Trump's ten day shake-up and the economic fallout in the Gulf

Published January 30th, 2017 - 05:49 GMT
Withdrawal from the TPP and potential trade wars against Mexico and China will do nothing to help rescue world trade activity, which has been declining alarmingly since the global financial crisis. (AFP/File)
Withdrawal from the TPP and potential trade wars against Mexico and China will do nothing to help rescue world trade activity, which has been declining alarmingly since the global financial crisis. (AFP/File)
During the campaign for the US presidency and in the weeks after Donald Trump’s victory, some worried observers expressed hopes that Trump might not have meant all he said on the campaign trail; that it was all just electoral rhetoric and he would have to soften his policy stance once he got in power.

Now, after the first 10 days of President Trump, it looks as though he meant it all along, and that his administration is going to be fundamentally radical — in the sense of pursuing totally new strategies and ditching many of the decades-old constants of US policy.
We have already seen this in relation to Mexico, the Trans-Pacific Partnership (TPP), health care and other keystones of the past. Toward the end of last week, we saw it also in Trump’s approach to security, with drastic measures to halt migration from some Muslim countries he deems as terrorist havens.

Forget, if you can, the wisdom of those measures, or the sheer inhumanity of some of them, or even the basic question of whether they will have whatever desired effect is in Trump’s mercurial mind. Ask instead what his economic-policy pronouncements will mean for the Middle East, and especially the Arabian Gulf. You have to conclude that, if he follows through in this as he has in other areas, we are in for a difficult time.

The geopolitical implications are bad enough: Exacerbating the Israeli-Palestinian conflict via Trump’s strong support for the former; risking increased tension through his tougher stance against Iran; the strategic consequences of a withdrawal of US involvement in Syria or Iraq, or — contrarily — the unpredictable results of his stated determination to eradicate “radical Islamic terrorism.”

Grave consequences 

Two specific economic polices have potentially grave consequences for the Gulf: Trump’s energy strategy, and his protectionist stance on world trade. The Gulf lives by trade and is (still) largely dependent on oil and gas revenue, so whatever Trump does in this area will fundamentally affect the economic livelihood of the region.

On energy, the signs are not good. The new president, true to his policy of putting America first, has said that he will lift environmental and planning constraints on US domestic oil, gas and coal production. This is likely to lead to a surge in American energy production just as the rest of the world is learning to live with the fact of oil at less than $60 a barrel.

Already shale producers are reporting a strong rise in the number of rigs drilling for oil and gas, with the largest one-week increase for over five years. This is partly a market function, with firmer oil prices making it economic once more to drill. It also reflects increasing self-confidence by the domestic US energy industry in the Trump era.

But if a big increase in production adds significantly to world inventories, it puts at jeopardy the gains of the past two years in Gulf producing countries. Were all those painful austerity measures, painstaking transformation plans, and hours of the Organization of the Petroleum Exporting Countries (OPEC) diplomacy, really intended to allow a new boom in the Permian basin in Texas?
New downward pressure on the oil price from US shale endangers the careful budget plans of all the Gulf states, but especially Saudi Arabia, where $50 per barrel was assumed as the 2017 level in the recent crucial budget statement, at a critical time for the National Transformation Plan 2020.

Potential trade wars

The oil price equation is pretty straightforward in its implications for regional economies, but the effects of President Trump’s trade policy are more complicated. Withdrawal from the TPP and potential trade wars against Mexico and China will do nothing to help rescue world trade activity, which has been declining alarmingly since the global financial crisis. The great ports of the eastern Gulf, like Dubai’s Jebel Ali, would obviously be affected by any decline in East-West trade; planned expansion on the Red Sea coast would also be hit by a Trump-induced decline in world trade.

Some of this could be offset by the prospect of an early “Trump boom” for the world economy, which some economists are forecasting will lift US gross domestic product (GDP) for at least the first couple of years of his presidency as the effects of tax cuts and infrastructure spend take hold. But it probably would not compensate for the carnage of a global trade war.

There may be other compensations too, with increased opportunities for Gulf companies — the Dubai property developer Damac, for example — which could make it on the president’s favored list. But these too might be outweighed by other protectionist measures, like a decision in the “open skies” row in favor of American airlines and at the expense of Emirates, Etihad and Qatar.

All in all, the proven volatilities of the 10-day-old Trump presidency mean greater economic uncertainty for the Gulf.

By Frank Kane

 


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