Tackling Trump's tariffs

Each week our Editor-in-Chief writes exclusively for you – subscribers to this newsletter. Today he looks at Trump's proposed tariffs and their chances of implementation.

Tariff is one of the rare words in English that comes from Arabic. Ta’arifa is a verbal noun, since you ask, originally meaning “price list”. But I doubt President-elect Donald Trump knows that – or cares.

Mr Trump has vowed to introduce tariffs of 60 percent on Chinese imports and 10 to 20 percent on those “from every other country”.

While we can be sure that China and Iran are in the crosshairs, Trump has been noticeably vague on exactly how the 10 to 20 percent will work for the rest of us. He has, for example, said that the threat of tariffs “is good for negotiation”. At this point, there is much chin scratching and intonation of the mantra: “Take him seriously but not literally”.

In theory, the Middle East is well positioned for this one.

Israel,?Jordan,?Morocco,?Oman?and?Bahrain all have free trade agreements with the US, while?goods produced in the Palestinian territories enjoy duty-free access. These were largely bonbons handed out to those states that played nicely 20 years ago over the peace process with Israel. Suddenly these deals have gone from “Nice to have” to “Godsend”. A bit like finding a $100 bill down the back of the sofa.

To be sure, Trump has a history of ripping up agreements he does not like – for one, the Joint Collective Plan of Action, the 2015 agreement that monitored Iran's nuclear ambitions – but I doubt if he cares sufficiently about these FTAs. If he does, boffins think it will at least be the tail-end of 2025 before he can enact new tariffs into law.

Elsewhere in the region, both?Turkey?and?Egypt have trade and investment “framework agreements” with the US dating back to 1999 – perhaps Ankara and Cairo are ruing not going the extra mile for an FTA – but it is notable that Saudi Arabia and the United Arab Emirates, which both have manufacturing ambitions, do not.

US presidential candidates have a history of talking tough on protecting industry – and then being somewhat more free-trade when confronted by the realities of office. In this instance, is Trump really prepared to provoke the ire of allies and neighbours such as Canada and Mexico? To which the answer, one fears, is: “Yes. He did it last time.”

Trump himself has only one more term to serve. There is no one much to hold him to account if he enforces or does not enforce – apart from perhaps JD Vance who, barely a week after his boss’s successful election, has the look of a man measuring up the curtains in the Oval Office.

Arab countries are not big exporters – yet – of manufactured goods or of agricultural products. So, 10 percent on a bag of carrots or a TV set will not make much difference.

Oil and gas are different.

True, Saudi Arabia sells oil cargoes into the Gulf of Mexico via Aramco’s Motiva refinery and the new administration has vowed to tear up a Biden moratorium on building new liquefied natural gas terminals. But this should help the ambitions of Aramco and Adnoc in investing in Port Arthur and Rio Grande and, in general, the Middle East has been performing its own "pivot" by directing its hydrocarbon exports to Asia Pacific.

Two additional thoughts: first, batteries. To date the Chinese (and South Koreans) have only announced?battery plants in Morocco – remember that FTA? – and Turkey. So far, the activities of Farasis in Turkey look like they are aimed solely at supplying Togg, a local EV maker. The ambitions of CNGR Advanced Material and the catchily named Zhejiang Huayou Cobalt-LG Chem in Morocco, however, look to be on a different scale altogether.

The European Union, it should be noted, has also introduced?tariffs on electric vehicles?from China and announced investigations into solar panels. It would be surprising if the US and the EU between them were not to realise if large amounts of batteries were exported from Morocco and Turkey without someone noticing.

So, it is back to the good old days of rules of origin and counting threads in shirts and the sparkplugs in car engines. Or should that be the lithium content in batteries? We shall see.

Second: Trump is known to be transactional. He has been effusive in his statements in support of the UAE and Saudi Arabia, but he may demand something of them if they are not to be treated like “every other country”. More action on Yemen?

Nonetheless, when it comes to trade there is reason to be fairly relaxed – albeit the performance of the wider world economy is a major concern.

Oil is another matter. Last week my colleague Eva Levesque spoke to?Joseph McMonigle, secretary-general of Riyadh's International Energy Forum. He believes capital discipline will disincentivise much more investment in US domestic production. The oil companies know it isn’t worth it, McMonigle believes.

But oil prices are flabby. Very flabby. Oil revenues in Saudi Arabia are not covering the cost of the kingdom’s considerable outlays. Quota indiscipline is its usual rampant self. Riyadh has been making noises about flooding the market.

In 2020?Trump intervened to coordinate production cuts. This time, Riyadh may feel that it has no choice but to turn on the taps.