probably more complicated than it looks.

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The Chinese yuan has sometimes been seen as a potential alternative to the dollar, although this hardly seems likely to be the case in the coming years as the Chinese economy continues to slow.

The Japanese yen also had a period in the late 1980s when it was seen as a contender to take over from the dollar, but it also failed as its economy stagnated during the 1990s. 

Another option might be the setting up of a new alternative currency or financial system to rival the dollar-based system. Plans have been mooted for many years in various parts of the world, but have never borne fruit.

Russia has been a frequent advocate of such schemes in recent years, but its political motive is unlikely to attract others to its cause. 

The euro was once thought of as a potential alternative to the dollar, but it is still only 20 percent of international reserves, against the dollar’s 59 percent.  

It is not too long ago that the GCC had its own aspirations to create a single currency. However, national differences needed to be overcome, even within a relatively small and similar group of countries.

When it comes to the Brics, therefore, the challenges facing them to create their own currency are myriad. Each country is economically very different, so a unified central bank is unlikely to be to everyone’s taste. 

Where it might be difficult for the White House to control the trend towards de-dollarisation is in the growth of crypto currencies

It might, however, be equally difficult for Trump to pursue his threat. Protecting the dollar’s status helps to keep its value strong, but reinforces the persistence of the US monthly trade deficit, $73.8 billion in October, down from a record $83.8 billion in September data. 

Where it might also be more difficult for the White House to control the trend towards de-dollarisation is in the realms of de-centralised finance and the growth of crypto currencies.

These are developing rapidly, and, to some extent, are benefiting from Trump’s explicit encouragement, with alternative assets making rapid gains since his election victory. 

Stablecoin usage is also growing, especially among corporates, not always for political reasons but mostly because they are often faster and more efficient than bank transfers.

However, whether these represent a move away from the dollar is unclear, as most stablecoins are fixed to the dollar, adding another layer of complexity around the nature of such capital flows.   

While the world economy is braced for Trump’s tariffs, which could potentially hurt global trade, it is questionable whether de-dollarisation is an issue that can be effectively combatted in this way. 

It may also prove counterproductive for US interests to intervene too heavily if the dollar only strengthens.

As it is also increasingly unclear what a decentralised financial system implies for the dollar, tariffs may not achieve what they intended and may only succeed in creating unintended consequences.  

Tim Fox is a partner at Capital Gate Advisors