How a US-China trade war could impact the Middle East

As Washington and Beijing wage an intense trade war, the economic consequences for the Middle East’s energy industry could be severe.

Sending shockwaves through global markets, the mutual trade embargo has caused oil prices to drop to their lowest level since February 2021 due to fears of reduced demand.

Launching economic hostilities against China last week, Washington imposed tariffs of 104% on Chinese goods. Beijing retaliated with 84% duties on US imports, but as the markets panicked and bond yields surged, US President Donald Trump paused tariffs on all countries at 10% for 90 days, while yanking up duties on China, first to 125% and then 145%.

Refusing to yield, China ratcheted up duties on the US to 125%. Though Beijing has a massive volume of sales to the US, it only amounts to 2% of its GDP. Soon after, Washington exempted smartphones, computers, and some other electronic devices from “reciprocal” tariffs.

However, this move and the low-tariffs ‘window of opportunity’ for other countries couldn't save the markets from an overall impact, and where oil-based economies in the Middle East are concerned, the outlook remains bleak for the near future.

Budgets based on oil

With a barrel of oil costing just over $64.65 (at the time of publication), much lower than the break-even price for producers, Brent Crude came down nearly 30% from last year when it was over $90. Even as they opened for the week, the Dubai financial market fell 5%, Abu Dhabi securities exchange fell 4%, and Saudi Arabia’s Tadawul stock exchange fell over 6% in trading, while Saudi Aramco showed losses of over 5%.

For hydrocarbon-based economies like Saudi Arabia, the UAE, and Iraq, any drop in oil revenues could become a huge strain on national budgets. Oil prices create such a fine line between stability and free-fall for these nations that they have to adjust their fiscal policies and accelerate diversification bids, even if a trade war brings oil prices down for five consecutive days.

As per an economist at Goldman Sachs, an oil crash could have serious consequences for Riyadh as its budget deficit could soar to $67 billion this year, meaning it would have to make mega-cutbacks on projects and borrow from global bond markets.

Though the main impact is on oil markets, the ongoing trade war has been dampening global economic growth, and this trend could worsen with a reduction in oil demand combined with tumbling stock markets.

Zeeshan Shah, an analyst at FINRA in Washington, DC, told The New Arab that among the GCC states, Saudi Arabia would be the most affected, as Qatar’s wealth is based on natural gas, and the UAE has been able to diversify a large part of its economy with trade and tourism.

If the price of oil remains low for a period of time, it could also slow down Crown Prince Mohammed bin Salman’s modernisation plans, he added.

Predicting that Middle Eastern economies would face structural challenges far beyond oil price volatility, Burak Can Celik, a Turkish political analyst, told TNA that oil-exporting nations in the Gulf would have to cut public expenditures and delay Vision 2030-style projects if Chinese industrial demand contracts further during the trade war.

Celik said that not only would the geopolitical leverage of oil be eroded, but there could also be decreased remittances, inflationary shocks, food import challenges, and social unrest that could “snowball into political crisis”.

On the other hand, pointing out that lower oil prices would benefit China, Torek Farhadi, a senior economic analyst, told TNA that Beijing would benefit from a smaller oil import bill, allowing it to be more “competitive and offer its' products at lower costs to the world, including to the US”.

Farhadi observed that lower oil prices were a challenge for OPEC, OPEC+ countries, and the US, as this made some potential projects unprofitable. The net beneficiaries from this trend could be China, India, and Turkey.

Li Chao, Deputy Editor-in-chief of the China Media Group (CMGMiddleEast), told TNA that companies in the Middle East should be preparing for a future with higher prices and increased costs from US President Donald Trump's reciprocal tariffs, since Egypt, Morocco, Lebanon, Iran, and Sudan will have a tariff rate of 10 percent while Tunisia, Jordan, Algeria, Libya, Syria, Iraq will face higher rates.

“That’s why businessmen should find contingency plans to mitigate any potential fallout and adapt to disruptions to global trade, because they don’t know what trade will look like in the next several months,” he said.

In Chao’s opinion, oil-producing countries in the Middle East could face a more complex impact, as after the introduction of the reciprocal tariffs, the international oil price and the expected growth of crude oil demand both declined, which seriously affects the budget balance of MENA oil-producing countries.

