Oil, dollars, and debt: How safe is the Middle East from the global trade war?

The global trade war triggered by U.S. President Donald Trump shows no sign of abating, with tit-for-tat tariffs hammering major economies, tanking stock markets and dimming growth prospects.

The economies concerned – North America, the European Union, and China – face highly uncertain futures. But for the Middle East, which has so far been spared of additional levies, there are still reasons to worry – as well as opportunities to take advantage of.

Direct impact from tariffs, like the U.S. levies on steel and aluminum imports, have just a minimal impact on the Middle East, economists say. The Gulf region, for instance, accounted for roughly 16% of U.S. aluminum imports in 2024, led by the United Arab Emirates and Bahrain, Standard Chartered MENA Economist Carla Slim told CNBC. While those sectors may be affected, analysts say, the hit will be minor.

But the blow to growth from a trade war is likely to hurt the price of oil, the mainstay of the region’s economy. There are also immediate costs to countries whose currencies are pegged to the dollar, such as Saudi Arabia, the UAE, Qatar, Oman, and Bahrain.

The U.S. dollar has been selling off since the start of the year, making imports for countries with dollar pegs more expensive – a challenge for a region highly dependent on goods from abroad.

Trade tariffs implemented by the U.S. typically make the greenback stronger over time, however – if that happens, oil becomes more expensive, as the commodity is traded in dollars. This would give an initial boost to oil-exporting Middle East countries.

But bad news may lie ahead as oil demand slows due to weakened global trade and shipping.

“The macro outlook for MENA (Middle East and North Africa) is set to be weighed down by global tariff uncertainty indirectly through oil prices, to the extent that tariff and macro uncertainties continue to be a drag to Brent oil prices,” Slim told CNBC.

Since the oil price shock of 2014, however, many of those economies have implemented structural reforms and diversification programs in a bid to lessen their dependence on oil revenue.

“Strengthening domestic demand resilience continues to be the best lever to immunize local economies from global external shocks, in our view,” Slim said.

Despite diversification efforts, however, oil “still accounts for the largest single share of income,” said Edward Bell, acting chief economist at Dubai-based bank Emirates NBD.

“For an economy like the UAE that is highly open to trade and acts as a global trade facilitator through extensive infrastructure and logistics links, a drop in global trade will also be an externally imposed headwind to growth,” Bell noted.

A stronger greenback also means that dollar-denominated debt is more expensive to service. For Lebanon, Jordan, and Egypt, which have particularly high levels of external debt, this is a major concern and could cause acute economic pain.

Jordan is the most vulnerable country in the region to the tariff wars due to its high export dependency on the U.S., according to James Swanston, senior emerging markets economist at London-based Capital Economics. Nearly 25% of Jordan’s exports — mainly textiles and jewelry — go to American markets. 

“Jordan’s economy is the most exposed to potential tariffs,” Swanston told CNBC. 

But the country may find some reprieve in its diplomatic ties to Washington – “a carve-out was secured with regard to U.S. foreign assistance following the suspension of USAID” because of Jordan’s strategic importance in U.S. foreign policy, Swanston noted. “This might suggest that Jordan could negotiate fairly easily out of tariff impacts.” 

One significant and positive change for the MENA region brought about by the tariffs is the push for more geographically streamlined trade corridors.

“For MENA, we think this will add impetus to fast-growth trade corridors, such as the GCC-Asia trade corridor which has experienced long-term growth of 15% and stands to benefit most,” said Standard Chartered’s Slim.

She sees rising trade volumes ushering in a parallel increase in financial and investment flows between the Gulf states and Asia in particular, “as Asian businesses set up presence in the Middle East or expand existing businesses, adding impetus to the organic growth we’ve observed since [China’s] Belt and Road Initiative.”