GCC countries and the wider MENA region are safe from direct Trump tariffs, but should the trade taxes on Canada, Mexico and the Eurozone go ahead as the president has threatened, the region will see interest rate impact.

After a frenzied headline-hogging first three weeks replete with pronouncements on domestic and foreign policy and trade relations, analysts have been racing to understand the impacts of the presidential orders.

The MENA region, the GCC in particular, is broadly safe from direct tariffs as they did not feature in Trump’s electoral campaign.

The US runs trade surpluses or small trade deficits with most MENA countries except for Iraq and Israel, said Ramona Moubarak, Head of MENA Country Risk, BMI.

“Israel is a strategic partner, so the likelihood of imposing tariffs is virtually zero,” she said.

Most US imports from Iraq are oil or oil-related products, so tariffs would not be useful except to increase pressure on Iraq for political reasons, possibly in relation to Iran, in which case other oil exporters in the MENA have ample spare capacity to fill the gap.

US inflation impacts

But while there has been a hold on the promised tariffs on Canada on Mexico, if they go ahead, they will lead to inflation in the US, which has direct implications for GCC countries and Jordan, Moubarak said.

A US inflationary shock would discourage the Federal Reserve from cutting rates and disrupt the easing cycle, impacting dollar-pegged countries, she added.

“Higher rates for longer would keep borrowing costs elevated or even raise them, exerting pressure on the economies in these countries.”

Tariffs on the Eurozone would likely lead to slower economic growth in the bloc and expose Maghreb countries – Morocco, Algeria, Tunisia and Libya – to lower demand for goods and services. For example, Tunisia might see slower growth from Germany and Italy and Morocco’s car exports to Italy may be hit.

“Egypt might also face challenges if there is a swing in how investors view emerging markets, potentially leading to large capital outflows,” she said.

GCC AI investment

Investment pledges by the UAE and Saudi Arabia, especially in AI, are additional factors that would further reduce any incentive from Trump to impose direct tariffs in the region, she added.

“These investment pledges resulted from the close relations that Trump has with the leadership of the countries.”

During his campaign, Trump said that he would like to bring Saudi Arabia closer to the US in order to distance it from China, Moubarak added.

Imposing tariffs on oil exports from the GCC would go against this objective as it might bring the bloc closer to China.

Regarding China and its growing relationship with the GCC, Moubarak said the new China tariffs could lead to a slowing economy, reducing demand for oil and exerting pressure on prices.

“Both factors are negative for GCC countries. However, cooperation in other economic areas between China and GCC countries, notably in logistics, manufacturing, and bilateral investment, is unlikely to be significantly affected unless President Trump explicitly sanctions such transactions.”

Meanwhile, Trump will preserve the implicit US red lines that GCC markets should not cross in their relations with China, especially in matters of IT, AI and cybersecurity. 

Moving manufacturing from China to MENA?

The idea of shifting manufacturing to other regions, such as the MENA region, to mitigate the impact of tariffs could gain traction, but it would require significant investment and logistical planning and depend on the availability of infrastructure, cost of labour, the regulatory environment, and political stability, Moubarak said.

Israel and Palestine

Trump shocked the world with his announcement that the US could “take over” Gaza, resettle its Palestinian residents and oversee its redevelopment, an idea that was widely condemned in the region as well as elsewhere.

A press spokesperson later walked back the notion that Palestinians would be resettled permanently, stating that such a move would take place on a temporary basis.

BMI’s commentary in reaction to Trump’s plan is that the administration is likely aware of challenges to it in the form of resistance in Gaza and social unrest in Egypt and Jordan, the countries that the Palestinians would be resettled in, and moreover that it would embolden the Iran-backed “Axis of Resistance,” triggering a rise of radical Islamist sentiments in the region to fill the void left by Iran.

“We believe that it is very likely that the Trump administration is aware of these challenges and raised the bar in its proposal to force Arab countries to submit a counter proposal and launch a pan-Arab negotiation over the future of Gaza,” BMI said.

(Reporting by Imogen Lillywhite; editing by Seban Scaria)

(imogen.lillywhite@lseg.com)