Analysis: Will Gulf economies feel the heat from Trump’s tariffs?

The region’s strategic positions in global trade and its relationship with the United States have largely insulated it from the most punitive aspects of the new tariff regime, but experts caution against complacency.

“There is a very slim to none probability that the US administration is purposefully designing tariffs to target the GCC countries in isolation from the rest of the world, given that the US maintains a surplus trade with the Gulf countries,” said Ahmad Assiri, Research Strategist at Pepperstone.

The Gulf Cooperation Council (GCC) nations have been subject to minimal tariffs under Trump’s new trade policy, which has imposed duties of up to 25 per cent on major economies including China and the European Union.

“As the US trade policy is centred around trade deficit and what’s so-called ‘unfair trade practices’, reciprocal tariffs were implemented on nearly 90 nations worldwide with high to ridiculously high rates to countries described as ‘Dirty Nations’ while the GCC countries receive only the very minimum reciprocal tariff rate,” Assiri added.

Oil markets at risk

Despite the relative exemption from direct measures, analysts warn that the region remains exposed to secondary effects, particularly through energy markets.

“While the Gulf did not receive high direct tariffs, the indirect impact of global trade disruptions will reflect on the local economies, particularly when it comes to oil,” Assiri said. “The high tariff regime is likely to slow global economic growth and certainly the US economic growth, with a worrying potential for a recession period ahead.”

Oil prices have shown sensitivity to Trump’s tariff announcements, with WTI crude oil futures rising to around $61.8 per barrel on Tuesday after the president hinted at another tariff exemption for the auto industry. However, OPEC+ has already cut its demand growth forecasts for 2025 and 2026, citing slower first-quarter trends and impacts from US trade tariffs.

The group now expects demand to rise by just 1.3 million barrels per day in 2025 and 1.28 million bpd in 2026, down from earlier estimates of 1.45 million and 1.43 million bpd, respectively, according to data from Century Financial.

Joseph Dahrieh, Managing Principal at Tickmill, emphasised these concerns, noting potential pressure on the region’s primary export.

“Even without direct tariffs, the Gulf could remain exposed to the indirect fallout from global trade tensions. Slower global growth could lead to reduced industrial activity and dampened oil demand,” Dahrieh said. “The International Energy Agency recently cut its oil demand forecast for 2025 by 300,000 barrels per day, highlighting the current risks.”

The World Trade Organisation this week projected that global merchandise trade would contract by 0.2 per cent in 2025 as a direct result of rising tariffs and trade policy uncertainty, with the potential to worsen to a 1.5 per cent decline if tensions escalate further.

Banking sector exposed

A new Fitch Ratings report published Monday found that while US tariffs are likely to have only small direct effects on GCC bank operating environments, indirect effects could be substantial.

“Lower oil prices and weaker global demand are the main risks for GCC bank operating environments,” Fitch stated. “Government spending strongly affects bank operating conditions in most GCC countries, and a further drop in oil prices could weaken Fitch’s lending growth forecasts.”

The credit agency had previously projected non-oil GDP growth for the GCC of over 3.5 per cent in both 2025 and 2026, but now warns that “lower oil prices and budget revenues could lead to a marked reduction in non-oil economic activity and government spending.”

Dahrieh also highlighted the region’s unique exposure to US monetary policy through currency pegs. “If the US responds with interest rate cuts to economic strain, the GCC economy could see lower rates as well,” he said. “Conversely, if inflation rises in the US due to tariffs and the Fed raises rates, Gulf economies might see tightening financing conditions.”

Strategic position as buffer

Trump’s “Liberation Day” announcement on March 31 triggered global market uncertainty, with the initial proposal including a 25 per cent tariff on automobiles, 20 per cent on pharmaceuticals, and 10 per cent on all imports from most countries. Though he subsequently announced a 90-day pause on April 9, lowering the rate to 10 per cent for most countries, Chinese imports still face duties exceeding 125 per cent.

Amidst this turbulence, experts suggest the Gulf’s strategic positioning could serve as a buffer and even create opportunities.

“I strongly think the Gulf nations have an excellent stance when it comes to global trade as well as political stance with the US, Europe, and the rest of Asia. This is the Gulf leverage to work out bilateral trade with different partners,” Assiri said.

Dahrieh echoed his sentiment, stating that the neutrality of Gulf states in major trade disputes can “enhance its appeal as a trade and investment hub.”

“The UAE, for example, has strategically positioned itself as a connector between East and West, offering business-friendly zones, world-class logistics infrastructure, and access to global markets,” he explained.

The UAE’s pursuit of Comprehensive Economic Partnership Agreements (CEPAs) has been highlighted as a potential model for navigating the fragmenting global trade landscape. Since 2022, the UAE has signed or concluded CEPAs with 27 countries, including India, Indonesia, Turkey, and South Korea.

“The UAE’s CEPA strategy has been designed to develop a diversified trade portfolio and become a trade hub,” Mahdi Ghuloom, Junior Fellow in Geopolitics at the Observer Research Foundation Middle East, recently told Arabian Business. “While Trump’s tariffs are a separate issue, the UAE’s CEPA push reflects foresight and an effort to insulate itself from global trade volatility.”

Looking ahead

Despite potential buffers, analysts stress that the Gulf’s economic fortunes remain deeply connected to global market conditions.

“For the Gulf economies, which are still heavily reliant on hydrocarbon revenues, this trend could pose fiscal risks,” Dahrieh warned. “Lower oil prices can widen budget deficits, constrain government spending, and slow down diversification efforts.”

Fitch noted that GCC banks are “generally well placed to absorb a deterioration in the operating environment” having “strengthened their capital buffers in recent years,” though it warned that Bahrain’s banking sector appears most vulnerable among Gulf nations.

The WTO’s Chief Economist Ralph Ossa noted in the organisation’s latest report that tariffs are a “policy lever with wide-ranging, and often unintended consequences.”

“In a world of growing trade tensions, a clear-eyed view of those trade-offs is more important than ever,” he wrote.

Assiri concluded with a prescription for regional economic stability. “Providing clarity for international investors is the key to success for the coming period as the ambiguity in global trade remains unreasonably high,” he said.

“The Gulf nations’ success in this environment will hinge on how much clarity and predictability can be given to investors to plan their investments for the years ahead.”