Possible implications of Trump’s economic policy for Gulf states

By Dr. Samuel Greene, Sobhon Khairy and Sabrina Abboud

February 6, 2018

At a campaign event in Raleigh, North Carolina, an enthusiast reaffirmed her support for Republican candidate Donald Trump because “with his background, he’s going to put the economy back where it belongs.” This sentiment has been prevalent among many Trump supporters who hope that America’s 45th president will decrease unemployment and bolster the economy.

What this might mean in practice has been less clear, as the Trump administration’s economic team has senior appointees from mainstream Republican economic positions, such as Treasury Secretary Steven Mnuchin and economic adviser Gary Cohn, who directs the National Economic Council, as well as economic nationalists. Beyond departed adviser Steve Bannon, other important nationalist voices on the economy include Commerce Secretary Wilbur Ross, Robert Lighthizer, the U.S. Trade Representative, and senior adviser Pete Navarro.

This paper advances a scenario in which hardline views on trade, immigration, and Iran win out. While such an outcome is not assured, it is certainly plausible—the Financial Times suggested that the “title” of “most senior” nationalist in the administration “still belongs to President Trump, an instinctive trade sceptic whose documented screeds against free trade go back to the 1980s.” Since his inauguration, the president has continued to make public statements about the United States’ future participation in the global economy during his time in office.

From both the president’s official and personal Twitter accounts, to readouts of his phone calls and meetings with world leaders, to his remarks made available by the White House Press Office, President Trump has made known his intentions for a “greater” America: one that yields, at minimum, perceived equal gains in its economic agreements with other states; focuses its trade on bolstering American exports while reducing trade deficits; and takes on less of a perceived global economic burden.

For the states in the Middle East, particularly the members of the Gulf Cooperation Council (GCC), a scenario in which the Trump administration adopts hardline policies to achieve these goals would provide both opportunities and challenges.

Protectionism and “Little America”

 

During the election cycle, Donald Trump’s campaign rhetoric reflected an emphasis on protecting America’s interests first and foremost in all its economic policies. In his inaugural address, the newly-elected president vowed that “every decision on trade, on taxes, on immigration, on foreign affairs will be made to benefit American workers and American families… protection will lead to great prosperity and strength.” Many policies aimed at reducing trade barriers that previously had bipartisan support were suspect for both candidate Trump and President Trump.

The president quickly turned his sights to the North American Free Trade Agreement (NAFTA), consistent with his campaign statements. He tweeted six days into his presidency that “the U.S. has a 60 billion dollar trade deficit with Mexico. It has been a one-sided deal from the beginning of NAFTA with massive numbers… of jobs and companies lost.” He subsequently announced intentions to seek renegotiation rather than full termination of the agreement.

However, during initial negotiations, Trump announced that he would “end up probably terminating” the agreement. Almost immediately upon being sworn into office, President Trump also withdrew the United States from the controversial Trans-Pacific Partnership (TPP), following through on his campaign promises to scale back U.S. involvement in any trade deal deemed “unfair” to American industry.

Despite the withdrawal from the TPP, there are some signs that the Trump administration is interested in bilateral trade ties. President Trump met with Japanese Prime Minister Shinzō Abe after announcing the U.S. exit from the TPP to discuss opportunities for bilateral economic cooperation and a U.S. role in regional cooperation. Yet Trump has also called into question bilateral trade ties with key allies such as South Korea.

Another example of the Trump administration’s rejection of multilateralism is the U.S. withdrawal from the Paris Agreement, a multinational effort to decrease greenhouse gas emissions across the globe. Trump stated that the agreement “handicaps the United States economy in order to win praise from the very foreign capitals and global activists that have long sought to gain wealth at our country’s expense. They don’t put America first. I do, and I always will.”

