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Sat 21 Sep 2019 12:07 AM

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Opinion: how the US-China trade discord could impact Gulf economies

Dispute could have a range of negative and positive outcomes for the Gulf region

Opinion: how the US-China trade discord could impact Gulf economies
The two biggest economies have imposed billions worth of one another’s imports, thus affecting the growth of the global economy

With the trade war between the US and China showing no sign of de-escalating, Gulf economies should be prepared to deal with wide-ranging repercussions, including rising import and export costs but also a potential increase in long-term investment from both superpowers.

Both the US and China are likely to see a slowdown in economic growth driven by lower output and higher costs, which will inevitably be passed on to consumers.

It is these two factors that will ripple through to economies here in the Middle East in the form of imports, exports and foreign investment.

If we look at the current trade balance between the US and the UAE, the UAE imports around $19.5bn of goods from the US.

A resolution to the US-China impasse is likely to provide  positive support for oil prices and the economies of the Gulf region

Should we see higher production costs in the US as a result of increased tariffs, this will filter through to the UAE in the form of higher cost of goods. Adversely, the largest exports from the UAE to the US include aluminium, iron and steel products.

A decrease in economic activity in the US, specifically within the manufacturing sector, is likely to impact these exports considerably, albeit only a fraction of the UAE’s current export market.

There are a number of viewpoints when considering the impact of the situation on foreign investment in the Gulf region.

From a general investment perspective, uncertainty in markets tends to lead investors to take a more cautious approach, avoiding higher risk areas of the market such as emerging and frontier markets.

With all of the GCC economies falling into these investment categories, in the short-term we may see a slowdown in direct foreign investment as asset managers increase their allocations to ‘safe-haven’ assets and reduce their exposures to higher risk investments. However, when considering the long-term implications of the US-China trade dispute, the GCC countries may also benefit from a re-direction of foreign investment from the world’s largest economies.

The GCC countries may also benefit from a re-direction of foreign investment from the world’s largest economies

Should the current dispute escalate further, both the US and China will inevitably look to re-direct considerable flows of their current investment in each other’s economies elsewhere and with favourable foreign trade criteria across many of the GCC countries, this could put them at the front of the queue.

We don’t believe GCC countries should be ‘worried’ about the current trade war. However, they should be aware of the current situation and accommodate and plan for any potential direct or indirect economic impacts a worsening trade situation will have on the region. The economic fallout of the current US-China trade war will continue to be felt globally until there is a resolution.

The living standards of individuals in the region should not be significantly impacted in the short-term, however, should the current dispute continue there may be effects on the Gulf economies with everyone across the region likely to feel the pinch along with consumers globally.

If the US-China trade situation were to deteriorate to such a point that it had implications on the price of oil, then the Gulf’s economies would most certainly be affected.

With many of the region’s main economic returns still derived from oil and gas, should we see a slowdown in global output this is likely to result in a reduction in demand and thus negatively impact the price of oil. However, with OPEC recently taking steps to curb production, a resolution to the current US-China impasse is likely to provide a positive support for oil prices and the economies of the Gulf region.


Iain Ramsay,  chief investment officer at GWM