How can US trade tariffs impact Middle Eastern countries?

Trump threatened to impose tariffs during his election campaign, positioning protectionism as a key selling point to appease voters.

After taking up the world’s most important office, he slapped a 10% duty on Chinese imports and a 25% tariff on Mexican and Canadian goods. 

China responded with its own set of retaliatory measures, including a 15% tax on certain types of coals and liquefied natural gas, and a 10% tariff on crude oil, agricultural machinery, large-displacement cars and pickup trucks. 

Weeks into the job, he ordered a 25% import tax on all steel and aluminium entering the US, to be enforced on March 12. It is essential to remember that the US is the world’s largest importer of steel, with Canada, Brazil and Mexico as its top suppliers. 

The White House also issued an executive order on February 25, calling for an investigation into whether copper imports pose a threat to US national security.

But how do these trade tariffs and perhaps more to come, impact the wider Middle East region? The impact is multi-fold, ranging from lower trade figures and subsequent lower US and global growth.

If this scenario plays out, a delay in interest rate cuts is probable, which may impact the six-nation Gulf Cooperation Council (GCC) bloc and other Middle Eastern countries.

Dwindling trade 
The US imported $1.61 billion and $671 million worth of aluminium from the UAE and Bahrain in 2023, respectively, ranking the two GCC states among its top 10 aluminium exporters, according to ITC data. 

“For the UAE, aluminium exports to the US represent just 0.3% of the country's total exports and about 0.3% of its GDP. In contrast, Bahrain's aluminium exports to the US account for about 5.5% of its total exports and 1.5% of GDP. Therefore, while the impact on Bahrain will be more pronounced than on the UAE, it remains manageable,” said Ramona Moubarak, MENA head of country Risk for BMI, a Fitch Solutions company.

“Although discussions about imposing 25% tariffs continue, we believe that these rates might be slightly reduced, albeit not to the levels observed in 2018 when substantial concessions were granted. A compromise tariff rate between 10-15% could potentially be reached.”

The US remains the top destination for Emirati exports, with other export markets including the Netherlands, Japan, Italy, India and Turkiye. Similarly, the US is Bahrain’s top importer of aluminium products, with OIC countries such as Saudi Arabia, Turkiye, Morocco and Egypt amongst its top 10 importers.  

“A robust global demand outlook for aluminium will likely mitigate risks posed by losses in US export demand on Bahrain and the UAE, making it is easy to reroute exports to alternative markets,” adds Mubarak.

The UAE and Bahrain which have several free trade agreements, could look to reroute exports to these destinations. 

Fed rates’ blast radius 
The trade war that could potentially escalate and materialize in lower trade figures could slow overall growth. 

“We estimate that tariffs on the scale that Trump has announced will slow both US and global growth, push up inflation, and cause further delays in Fed interest rate cuts,” Eastspring Investments said in its monthly bulletin in February. 

President Trump has pushed for lower interest rates in a social media post on February 12, suggesting that monetary easing should work in tandem with tariffs. 

Since five of the six GCC countries have pegged their currencies to the US dollar, any movement in interest rate cuts will be reflected across the region, with Central Banks mirroring the move. 

The Fed decreased rates by 100 bps in 2024. S&P Global Ratings said ahead of the trade tariffs that the Fed could afford to slow the pace of rate cuts in the months ahead.

“In general, lower rates will dent the net interest income of banks in selected emerging markets in EMEA.”

For the GCC, higher lending growth and a lower cost of risk will compensate for declining margins. For Turkiye, the decline in global interest rates will help banks roll over their external debt (21% of total funding at mid-2024), with a positive impact on pricing and demand, it added.