In early 2018, the administration’s decision to place tariffs on solar panels and heavy washing machines after alleged dumping is another potential indicator of a protectionist bent to its policy, particularly given that Steven Mnunchin, one of the moderates in the administration, warned of future restrictions, arguing that “[t]here’s been a trade war in place for quite a while. The difference is, U.S. troops are now coming to the ramparts.”

Although the ultimate direction of the Trump administration’s economic policy remains to be written, limited bilateral trade engagement may come to replace broad multilateral economic cooperation. At the global level, such actions could cause considerable disruption to a global economy that increasingly relies on the connections of an open economic system.

The implications could include a negative trajectory for the U.S. economy, as more prices rise and the disruption of supply chains slows economic growth. At the extreme, hard protectionism could possibly result in global contagion, given the size of the U.S. economy and the range of global investments that rely on the U.S. financial system, particularly if bilateral trade negotiations disappoint.

Much of the current positive economic outlook, including growth in the stock market, has been driven by assumptions that mainstream economic positions would win out, and that corporate tax reform would be easily enacted by a pro-business Congress.

While a hard-won tax reform was narrowly passed by Congress, confidence that the administration will pursue other pro-growth polices remains uncertain. Particularly in a hardline protectionist scenario, where the January 2018 tariffs are followed by additional moves to restrict trade, the current positive economic trajectory cannot be assumed to continue, notwithstanding corporate tax cuts.

What, then, would a protectionist “Little America” mean for the Gulf states? If the United States embraces protectionism by, for example, imposing a hardline tariff regime to protect American industry, and otherwise engages in hardline tactics likely to damage the U.S. market and perhaps cause global economic uncertainty, Gulf states will face challenges and opportunities.

U.S. policies that roll back multilateral economic cooperation and instead focus on keeping goods and capital in America at the expense of competitiveness will subject the sovereign wealth funds (SFW) of the Gulf states to significant exposure if U.S.-based assets lose value, particularly given significant investments in assets that are vulnerable to an economic downturn in the U.S. Indeed, a Wharton School of Business report found that during the 2008 financial crisis, “most Middle Eastern SWFs, like their peers elsewhere, are estimated to have lost up to 30 percent of their portfolios in the precipitous decline in global equity markets.”

If the Trump administration enacts damaging protectionist policies, however, there is a potential opportunity. Investors could look into Gulf states and their assets as an alternative option. The Gulf could be particularly attractive for investors from the MENA region and from other developing countries. States such as the UAE that have already made encouraging FDI an important part of their economic strategy would be particularly well placed to benefit. This might also increase the appetite for investment in expected sales of parts of Saudi Arabia’s state-owned companies, particularly Saudi Aramco.

Although Trump favors protectionist policies, the United States has also continued to seek investment from the Gulf states and has expressed interest in pursuing increased bilateral trade engagement. Working with Saudi Arabia to increase economic cooperation and investment has been a particular priority. In a meeting with then Deputy Crown Prince Mohammed bin Salman Abdulaziz Al Saud, the president affirmed support for developing a new U.S.-Saudi program within the context of Saudi Arabia’s Vision 2030.

Trump anticipates that the program could foster projects in energy, industry, infrastructure, and technology, and could possibly cultivate more than $200 billion in direct and indirect investments. On his June 2017 trip to Saudi Arabia, the president initiated arms deals with the Saudi Arabian government, reportedly worth some $110 billion. Although it awaits Congress’s approval, which has been complicated by Senator Bob Corker’s hold on arms sales to the Gulf, this deal could set a precedent for future growth in arms deals between GCC states and the United States.

This focus on states that are reforming their economies and opening opportunities for investment illustrates a key point. In the face of a “Little America” potentially defined by a contracting, protectionist economy, investors will be searching for relatively low-risk investments. Within this context, the GCC states will have to demonstrate that they are a safe bet for investment and that they host an enabling environment for FDI.

