U.S. Tariffs Threaten to Undermine the Economies of the Gulf

On April 2, U.S. President Donald Trump issued an executive order imposing a base tariff rate of 10 percent on imports from most countries worldwide, including Iran and Syria, which have been subject to U.S. sanctions for years. The tariffs apply to imported goods and services, but exclude oil and gas.

As the president detailed in the Rose Garden, the rate of tariffs varies significantly by country. While a 10 percent tariff has been imposed on all six Gulf Cooperation Council (GCC) countries, other regional states face much steeper rates: Iraqi exports to the United States will be charged a 39 percent tariff, Jordanian goods and services 20 percent, and those from Israel 17 percent.

Immediate Ramifications

The GCC countries are likely to suffer from the United States’ new trade barriers. In the long run, the systemic effect of higher trade barriers will adversely affect their economies. Indeed, tariffs and international counter-measures will likely reduce global demand for oil, result in high import costs, diminish trade of sensitive and advanced goods and technologies from the United States, and hurt the small and medium-sized enterprises (SMEs) that form the backbone of Gulf economies. In fact, the decline in the value of the member countries’ stock markets was the first reaction to the tariffs. Following Trump’s announcement, the Saudi Tadawul All-Share Index dropped by 0.61 percent, Abu Dhabi’s stock market fell by 2.86 percent, Dubai’s by 2.64 percent, Oman’s by 0.76 percent, and Bahrain’s by 0.5 percent.

Despite their potential impact, some regional media outlets have downplayed the significance of the tariffs. The website of The National, the state-run Emirati newspaper that aligns closely with the government’s views, has reported that the UAE’s leading exports to the United States are precious stones and jewelry, followed by aluminum. “Given the high-profit margins associated with precious stones and jewelry, and the UAE’s status as a low-cost producer of aluminum,” the outlet reported, “the impact on UAE businesses is expected to be minimal.”

Economic Vulnerabilities

The most important and perhaps longest-lasting impact of tariffs on the economies of the GCC will be depressed demand for oil and, as a result, oil prices. Though oil and gas imports are exempt from tariffs, rising trade barriers will likely lead to a decline in exports and heightened uncertainty in global production and consumption of goods. This chain reaction ultimately reduces global market demand for oil because fewer goods are being produced, transported, and purchased. Markets have reacted predictably; following the announcement of the tariffs, crude oil prices dropped by $10 per barrel.

The potential for a global trade war would almost certainly weaken global energy demand due to a recession in the largest oil-consuming countries, such as China, India, Japan, Brazil, and Canada. This presents an obvious problem for the GCC countries—most of which depend on energy exports to fund their budgets and diversification initiatives. Saudi Arabia, for instance, needs oil to be priced near $96 per barrel to balance its 2024 budget​, well above current prices of roughly $62 per barrel, and still significantly higher than the pre-tariff prices of roughly $70 per barrel. The IMF estimates the UAE’s break-even price at around $36 per barrel, but Emirati leaders will still be watching oil prices with trepidation. Any decline in global oil demand could create budget deficits, spark recessions, and even contribute to inflationary pressures across the GCC states.

Developments in the United States may also hold consequences for the GCC states. As a tax on imported goods, the cost of tariffs is typically passed to the consumer in the form of price hikes. As inflationary pressures grow, the U.S. Federal Reserve may keep lending rates high to mitigate inflation. Higher interest rates tend to strengthen currencies, but a stronger dollar will diminish the export competitiveness of the United States, because its goods will cost more in international markets. Because many Gulf countries—including Saudi Arabia, Qatar, Oman, and the UAE—peg their currencies to the dollar, rising inflation in the U.S. will directly impact the competitiveness of Gulf industry and manufacturing.

Furthermore, a world trade system marked by growing tariffs will increase the cost of raw materials, disrupt supply chains, and generate market volatility. This dynamic can diminish the growth potential of SMEs, which contribute significantly to the Gulf region’s economic outlook. To give an idea of potential impact, the GCC hosts an estimated 675,000 formal SMEs. By mid-2022 alone, the number of SMEs in the UAE was 557,000. SMEs contribute as much as 63.5 percent to the non-oil GDP and provide one in four jobs across the region. The disruption caused by tariffs could reduce or halt hiring, change micro and macro investment patterns, and could trigger a wider recession throughout the Gulf.

Another potential impact relates to the redirection of Asian exports. Tariff increases will almost certainly lead to a surge in Asian exports being redirected to new markets within the GCC, which could crowd out local producers. For instance, Chinese steel exporters who typically ship to the United States will likely seek new markets to sell their product, potentially impacting global pricing dynamics. Producers based in the GCC will experience competitive pressure from this influx of exports, which could cause the Gulf states to implement protectionist policies of their own.

Not Powerless

Like the rest of the world, the GCC economies will be hurt by tariffs. However, these countries do possess leverage, and they can retaliate if they feel their economic future is at stake. As major energy producers and exporters, they could slash production to raise prices and enact a political cost on the U.S. president. Similarly, they could align more closely with the European Union, China, or other major trading powers to reduce their reliance on the United States.

With President Trump scheduled to visit Saudi Arabia, the UAE, and Qatar in May on his first foreign trip returning to office, there is a good chance that negotiators are working behind the scenes to blunt the damage caused by his tariffs. Given Riyadh and Abu Dhabi’s $600 billion and $1.4 trillion investment commitments in the United States, respectfully, and Qatar’s foreign policy and global energy market clout, the GCC’s three most powerful states will surely leverage their strengths in attempts to moderate the president’s protectionist urges.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.