Should the China-US trade dispute worry Gulf countries?

US President Donald Trump has been ratcheting up the pressure on China in the Sino-American trade war, with the latest salvo being an increase of tariffs on $200bn of Chinese goods from 10 percent to 25 percent. This follows a robust list of measures unveiled in 2018, which led to both Chinese retaliation and the initiation of formal bilateral negotiations to resolve the dispute.

Given how important the global economy is to the Gulf economy, should the Gulf countries be worried? The short answer is yes, both because of the direct fallout from the tariffs, and because of the indirect effect resulting from the gradual dissolution of the international order.

To start with the direct effect, while many of the measures are bilateral, some – most notably the aluminum (10 percent) and steel (25 percent) tariffs – have been applied to almost all exporters, including those with established bilateral or multilateral free-trade agreements with the US, such as Bahrain, Canada, Mexico, and Oman. Several Gulf countries, including Bahrain, Saudi Arabia, and the UAE, export metal products to the US, and have been directly affected by the tariffs.

In 2017, according to data from the Gulf Cooperation Council statistical office (GCC Stat), GCC goods exports to the US equaled $33bn, or six percent of the GCC’s gross exports. Of those exports heading to the US, eight percent were aluminum and aluminum products, coming primarily from Bahrain and the UAE. Official data for 2018 is yet to be released, preventing us from gauging the effect of the tariffs. However, both countries have applied for exemptions, indicating that their US exports are threatened by the tariffs.

Readers might be wondering why the US would impose global rather than bilateral tariffs in an attempt to discipline China, whom it accuses of unfair trading practices. Some officials have suggested that part of the reason is that monitoring Chinese metal exports is too difficult, meaning that a bilateral tariff would allow China to evade the taxes by exporting to an intermediate country that would then covertly re-export to the US. The only surefire countermeasure is to apply the tariffs globally. Thus, the Gulf countries and the rest of the world’s metal exporters suffer collateral damage.

In the specific case of metal exports, the US is keen to maintain its domestic production for security reasons, as aluminum and steel are critical inputs to a wide range of military hardware. This probably explains why Bahrain and the UAE are yet to receive complete exemptions for the aluminum exports, despite both having exceptionally good bilateral relations with the US, and, in the case of Bahrain, a bilateral free trade agreement.

However, in the long run, the threats from indirect channels are more concerning. A notable aspect of Trump’s tariff policies is that they are unilateral, and bypass the World Trade Organization’s (WTO) system for addressing trade disputes. The global exchange of goods and services has been critical to world prosperity since the middle of the 18th century, and the WTO exists to ensure that global trade is unimpeded by political disputes, as occurred during the interwar era.

Global trade is of acute importance to living standards in the Gulf countries, because almost all of the oil, gas, and petrochemicals produced are consumed outside the Gulf, and because almost all of the goods and services – including critical ones such as food and military hardware – are imported. The US’ unilateralism undermines the integrity of the WTO. If as a result it becomes politically acceptable for countries to unilaterally raise tariffs, including those that Gulf countries export to, then this would expose them to greater trade risks than they already face.

US officials would likely respond that the WTO system is actually broken and exploited by China, and would frame the unilateral measures as a necessary impetus for reforms, having exhausted the WTO’s existing channels. Whether or not other countries share this view does not alter the fact that the Gulf countries need an effective system of world trade to maintain and elevate their living standards.

In fact, the Gulf countries do not only need global markets to acquire critical goods, they also need them to be able to produce important ones competitively. Producing at large scale – a key advantage that the domestic market offers American and Chinese producers – allows producers to lower their costs by exploiting techniques such as mass production. Sometimes, these savings are the only way to maintain the economic viability of a product. This is why Saudi Arabia’s arms manufacturing strategy emphasizes exports as being part of the plan. This model is under threat if Trump’s tariffs unleash a global wave of trade protectionism.

Finally, and most ominously, free trade goes hand in hand with peace, meaning that protectionist measures are usually associated with wars. In fact, the Second World War was preceded by a protectionist wave, which actually played an important role in the war calculus of key participants such as Japan. The deterioration in Middle Eastern security since 2011 is arguably a manifestation of the economic angst and protectionist mindset unleashed by the global financial crisis of 2008.

The Gulf countries should be very wary of the role that Trump’s tariffs are playing in pushing the world to the brink of war. Since the latest measures were framed by Trump as being a response to a breakdown of negotiations with China, the signs are not positive.

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Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.