Gulf states will need to overcome an uncertain economic environment, given low oil prices and regional political instability, as well as a need in many states for regulatory reform. This same concept also applies to the United States. If the Trump administration creates a status quo in which bilateral relations replace multilateral trade agreements, there is opportunity for Gulf states to engage in bilateral relationships with the United States, wherein the U.S. must prove that it is a safe bet for Gulf investment.

The Iran question

The economic policies of the Trump administration toward Iran could mesh with the considerable distrust that most GCC states have for Iran. When the Obama administration signed the so-called “Iran Deal”, commonly referred to as the 2016 Joint Comprehensive Plan of Action (JCPOA), that relaxed sanctions on Iran, most Gulf states, particularly the UAE and Saudi Arabia, expressed grave misgivings.

In contrast, President Trump has made his mistrust of Iran apparent, threatening in his campaign to “tear up” the JCPOA upon taking office and tweeting shortly into his presidency that “Iran is playing with fire – they don’t appreciate how ’kind’ President Obama was to them. Not me!” The White House Press Office further cited the sanctioning of 25 entities and individuals involved in Iran’s ballistic missile program during the president’s first 40 days in office as evidence of its tough approach to Iran.

Although these sanctions make a statement about the new administration’s foreign policy regarding Iran, placing more sanctions and putting Iran “on notice” remains a relatively low-risk method of signaling action to the public with very little diplomatic or political costs. However, Trump’s October decision to refuse to recertify Iran in compliance with JCPOA, leaving Congress to determine the next course of action, and his January threat to withdraw in 120 days, leaves the future of U.S. policy very much in doubt.

It is unlikely that these actions alone will compel other states to engage in collective action in order to recreate a sanctions regime against Iran. Ad hoc coordination of sanctions outside of international organizations has a poor track record of success. A U.S. attempt to reinstate the pre-JCPOA sanctions regime at the United Nations would likely be vetoed by Russia and China.

Many European states would defect from ad hoc sanctions in the face of increasing trade between Iran and EU members. As such, President Trump’s actions will likely continue to have little influence on the Iranian economy as Iran continues to find partnerships in Europe and with other U.S. allies.

If the U.S. does re-impose sweeping sanctions against Iran on an ad hoc basis, this would support the foreign policy of many Gulf states, particularly Saudi Arabia, Bahrain, and the UAE. Reinstating sanctions is a means of providing geopolitical support for what most GCC states have continued to signal about Iran: that the state cannot be trusted, as it sponsors terrorism and engages in proxy warfare in Syria and Yemen. Despite the political support that these sanctions would represent, states who impose sanctions on an ad hoc basis face a trade-off in reinstating sanctions against Iran.

For example, the UAE benefits from the new market opportunities afforded by a trade regime with Iran. A source from Iran noted that as the UAE tightened sanctions prior to JCPOA, “some 25,000 companies registered in the UAE which have done business for over four decades have lost 40 percent of their business because Iranian banks, we’re affected by the sanctions.”

It is likely that other states in the region would defect from a new sanctions regime, leading them to benefit from access to Iranian markets at the expense of GCC states that signed up to enforce an ad hoc strategy of economic coercion against Iran. On the other hand, most of the GCC states view Iran as perhaps their most significant security challenge. Thus, the lost gains from potential trade would likely be an acceptable concession for the political gain of a broader U.S.-led sanctions regime, particularly if this was accompanied by a more rigorous security cooperation against Iran.

Immigration policy

One rhetorically significant part of President Trump’s agenda has been his opposition to immigration. While the most inflammatory rhetoric has been against undocumented immigrants, several proposed policies such as H1-B visa restrictions would raise challenges for legal immigration. Trump’s policies and rhetoric, coupled with a string of post-election attacks on minorities, have made the United States a less appealing destination for foreign workers and students.

Anti-immigration sentiment has also struck two of the other largest destinations for English speaking talent. Theresa May’s Brexit plan, derided for its inward approach by Die Welt as “Little Britain” (January 19, 2017), has explicitly targeted immigration control in its Brexit negotiations. Anti-immigration sentiment among many British voters is likely to continue to drive policies such as restricting the number of immigrants and their access to benefits.