“In order to reduce the trade surplus with the United States, countries such as Japan, South Korea and India are also likely to choose to increase energy imports from the United States, which will in turn affect the energy companies of Middle Eastern countries,” he added.

Market instability

Meanwhile, foreign investment in the Gulf could hit rock bottom if there is market instability along with fears of a global recession. Any negative economic shock like the fall of stock markets could reduce export opportunities and impact local industries, making it even more difficult for the faltering economies to re-stabilise.

Not only that, but Trump’s tariffs and crashing global stocks could delay new listings in the Gulf, reversing the trend against IPOs, as more than 40 companies were expected to go public this year.

Then, if for some reason, the dollar falls, there may be immediate costs to nearly all MENA countries maintaining exchange rates fixed to the dollar. And if tariffs raise dollar value, the value of their currencies will rise against other currencies, making imports from the Middle East more expensive.

According to financial advisory firm Price Waterhouse Coopers, Middle East businesses should immediately assess the impact on their supply chains, ​adjust manufacturing processes and diversify sourcing options after evaluating various scenarios and variables.

Discussing the “negative economic shock” with regards to tariffs, Shah said that it would hit non-oil exporting countries like Jordan and Morocco more due to the trade deficit, even though both countries have free trade agreements with the US.

“In the long run, this will cause tremendous harm to US interests in the region as no one will trust the US with regards to economic relations and will begin to look elsewhere, whether towards the EU or China,” Shah said.

Turkish political analyst Celik believes that MENA nations might be forced to strategically recalibrate and navigate a more multipolar order. Pushing regional players to hedge further by strengthening ties with BRICS nations or enhancing regional autonomy, he looks ahead to “a more self-reliant Middle East, but not without turbulence”.

Disruption in global supply chains

If global supply chains are disrupted, it would upset trade dynamics, and Chinese goods might have to be rerouted through Southeast Asia to evade tariffs. In this situation, ports in the Middle East could become alternative conduits if trade activity is accelerated, and countries like the UAE (via Dubai), Qatar, and Oman could become critical trade hubs.

But the downside would be that such a movement of goods could draw scrutiny from the US, risking secondary sanctions.

Discussing this probability, Shah observed that though it would ultimately help boost their economies if China is forced to reroute its exports through various third countries like the UAE, they could come under severe pressure from the US to crack down on these types of transshipment.

He added that this could force the UAE into an uncomfortable position, “trying to placate its most important ally, the US, while trying not to upset China, with which it has built an increasingly important economic relationship”.

According to Chao, “Even the global ports operator from UAE DP World felt challenges that require greater flexibility and adaptability. On the other hand, The UAE steel companies said the US reciprocal tariffs do not apply to steel products, as the metal is already subject to the existing Section 232 framework, but such protectionist trade policies have broader implications for trade flows, since major steel-producing countries, such as China, could shift their exports toward MENA markets, which may exert competitive pressure on Gulf-based manufacturers".

Terming the ongoing trade war a “tectonic shift with global reverberations”, Celik said that the MENA region has been caught in a “crossfire between giants”. In his opinion, the rerouting of supply chains in case of tariffs could either marginalise MENA’s logistics hubs or they could evolve into “alternative gateways”.

According to Chao, the Sino-US trade war might lead to a downward trend in the total global trade volume for a certain period of time. He noted that the most successful economic diversification transformation of the Gulf countries in the past half century or so was reflected in the shipping and logistics field but the decline in trade volumes was likely to have a negative impact on the Gulf countries' role as nodes for international container transport, air cargo, and logistics as well.

Geopolitical manoeuvring

If the trade war escalates, there may be no end to geopolitical manoeuvring in the region, as more Middle Eastern countries might seek to diversify their trade relationships and reduce dependence on the US and China by looking towards Europe and other global economies.

Enhancing intra-regional trade might also create a buffer against global economic shocks. This multi-alignment strategy might help mitigate risks from tariff escalations and supply chain upsets.

At the same time, Middle Eastern countries could position themselves as neutral trade hubs and benefit from the redirected economic activity from both sides.

Sabena Siddiqui is a foreign affairs journalist, lawyer, and geopolitical analyst specialising in modern China, the Belt and Road Initiative, the Middle East, and South Asia. 

Follow her on Twitter: @sabena_siddiqi