How the GCC States Can Weather Trump’s Tariffs

On April 2, President Trump heralded a new era in United States trade policy when he announced massive “reciprocal” tariffs to almost all U.S. trade partners. These new tariffs are divided into two components: a baseline tariff of 10 percent on all U.S. imports and a reciprocal tariff on specific countries based—somewhat crudely—on their trade deficits with Washington. While that second set of tariffs is paused (with the notable exception of China) at the time of this writing, the countries originally subject to the highest reciprocal tariffs included China, Japan, India, South Korea, Taiwan, Vietnam and several European countries. In the Middle East, the highest tariffs fell on Syria, Iraq, Libya, Algeria, Tunisia and Jordan. According to President Trump, the tariffs are intended to reduce U.S. trade deficits and reshore American manufacturing jobs. 

A Muted Impact

The new 10 percent tariffs are likely to have a minor impact on the GCC states. Perhaps most importantly for the region, the Trump administration has exempted oil and gas exports to the United States from the tariff regime. This is significant, given that hydrocarbons form the largest GCC exports to the United States. In 2024, the share of GCC oil exports to the United States was about three percent of the region’s production and less than 10 percent of total U.S. oil imports. Though the GCC states are not likely to be significantly impacted by the new tariffs, they are not immune from the broad indirect impact of the disruption to global trade. As the situation currently stands, a potential trade war between the United States and China, combined with a general rise in protectionism are likely to fuel uncertainty, slow global economic growth, and exacerbate fears that inflation will once again worsen. If an economic slowdown occurs, demand for oil would decrease, and GCC states would feel the impact. 

Against this backdrop, Gulf countries must balance their economic interests with their desire to maintain stable relations with the United States. In the last two decades, the GCC states have made ambitious and serious efforts to reduce their dependence on oil revenues and diversify their economies, but they still have some way to go. Significantly lower oil prices would slash public funds available to advance economic-reform initiatives. In addition, a potential peace agreement between Russia and Ukraine would lead to lifting of sanctions on Russia’s oil and gas exports, further lowering the price of oil and decreasing GCC states’ revenues. Furthermore, direct negotiations between Washington and Tehran on the latter’s nuclear program might ease sanctions on Iran’s oil exports, potentially compounding the problem. Worse still, U.S. crude oil exports continue to grow, exceeding an annual average of 4.1 million barrels per day by the end of 2024—threatening to undercut regional production and drive prices lower.

In terms of monetary policy, the currencies of each GCC state except Kuwait are officially pegged to the U.S dollar—meaning that Gulf financial markets are particularly vulnerable to tighter monetary conditions, especially if the U.S. Federal Reserve keeps interest rates high to contain tariffs’ inflationary pressures. In the last few decades, the United States has faced a growing budgetary crisis, as a ballooning GDP to debt ratio and elevated deficits have cast doubt on its long-term economic stability and financial creditworthiness. Finally, digital currencies have made impressive advances in recent years, further weakening the  dollar’s dominance. As a major U.S. adversary, China has actively promoted its own digital Yuan as an alternative to the dollar, and some GCC states have even signed agreements to settle payments in digital RMB, a form of digital currency issued by China’s central bank .

A Trading Partner to All

For many years, the governments of the Gulf have been aware of the vulnerability of overreliance on the U.S.-centric international trade system, and have established strong trade ties with other partners around the world to diversify their financial and commercial partnerships. These ties are certain to help in mitigating potential losses in trade with the United States amid the Trump tariffs. And while Washington will likely remain the region’s closest security partner, Beijing enjoys several advantages when it comes to trade. For example, GCC states increasingly see China as a reliable partner and alternative to the United States. Furthermore, trade and investment with China come with no political conditions, unlike any deals made with Washington. 

Since the early 2000s, advancements in hydraulic fracturing, or fracking, have made the United States the world’s largest hydrocarbon producer. Meanwhile, the Chinese economy continues to grow, fueled largely by hydrocarbon imports from the Gulf region. Indeed, over the last two decades, Asia has consumed over 70 percent of total GCC oil and gas output. Even in an increasingly tumultuous international trade environment, Asian markets are projected to remain the main destination of GCC hydrocarbon exports in the future. There are synergies in the realm of clean energy, as well; as part of their national economic diversification strategies, the GCC states have undertaken several massive initiatives to increase their renewable energy potential. For its part, China has emerged as the world leader in solar and wind power. Exchanging goods and technical know-how with China has emerged as a clear priority for the GCC states as they navigate the transition toward a post-oil future.

The growing importance of trade relations between the GCC states and Asian powers like China have been institutionalized by several free trade agreements (FTAs). Multilateral negotiations with China started in 2024 and the two sides are in the process of ironing out the final details of a free trade agreement that includes the entire bloc of Gulf monarchies. In September 2023, the extension of the Joint Action Plan with Japan for 2024-2028 was ratified. A few months later, the GCC penned an FTA with South Korea. Negotiation with India is ongoing, and the two sides are expected to sign an FTA in the near future.

As another trade alternative to the United States, the European Union is the second largest trading partner to the GCC after China. Over the past four decades, the two blocs have signed several agreements to promote economic, trade and financial cooperation. These include the 1989 Cooperation Agreement, the Dialogue on Trade and Investment, launched in 2017, the 2018 EU-GCC Dialogue on Economic Diversification, and EU-GCC Strategic Partnership, which began in 2022. The EU-GCC partnership has been further consolidated by holding the first summit in Brussels in October 2024. Equally important, several GCC sovereign wealth funds have made substantial investments in Europe in technology, infrastructure, and strategic industries. These investments and the huge trade volumes have created a strong and healthy economic relationship between the two regions. 

GCC States Remain Well-Positioned

In addition to diversifying their trade relations, the GCC states have made significant progress in promoting socio-economic reform at home in crucial sectors such as education, gender equality and digitization, which will further tariff-proof their societies. Digital transformation is positively correlated to progress in broad economic development, and can help Gulf economies to weather tariffs; this is because tariffs generally apply to physical goods and services rather than digital ones. Furthermore, a recent study by the International Monetary Fund concludes that “the GCC’s young and tech-savvy population, along with its relatively advanced digital infrastructure positions it well to reap the economic benefits of further digitalization.” 

The direct impact of the new U.S. tariffs on the GCC economies is likely to be modest, but the disruption of the global trade system has already generated uncertainty and raised doubts about sustained global economic growth. GCC economies are well integrated in the global economy, so they must adapt to developments and navigate a radically redefined commercial environment. The bloc’s relations with the United States, China, Europe, and other global powers are more important now than perhaps ever—especially if the GCC states seek to drive the technological and socio-economic transformations required to seize the economy of the future.

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