Indeed, a Canadian newspaper found that “as a result [of anti-immigrant policies], the number of international student applications to Britain from India, which is one of the largest sources of overseas students to the U.K., is dropping quickly. In contrast, Canadians are reporting increases of 25 to 75 percent in expected enrollments from Indian students.” Australia has also pursued restrictive policies on immigration.

The shocking conditions of detainees held in offshore detention on Manus and Nauru is perhaps the most visible sign of its immigration policy, but regulations are changing to make attaining Australian citizenship more difficult and to reduce benefits for permanent residents. Australia has even invested in a world-wide campaign in local languages aimed at discouraging migrants from attempting to come to migrate to Australia by boat.

IMMIGRATION PROPOSALS OF THE RAISE ACT:
- Reduce number of green cards.
- Make employment-based green cards points-based.
- No welfare for new immigrants.
- Restrict immigration through family connections.
- Curtail diversity visa program.
- Cut refugee numbers.
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This environment gives Gulf states that conduct their business in English an opportunity to attract global talent looking for competitive salaries and seeking an alternative to countries that have expressed hostility toward immigrants. In particular, the UAE is potentially well situated to advance its goals of developing a knowledge-based economy by attracting skilled labor that is discouraged by the less welcoming environments of the U.S., U.K., and Australia.

As countries in the Gulf seek to develop a knowledge-based economy as part of their strategies for economic diversification, recruiting globally is vital. However, a strategy that seeks to capitalize on attracting global talent will require compromises in other areas, particularly that of demographics, where an imbalance between locals and expatriates remains an important concern. A strategy that focuses on shifting more jobs to locals and reducing immigration may conflict with a global knowledge recruitment campaign.

A significant challenge to establishing a knowledge-based economy is knowledge transfer. Many countries in the Gulf have struggled to keep the knowledge capital generated by recruiting foreign talent, which instead frequently departs the region following the end of contracts. Singapore, which is frequently seen as a model by smaller Gulf states, has created a program that targets talented expats.

It allows for permanent residence or citizenship, leading to a white-collar expat community with longstanding ties to the country. However, such policy would be challenging to adopt in countries like the UAE or Qatar. Emirati and Qatari identity is different from Singapore’s multi-ethnic composition, where English serves as the primary language. By contrast, much of the Gulf works in English but the language of culture and government is Arabic and Islam is its religion.

Thus, the legitimate Khaleeji fear of becoming foreigners in their own countries makes assimilating global talent a challenging policy proposition. Taking advantage of this opportunity will require creative policy solutions.

Conclusion: Balancing challenges and opportunities

The U.S. will continue to be an important security partner and its tough approach toward Iran under Trump fits with the security interests of the Gulf. But if it adopts an inward looking economic nationalist policy, its economy policy will not always align with Gulf interests. Thus, Gulf states should seek to the position themselves to take advantage of opportunities presented by the U.S. and protect themselves from possible negative consequences from Trump’s economic policy.

Gulf states should consider undertaking measures that will increase their attractiveness to investors and to global talent seeking more welcoming markets. GCC states should consider following Dubai’s lead in regulatory reform to reassure investors and to pursue innovative policies that will make the Gulf an attractive destination for the best minds that are needed for a knowledge-based economy to succeed.

Gulf states will also need to be mindful of challenges caused by the Trump administration’s economic policies. In the event that Trump follows a hard protectionist approach, Gulf states should take steps to shield their investments and hedge against possible global spillover. Such measures will allow GCC states to pursue opportunities from a secure position.

Disclaimer: The views in this paper are those of the authors, and do not reflect those of the NESA Center, the National Defense College, or any other person, government, or entity. The authors thank Sterling Jensen and Dave Des Roches for comments on a draft of this article.

Photo credit: Flickr/Creative Commons/U.S. Energy Department/Simon Edelman

 

 

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