On April 9, President Donald J. Trump announced a 90-day pause on reciprocal tariffs – except for those on China – that emerged as part of his “Liberation Day” tariff hike announcement a week earlier. Over that week, markets swooned, and oil prices dropped precipitously. A baseline 10% tariff on imported goods, sectoral tariffs, and exemptions remain in place. Meanwhile, the trade war between the United States and China continues to escalate.

Gulf countries did not bear the brunt of tariff pressure. Confronted with the baseline 10% tariff, Gulf countries looked for a short time comparatively better off than countries facing higher reciprocal tariffs, which are now paused. Aluminum and steel imports do face a 25% tariff, but Gulf exporters have managed such trade barriers in the past. The United States is not a major export market for Gulf Cooperation Council countries, which send just 3% of exports to the United States, and energy exports are excluded from these tariffs.

The new U.S. tariff policy – unprecedented as it may be – will not upend relations with Gulf countries. Regional governments have bigger economic and political objectives to accomplish. The nature and timing of tariffs nevertheless exert various pressures on Gulf governments and firms. Yet the prospect of a broader, longer-term impact looms. The early days of Trump’s tariff policy agenda have offered a glimpse into a global economy wherein Gulf economic planners’ room to maneuver across crucial policy domains and strategic initiatives is constrained.

Trade Isn’t Free Anymore

The immediate impact of the tariff announcements rippled through the Gulf. The region’s stock markets tumbled, though rebounds occurred alongside new tariff updates. Shares of major Gulf companies, such as the United Arab Emirates’ Emaar Properties, plunged to a level not witnessed for years. Global market volatility surely hit the internationally diversified investment portfolios of Gulf sovereign wealth funds. Those funds with greater exposure to the United States, such as the Kuwait Investment Authority, will be closely watching the U.S. economy for signs of distress over the months ahead.

 Gulf-based exporters that rely heavily on the U.S. market will be acutely affected by tariffs. Oman and Bahrain, which are more vulnerable economically than neighboring GCC states, have free trade agreements with the United States. These FTAs have set Oman and Bahrain apart from their neighbors and helped them to develop domestic industries and attract foreign direct investment. Bahrain recently set up a United States Trade Zone in Salman Industrial City to strengthen economic ties between the two countries “in accordance with the advantages of the free trade agreement.” With the application of a baseline 10% tariff, those FTAs are effectively dead, though not necessarily buried. In early April, Bahrain’s ambassador to the United States made a cautious statement suggesting the Bahrainis intend to uphold their end of the FTA.

Trump has indicated his openness to trade deals, and some analysts have suggested that warm relations with Trump strengthen the Gulf’s position to negotiate on tariffs. However, the stickiness of the 10% baseline tariff remains unclear, and it is hard to know whether Oman and Bahrain – which are not currently intended stops on Trump’s expected visit to the Gulf in May – can negotiate back to their previous statuses under the FTAs. There is not much room for dealmaking. The United States already enjoys a trade surplus with Bahrain and Oman.

The Bad News Is Uncertainty

Unprecedented tariffs and course corrections have created significant macroeconomic uncertainty in the global economy. A 90-day pause on reciprocal tariffs does little to ease concerns over a highly volatile economic policy environment. It also seems like an uphill battle to negotiate new and better trade deals over such short time frames. Meanwhile, the trade war with China continues to escalate with no clear offramp in sight. Trump has raised tariffs on imports from China to 145%, according to the White House. Some goods – like electric vehicles – face up to a 245% tariff when accounting for existing levies.

There will be knock-on effects in the Gulf. Slower growth and dampened investor sentiment across the region are likely. Amid such headwinds, it is hard to envision countries like the UAE making substantial headway on the ambitious dimensions of its “We the Emirates 2031” vision, such as doubling its gross domestic product. Some government-related entities were already expecting headwinds before the April tariff announcements, and their operating environment has become even more complicated now. DP World – the Dubai-owned port and logistics company that reported, in March, a 28% fall in 2024 annual profits – cited global trade uncertainties and geopolitical risks as part of a clouded outlook.

Other costs from the tariffs are expected to mount in GCC economies. An inflationary spillover is likely, given the region’s strong reliance on imports across various sectors. Inflationary pressures can complicate regional governments’ ongoing balancing act to enhance livability for a wide socioeconomic range of citizens and residents while simultaneously advancing subsidy reforms. In addition, construction costs are expected to surge over the next 24 months, with one estimate projecting a 3.4% to 7% increase in cost hikes in Saudi Arabia, which could prove to be a conservative figure.

A Challenging Oil Price Environment

Fiscal maneuverability will be squeezed by the current oil price environment, which is also influenced by tariffs. In recent years, oil prices have been moving in an increasingly uncomfortable direction for GCC governments. The downward pressures on prices are intensifying. In early April, oil markets faced a “toxic cocktail” of recession fears related to Trump’s tariffs and the unexpected decision by the OPEC+ alliance to speed up crude oil output hikes by 411,000 barrels per day.

