How will a second Trump term be different for Gulf economies?

Donald Trump’s remarkable return to the White House carries a wide range of uncertainty, not least of all on the Gulf Co-operation Council, whose economies stand to be impacted by a transactional and fickle politician.
When he does return to power, he will be doing so under a different Gulf region than when he left office four years ago. Today’s GCC is diversifying its economy from oil and gas, thawing tensions with Iran and on the doorstep of the Gaza war.
“Trump is likely to be different in terms of priorities and how his administration engages, and the Gulf is different. And so there are kind of a range of ways in which the new administration could be good for them. But also there is some significant risk,” said Justin Alexander, director of Khalij Economics.
The biggest and most direct Trump-policy risk for the Gulf is the T-word: tariffs.
Economists warn that his plan to impose a 10 per cent tariff on all imports into the US will reignite inflation and stagnate growth. Some of his other domestic proposals, including deporting immigrant workers, are also expected to have an inflationary impact.
Such policies would force the Federal Reserve to keep interest rates elevated, which would spillover into the GCC, where a majority of the countries follow the central bank’s policy decisions because of the currency peg.
“The big concern there for the Gulf states is that borrowing costs might be higher, maybe substantially higher, than they would otherwise be, because of the policies that Donald Trump has outlined,” Mr Alexander said.
His tariffs policies would also be a significant step forward in the recent trend in protectionist policies and global fragmentation.
“Gulf states are very open economies in terms of the importance of trade and they thrive in a world where there is stability and free trade and the development not just US tariffs, but the impact they will have, more broadly on protectionism around the world … that’s not good for Gulf states ,” Mr Alexander said.
Trade restrictions may have less of an impact on the Gulf, which have shifted most of its exports to Asia and Europe than the US in recent years. China is a particularly important export partner, absorbing 20 per cent of GCC oil and gas exports. India, Japan and South Korea are also major trade partners for oil and gas.
And even as a free-trade agreement between China and the Gulf reportedly stalled earlier this year, Beijing remains a critical economic partner for the region.
Another signature promise of Mr Trump is to increase oil and gas production, which also carries its own implications for the Gulf.
“Some of the Trump policies might reduce friction with the oil producers in the region and create new ones,” said Rachel Ziemba, a geoeconomic and country risk expert.
Such plans to boost production efforts would also come at an awkward time as many countries in the region start to diversify away from fossil fuels.
The UAE, Saudi Arabia and others are looking to generate economic growth by investing in technology, boosting female employment and other measures as a means to make their economies less reliant on oil and gas.
“There’s a bit of a disconnect on responding to climate change and the like,” Ms Ziemba said.
Underscoring that disconnect is his promise to rescind “all unspent funds” of the 2022 Inflation Reduction Act, a landmark Biden-era law that provides subsidies for clean-energy projects.
President Joe Biden signed the bill in 2022 as part of his administrations plans to cut greenhouse gas emissions by nearly two-thirds by 2035.
The greatest uncertainty, however, remains the conflict in the Middle East.
The trajectory of the war casts a shadow over the Middle East’s outlook as a whole, and the World Bank lowered the region’s economic growth to 2.2 per cent this year. The Gulf, meanwhile, is still on track for solid growth at 1.9 per cent after a 0.5 per cent increase last year.
Assuming the conflicts in the region remain unresolved by January, Mr Trump will assume office during a time of historic human and economic suffering in Gaza and Israel’s military efforts in Lebanon against Hezbollah.
“The region has changed a lot, not just in the last year, but the security decisions of the Gulf countries have shifted a lot since the last Trump administration, and in some cases because of the realisation that the US security interests and regional security interests weren’t always aligned,” Ms Ziemba said.
Mr Trump has vowed to pledge a quick end to the conflicts in Gaza and Lebanon. What that means is unclear, however, as he labelled himself as Israel’s “protector” during remarks at the Israeli-American Council summit in September.
One analysis conducted by Oxford Economics forecasts Mr Trump’s policies to cut GCC growth by 0.2 per cent, but that the immediate economic concern lays in the region’s conflicts.
“A Trump presidency would weigh on Middle East growth prospects. However, developments in the war between Israel and its enemies will be more consequential for the short-term outlook in the region than the next president’s trade and energy policies,” wrote Maya Senussi, Oxford Economics’ lead Mena economist.