GCC shelters from the trade wars
18 April 2025
The ‘Liberation Day’ tariffs that US President Donald Trump announced on 2 April have plunged global markets into turmoil, with many previously bullish investors turning bearish as a large swathe of reciprocal tariffs were announced.
A week later, Trump announced a 90-day pause on the new tariff regime for most trading partners except China, which received an increased tariff rate of 145%, which was then increased to 245%.
As global stock markets suffered some of their worst days on record, for the GCC, the main mechanism of transmission of economic pain came through the negative oil price shock. Brent crude prices dropped by about 16% and dipped below $60 a barrel for the first time since 2021.
Falling prices
For TS Lombard’s general base case, the negative impact of weaker oil demand is offset by more constructive aspects, which highlight the region’s resilience as it is relatively sheltered from the direct effects of Trump’s tariffs compared to most other emerging markets.
To focus on the negatives first, oil prices have taken a significant hit, dropping to lows unseen since before the Russia-Ukraine war.
It has been generally accepted that during the period from 2022 to February 2025, there was a $70 a barrel price floor for oil, supported by reduced Opec+ production in 2023 and 2024, coupled with geopolitical risk premium resulting from conflicts in Europe and the Middle East.
The geopolitical narrative began to untangle in 2024, and then completely unravel in 2025, as markets no longer price in any real oil shock risk.
This story has been exacerbated in 2025 with a twofold blow in early April: Trump announced his Liberation Day tariffs, and Opec+ announced plans to raise production even further, from an increase of 114,000 barrels a day (b/d) to 411,000 b/d by May, which shocked the oil market.
It is key to note that non-oil expansion depends on crude prices to finance growth, rather than for oil’s contribution to GDP. In Saudi Arabia, for example, non-oil GDP grows at about 2% when oil is below the $60 a barrel range, versus 4.7% on average above $80 a barrel.
Low oil prices become a concern when discussing GCC government budget balances. Economic diversification and oil decoupling plans have required high levels of capital expenditure, as the region begins to brace for a future of less oil dependency – though the deadline for this remains at least 10 years away.
Although GCC markets have decoupled from oil, overall funding and spending in the GCC remains driven by oil revenues. This can be seen with the breakeven oil prices for GCC countries.
There is a wide range of fiscal breakeven points within the GCC, with states such as Bahrain and Saudi Arabia suffering the most from drops in oil revenues. Despite these variations, the outlook for oil can be summarised in four points:
- Opec+ policy creates excess supply, coupled with weak global – and namely Chinese – demand on crude;
- Pricing out of geopolitical risk;
- Tariff policy creates global uncertainty, especially in energy-intensive industries;
- An Opec decision on production numbers will hinge on the outcome of Trump’s visit to Saudi Arabia, Qatar and the UAE.
TS Lombard does not expect oil prices to fall much further. It would not be in Trump’s favour to depress oil prices too far, as it would result in too much pain for US shale producers.
Trump wants lower energy inputs; a positive supply-side factor; and to showcase a win from his campaign pledges, many of which have yet to materialise. Nonetheless, the base case for oil remains bearish this year relative to the past two years, although TS Lombard is not overly negative on expectations about current price equilibrium in the $60-$70 a barrel range.
Potential upside
With markets remaining in a tumultuous state, and while questions are being asked about trade deals and the re-implementation of tariffs, it is key to note that oil, energy and various petrochemicals products have been exempt from US tariffs.
This means that, for a volatile and demand-dependent market, oil may see some upside towards the end of this year, as markets begin to price in tariff risk and supply-side disruption.
In terms of non-oil exports from the GCC to the US, with the exception of aluminium, little has changed from pre-Liberation Day operations.
In 2024, the US enjoyed a trade surplus with the GCC in general. For example, 91% of Saudi exports to the US in January 2025 were crude or crude-based products such as ethylene, propylene polymers, fertilisers, some plastics products, and rubber – most of which are exempt from tariffs.
For the UAE, 80% of exports to the US were similarly exempt, including supplying the US with 8% of its total aluminium demand. Significantly, Canada and China are the main aluminium exporters to the US.
With China and Canada also being major targets for Trump, countries such as the UAE and Bahrain will maintain a competitive advantage in selling to the US market, despite facing either the 10% baseline tariff, or the specific 25% aluminium tariff. The best case scenario is that both these GCC states are able to negotiate a trade deal that could exempt or curb the negative tariff effect on their aluminium exports.
Limiting impact
Although several industries have already suffered – as petrochemicals in general has suffered because of the drop in demand and oversupply in the market – the GCC finds itself in a unique position. Its economies are geared to being market- and trade-friendly, and they have low regulatory barriers, large amounts of space and energy to engage in manufacturing-intensive activities.
Coupled with strong relations with the Trump administration, the GCC has both an economic and geopolitical opportunity to act as a global intermediary. It has already been announced that Trump’s first foreign visits will be to the region, and today major global negotiations – from ceasefires to investment mandates – take place in the GCC.
A common argument being made regarding the latest output decision by Opec+ is that it is a geopolitical ploy to appease Trump’s pursuit of lower energy prices and gain favourable negotiating positions for the GCC states. Items on this docket range from civilian nuclear and drone programmes through to the approach to Iran and the Gaza-Israel question.
Saudi Arabia’s non-oil GDP remains high, showing the resilience of the kingdom when facing economic headwinds. Specifically, the kingdom has kept up its streak of strong non-oil purchasing managers’ index performances.
With the GCC exhibiting stable conditions as the world moves towards uncertainty and erecting trade barriers, the region’s overall competitiveness could be enhanced. This is especially true in the case of the real economy, where investments still have a mostly local rather than international reliance.
Overall, the short-term story relates to oil – and namely to the capital flows that oil brings, which fund economic diversification expenditures in the GCC.
Although lower oil prices are a key detractor for the region, the story is far from being all bad news.
Improved geopolitical relations and opportunities arising from the positioning of the GCC states allows them to exploit emerging gaps in markets that were previously dominated by economies that have been targeted with tariffs.
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Nearly a decade after the official end of the Islamic State conflict, Iraq’s reconstruction gap remains substantial. Estimates put the shortfall at about $88bn, reflecting the long tail of damage to housing, utilities, public buildings and transport links. Southern and central regions dominate the live pipeline, largely because they sit close to Iraq’s oil heartlands. Basra, in particular, is pivotal, anchoring major upstream activity and vital export infrastructure.
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Macro risk
Despite policy ambition, the most immediate determinant of Iraq’s fiscal room is the oil price. A $10-a-barrel drop can reduce government revenue by an estimated $7bn-$9bn annually. Such sensitivity matters because infrastructure spending is still largely funded by the public purse. Oil price swings affect project awards, payment cycles and the government’s willingness to assume up-front capex obligations.
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Oil and gas upstream remains the single largest driver of capital expenditure. Major developments, including the Gas Growth Integrated Project (GGIP) and Mansouriya, sit alongside a push to reduce gas flaring and expand downstream processing. The objective is to sustain export revenues while improving domestic fuel availability.
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The latest escalation involving the US and Israel with Iran has increased Iraq’s security risk premium. This is inflating materials costs and disrupting supply chains near eastern border zones. Even where projects are far from conflict areas, contractors are pricing in higher contingency for logistics and insurance. Iraq must also balance deep economic ties with Iran—particularly in energy—with Western investor expectations and sanctions-related compliance.
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Retal to develop project in Oman’s Sultan Haitham City
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The contract was tendered by Dubai’s Roads & Transport Authority (RTA), which signed a construction agreement with Elon Musk-backed firm The Boring Company.
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