How will Trump’s tariff threat affect the Gulf?

The proposed plans are certain to reverberate through global supply chains, analysts say

US President Donald Trump signs executive orders in the Oval Office of the White House. Bloomberg

The tariff measures announced by US President Donald Trump are expected to have a limited effect on the Gulf region after his threat to introduce taxes of up to 25 per cent on Mexico and Canada by February 1, according to analysts.

There is still a lot of policy uncertainty as Mr Trump takes office. However, the Gulf doesn’t seem to be an area yet affected, according to Scott Livermore, Oxford Economics' chief economist for the Middle East and North Africa.

“A handful of Middle Eastern countries, including Bahrain and Oman, benefit from comprehensive free trade agreements with the US and most countries run a trade deficit with the US,” he said.

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“Nevertheless, President Trump’s proposed tariff plans are certain to reverberate through global supply chains and demand. The GCC stands to lose in a less globalised world as the set of trade opportunities and partners shrinks, also potentially discouraging foreign direct investment. Country growth impact across the region will echo overall export exposure.”

Mr Trump said he planned to enact tariffs of as much as 25 per cent on Mexico and Canada by February 1, after he claimed that the two countries are allowing the flow of undocumented migrants and drugs into the US.

Mr Trump also indicated he was still considering a universal tariff on all imports to the US, but said he was “not ready for that yet”.

“You’d put a universal tariff on anybody doing business in the US, because they’re coming in and they’re stealing our wealth,” he said, adding that the introduction of such a tariff could be “rapid”.

In a post on Truth Social in November, Mr Trump warned he’d impose 25 per cent tariffs on all Mexican and Canadian imports as “one of my many first executive orders” and said it “will remain in effect until such time as drugs, in particular fentanyl, and all illegal aliens stop this invasion of our country”.

Mr Livermore said that in the BRICs bloc, future tariffs could be imposed on China, which may offer opportunities for some countries. However, most Middle Eastern economies are unlikely to draw in manufacturers relocating from China given their small populations and high wages, he said.

Egypt and Turkey could bring in some due to their proximity to Europe. However, Egypt suffers from poor infrastructure and a high administrative burden, while Turkey would be constrained by a recent decline in competitiveness, Mr Livermore said.

The GCC stands to lose in a less globalised world as the set of trade opportunities and partners shrinks

Scott Livermore,
Oxford Economics' chief economist for the Middle East and North Africa

Monica Malik, chief economist at Abu Dhabi Commercial Bank, said the main effect from any potential US tariffs on the region will probably be indirect, through their impact on global growth and energy demand.

“Tariffs on China will be particularly critical given its importance as an energy importer, while the weak demand backdrop in the eurozone would see further headwinds. Reduced global trade would also impact regional logistics activity,” she said.

“Nevertheless, we see the UAE’s global trade and economic integration continuing to rise and boosting its position as a trade and logistics hub, alongside attracting FDI.”

Another effect on the region will be through monetary policy, with higher import tariffs, tighter immigration policies and expansionary fiscal policies adding upside risks to the inflation outlook in the US, according to Ms Malik.

This will limit the pace of rate cuts by the Fed and thus the Gulf states – which mainly mirror US monetary policy moves, while the strong USD outlook will affect the external competitiveness of non-oil exports, she said.

“We remain positive on the region, particularly the UAE, given the trade and wider reforms. Greater investment activity and ongoing population growth are supportive of the outlook,” she added.