Will GCC get caught in a global trade war crossfire?

GCC countries could find themselves ensnared in the escalating global trade war initiated by President Donald Trump, according to economists and market analysts.

With many GCC nations heavily reliant on trade and foreign investments, the fallout from these rising tensions could be significant, they warned.

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Trump's tariffs - 25 per cent on imports from Canada and Mexico and 10 per cent on those from China - are set to have far-reaching effects. GCC nations may face disruptions in trade flows, impacting not only oil exports but also the importation of critical goods for local industries.

A recent analysis by Capital Economics highlights the consequences of these tariffs and their broader implications for global trade dynamics. The administration's agenda to safeguard American jobs and reduce the trade deficit has led to these tariffs, which could increase the costs of essential materials like steel and aluminum. For GCC countries, particularly Saudi Arabia and the UAE, this could slow down key infrastructure projects aimed at economic diversification.

The immediate concern for GCC nations is not only the direct impact of US tariffs but also potential retaliatory measures from affected countries, especially China and the European Union. Such tit-for-tat escalations could further complicate global trade dynamics.

The GCC, traditionally maintaining strong trade ties with both the US and China, may struggle to navigate this delicate balance. “If major trading partners engage in a prolonged conflict, GCC economies could experience shifts in market dynamics and disruptions in trade flows. For example, reduced U.S. exports to China might diminish demand for oil and gas from GCC countries, affecting revenues and economic stability,” they aruge.

Sectors most vulnerable to this trade war include construction, real estate, and manufacturing. Many GCC nations are investing heavily in infrastructure projects as part of their Vision 2030 initiatives. Rising material costs could hinder progress; Saudi Arabia's ambitious NEOM project, for instance, may face delays or budget overruns due to increased raw material costs driven by US tariffs.

The manufacturing sector, crucial for GCC diversification strategies, may also suffer. Increased production costs could deter foreign investments, stunting the growth of local industries and reducing job creation. Additionally, GCC economies are sensitive to global demand shifts for oil and gas. Analysts suggest that a decline in US exports to China could further reduce oil demand, impacting GCC revenue streams. With oil prices already volatile, any dip could strain national budgets and hinder growth.

“Opec+ faces new challenges with President Trump's tariffs on major crude suppliers, which could disrupt global oil demand and production. While the group may unwind its production cuts to stabilize the market, tariffs on Canada and Mexico could force those countries to redirect crude, impacting U.S. refineries and potentially leading to price hikes,” says Mukesh Sahdev, Rystad Energy's Global Head of Commodity Markets – Oil.

Despite these challenges, some experts see the potential trade war as an opportunity for GCC states to accelerate economic diversification. By fostering local industries and pursuing new trade partnerships in emerging markets across Asia and Africa, GCC countries could reduce their reliance on traditional partners.

While the trade war poses substantial challenges for GCC economies, it may also serve as a critical impetus for diversification and resilience, shaping the region's economic landscape for years to come.

According to Capital Economics, a trade war will not only raise prices for imported goods but also disrupt established supply chains. Companies facing higher raw material costs may pass those expenses onto consumers, leading to inflation. Industries reliant on steel and aluminium - such as automotive and construction-could see profit margins squeezed, potentially resulting in layoffs and decreased economic growth.

The most immediate consequence of Trump's tariffs has been a wave of retaliatory measures from affected nations. China has responded with its own tariffs on U.S. goods, including agricultural products. This tit-for-tat escalation raises the specter of a full-blown trade war, which experts warn could lead to severe economic repercussions on both sides.

Capital Economics posits that a prolonged trade conflict could lead to a substantial slowdown in global economic growth. If countries continue to impose tariffs, the World Trade Organisation warns that global trade volumes could shrink significantly, disrupting not only US trade but also economies that rely heavily on exports.