The Gulf must brace for indirect hits from Trump’s tariffs

• GCC nations on alert
• Uncertainty has global effect
• Oil prices expected to drop

Gulf states may stave off new tariffs US president Donald Trump is expected to announce but the measures’ indirect impact on the global economy and oil prices loom large.

The region’s focus, industry watchers say, should be on diversifying trade relationships while embracing the UAE and Saudi Arabia playbook of investing in the United States as a means of maintaining close ties with the White House.

“The uncertainty in policy, with the potential for rapid dramatic changes, weighs over everything and is naturally depressing markets,” says Justin Alexander, director of US-based consultancy Khalij Economics.

Stock exchanges in the US, Europe and the GCC have been treading water since the second Trump administration began wielding the threat of tariffs weeks ago.

The returning US president has already hiked duties on China and imports of steel and aluminium, engaged in an on-again, off-again tit-for-tat with Canada and Mexico, and set new automotive levies in motion.

Trump is now slated to present an additional plan to retaliate against countries he says impose “unfair” tariffs on US imports. He will make his announcement from the White House immediately after US markets close on what he has dubbed “Liberation Day”.

Officials have offered scant details about whether the policy will involve a flat tariff against all products and partners, or a matrix targeting individual markets on a case-by-case basis.

The GCC does not have especially notable trade with the US, with a combined $80 billion in bilateral exchanges and a small trade deficit in 2023, according to UN data analysed by the Gulf Research Center.

Gulf states also maintain lower-than-average tariffs and are cultivating good relationships with Washington. Since Trump took office, the UAE and Saudi Arabia alone have pledged a combined $2 trillion in US investment over the next several years.

As such, the region is not expected to be in the immediate line of fire, sources say.

It might even benefit from a rearrangement of global trade patterns, especially if the US hits competitors like Canada’s fertilizer industry or Europe’s petrochemical sector. 

Yet the new Trump tariffs will have implications for the Gulf too.

Oman and Bahrain, for instance, should take no comfort from their free trade agreements with the US given how similar arrangements have failed Canada and Mexico, according to Rachel Ziemba, founder of advisory firm Ziemba Insights.

All trade relationships are under the White House’s microscope and subject to being overhauled, she adds. As such, the new measures should be seen as “an opening offer” that partners need to negotiate over.

A recent controversy surrounding Kuwait exemplifies just how quickly things can become fraught.

US commerce secretary Howard Lutnick complained in March that the emirate has not been sufficiently thankful for the US intervention that freed it from Iraq’s occupation in the early 1990s, and that it still imposes outsized tariffs on US goods.

The Kuwaiti ambassador to the US, Sheikha Al-Zain Al-Sabah, cleared the air during a subsequent meeting with Lutnick in which she highlighted how her nation abides by the GCC’s customs regime and its low, 5 percent levy on most goods.

Having set the record straight, Kuwait should be able to avert reciprocal tariffs for now, according to Alexander.

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More broadly, the small, trade and energy-dependent economies of the GCC cannot expect to avert the effects of Trump taking a chainsaw to international commerce.

“If there is no additional squeeze from sanctions, I would expect oil prices to drop as soon as there are signs that tariffs are slowing global growth,” says Tim Callen, a former official at the International Monetary Fund who is now with the Arab Gulf States Institute in Washington. 

“And it’s not just the tariffs themselves, but the uncertainty the policy is causing which will affect investment, employment and growth,” he adds.

Price increases in the US would cause interest rates to stay higher for longer, thereby keeping borrowing costs elevated in the GCC, where currencies are pegged or weighted toward the dollar.

According to Alexander, Gulf authorities should continue pushing trade liberalisation by pursuing Comprehensive Economic Partnership Agreements or Free Trade Agreements with a wider range of counterparts. 

“Similarly [companies should] diversify both customers and the supply chain to address changes in prices,” he says.