Less than a week ago, the US brought into effect 25% tariffs on Chinese exports worth $34 billion. Beijing responded by levying an equal amount on American exports to China, escalating a rift between the two countries over trade imbalances. The Trump administration rattled the markets once again after it revealed that it would slap an additional 10% tariffs on goods worth $200 billion, sparking fears of a long drawn out trade war between two of the world’s largest economies.
The move is not without repercussions though. Economists note that a trade war could eat away at the GDP of the two countries eventually, slowing growth over long term but not impacting much over the short term.
But will a trade war between the US and China affect the Middle East? M.R. Raghu, managing director of Marmore MENA Intelligence, says that the trade war will definitely have implications in other markets.
“The prospect of other countries being pushed to take sides could broaden the scale of trade wars and the resultant spillover effects would be felt all over including the Middle East region,” he says.
“The impact of trade wars would be most felt in the economic growth and immediately felt in the equity markets. The former due to dampening of economic activity as demand for exports fall and the latter as increased risk aversion would lead to withdrawal of capital from risky assets. As most of the Middle Eastern markets are either classified as frontier /emerging markets, we could witness capital outflows.”
Lukman Otunuga, Research Analyst at FXTM, agrees as he says that protectionism breeds risk aversion, in turn impacting growth.
“A trade war between the two largest economies in the world presents a significant threat to global economic growth and stability. A scenario where a trade war encourages other markets to begin adopting a protectionist stance may lead to less demand for some U.A.E exports which could negatively impact growth. The uncertainty from such developments may fuel risk aversion, consequently impacting equity markets and local stocks in the Middle East.”
The Middle East could also be affected indirectly if the trade war escalates. The region accounts for 40% of China’s oil imports and if industrial activity falls as a result of the trade wars, demand for oil exports from the MENA could fall, Raghu explains.
According to a quarterly report released by FXTM, global trade tensions could negatively impact oil as it threatens global growth and could subsequently lower the demand for oil.
“The bullish price action witnessed in oil suggests that this risk has not been fully priced in; this is something that would need to be considered if a trade war becomes a reality,” Otunuga said. “With the primary dynamics driving markets still based around geopolitical tensions and rising production from US Shale, this could be another volatile trading quarter for oil.”
While the GCC countries have been steadily diversifying their economies, the primary income is still generated from oil revenues. Therefore any volatility in oil could dampen confidence among investors and affect the regional markets.
It is unsure how long the economic tension between the world’s two largest economies will last. But the longer it lasts, larger the impact will be on oil prices.