Brent crude oil prices subsequently dipped below $60 per barrel. At one point amid the market mayhem, Saudi Aramco lost around $90 billion in market capitalization. Oil prices have since rebounded somewhat, and Brent crude was trading at around $66/bbl as of April 21. However, even OPEC has lowered its forecasts for global oil demand growth in 2025 and 2026.

If oil prices stay subdued, there will be lower government revenue and more borrowing needs across the Gulf region. Tim Callen laid out the Saudi budget implications associated with different oil price scenarios. Indeed, Saudi Arabia’s expensive Vision 2030 economic transformation plan may face a fork in the road: costly progress or undesirable cutbacks. GCC issuers of bonds and sukuk will largely “remain resilient,” but credit conditions are expected to weaken in the months ahead.

This comes at a time when Trump wants to see a robust U.S.-Gulf economic corridor. Gulf governments and business actors are mulling how to respond with major investment deals. Yet Goldman Sachs Research found that “changing perceptions of US governance and institutions are also affecting the appeal of US assets for foreign investors.” Tariff policies have also made major trade agreements between the United States and some of these countries null and void.

Confronting the very real prospect of lower revenue and more expensive borrowing, regional governments may find themselves in the uncomfortable position of being asked to do more with less amid a high degree of macroeconomic uncertainty. The top economic priority of regional governments ultimately rests on the domestic front. Beyond investment pledges and commitments, this is where much of the financial resources and capacities of Gulf governments will be allocated during tough economic times.

A Silver Linings Playbook?

It is unsurprising, then, that there is an effort by analysts to view recent tariff developments through an opportunistic lens. One such approach involves portraying reexportation through the UAE and other regional hubs as effective tools for tariff mitigation. Indeed, the UAE is an established reexport center, and Saudi Arabia aspires to become a major logistics hub too. Some analysts view Emirati trade initiatives, such as Comprehensive Economic Partnership Agreements, as shielding against rising protectionism, while others see tariffs as an opportunity to double down on economic integration across the GCC.

This optimism is admirable but unconvincing – at least for now. Rules of origin still matter, and the Trump administration has closed many of the loopholes that global firms used previously to circumvent tariffs. Reconfigurations of supply chains – especially those driven by onshoring or nearshoring – are not guaranteed to benefit Gulf reexport and logistics hubs. Slower global growth could likewise reduce demand for many goods transiting through the region. Meanwhile, Comprehensive Economic Partnership Agreements are seemingly a parallel issue. These economic agreements do not influence the U.S.-UAE bilateral relationship, nor do they address the overarching macroeconomic uncertainty. And while the GCC is the best example of subnational economic integration in the wider Middle East and North Africa region, there has been very little progress on this front in recent years.

Others have suggested that Trump’s tariffs may highlight the comparative advantages of Gulf states as aspiring ecosystems for manufactures seeking to reduce tariff risks. Saudi Arabia is aiming to create “a world-class manufacturing hub” in the country with Alat, a company owned by the Public Investment Fund. When compared to unprecedented tariffs, Gulf countries’ policy consistency and general openness to free trade should support broader efforts to attract more foreign investments, according to these assessments.

This seems more plausible, but any substantial progress will take time to unfold. Meanwhile, Trump’s on-again, off-again tariffs have been fast and furious and involve various U turns. For example, calculations that reciprocal tariffs increased Gulf countries’ competitiveness made significantly less sense after the pause on these tariffs. It is also possible to envision a scenario wherein larger trade partners with the United States negotiate a baseline tariff below 10%, leaving Gulf countries comparatively less competitive – at least in a narrow, tariff rate-related sense.

Gulf economic policy planners ultimately want the appeal of their country to be assessed on the consistency of their regulations, strength of their commercial incentives, and attractiveness of their business (and social) environments. Of course, this will always entail some comparative dimension with global counterparts and alternative investment destinations. But eking out a sustainable competitive advantage alongside the current trajectory of tariff policy will be a challenging task.

Wait (for the Visit) and See

Rather than seek to capitalize on rapidly changing dynamics, Gulf countries are more likely to take a wait-and-see approach. Bahraini economist Omar Al-Ubaydli wrote that, for Gulf states, the “optimal strategy is to buy time,” and other economists from the region expect their countries to adopt a very cautious approach with the United States. Long-standing Gulf concerns over the reliability of U.S. foreign policy toward the region is now focused upon the economic arena.

Trump’s upcoming trip to the Gulf – his first overseas travel this term – is expected to be all business, with a heavy emphasis on investment deals. But it is possible that the trip will offer updates on the tariff front, especially if more details on other countries’ trade deals emerge before then. Many of the CEOs expected to align their travel plans to the region with those of the president are keenly interested in the direction of the U.S. tariff policy too.

Gulf governments and business actors also have questions, though they may not get answers right away. Until the tariff policy becomes clearer, and potentially thereafter, Gulf policymakers will have to contend with some unanticipated pressures and constraints.