President-elect Donald J. Trump has a reputation for unconventional policies, sending analysts the world over scrambling to understand the potential effects of his second stint in the White House. One area that Bahrain will be keenly observing is Trump’s trade policy, as one of the plausible paths – the imposition of steep tariffs for all countries that do not have a free trade agreement with the United States, while maintaining tax-free trade with FTA partners – could confer a significant economic dividend upon the Gulf state.
Trump’s Proposals
The plans of any president-elect should be taken with a grain of salt, especially those of Trump, as the reality of Washington politics frequently derails ambitious proposals. Nevertheless, taking Trump at his word, the new administration may impose a 20% tariff on all commodities entering the United States, in addition to a hefty 60% levy on those coming from China and a dizzying 100% tariff on all foreign vehicles.
Bahrain is one of the 20 countries that has an FTA with the United States, meaning that it – and its 19 peers – will be asking: If Trump’s plans materialize, will the FTA partners be exempt? In principle, the straightforward answer is “yes,” since that is the defining characteristic of an FTA. However, Section 232 of the 1962 Trade Expansion Act provides the president with the right to override FTAs if the tariffs under consideration serve a “national security interest.”
For example, in 2018, the Trump administration used this justification to impose exceptional tariffs on aluminum and steel because of the purported importance of the two materials to military manufacturing. The administration argued that China had been dumping metals into global markets, weakening U.S. capacity to produce them domestically and thereby undermining the United States’ ability to defend itself. At the time, a significant volume of Bahrain’s aluminum exports had been heading to the United States, benefiting from the 2005 FTA. The tariffs, then, caused a significant contraction in aluminum trade between the two countries, and Bahrain has been unsuccessfully lobbying for an exemption ever since.
Trump has yet to clarify his intentions, but the good news for Bahrain and the rest of the FTA partners is that it will be a lot harder for him to invoke Section 232 when applying tariffs to all commodities. Moreover, a supermajority in Congress can overrule presidential executive orders, and there is a good chance that the broad range of adversely affected interests in the United States will successfully lobby to deny Trump the free hand he might yearn for. After all, every U.S. product that utilizes imports somewhere in the production chain will suffer a sharp increase in input prices, while U.S. exporters will brace for retaliatory tariffs.
Israel – which also has an FTA with the United States – may be another key impediment to such a policy: The United States imports around $20 billion of commodities from Israel annually, and while that figure is trivial to the United States, it is over one-quarter of Israel’s total commodity exports and 4% of Israel’s gross domestic product. In 2018, when Trump imposed aluminum and steel tariffs, Israel was barely affected not because it was granted an exemption but because it hardly exports either commodity to the United States. Should a blanket 20% tariff be imposed, the Israeli economy will feel it.
Given the historical strength of U.S.-Israeli relations, it seems plausible that Israel would secure the exemption that an FTA should guarantee, making it easier for Bahrain and other FTA partners to secure a comparable exemption. That Bahrain has signed onto the Abraham Accords with Israel may play in its favor from the U.S. perspective as will the Bahraini economy’s small size compared to the United States as the world’s number one economy, as this drastically limits any potentially adverse effects of trade with Bahrain on U.S. jobs. The Comprehensive Security Integration and Prosperity Agreement that Bahraini Crown Prince Salman bin Hamad al-Khalifa signed in Washington in September 2023 offers further cause for optimism from the Bahraini side.
Potential for Bahrain
In 2022, Bahrain’s commodity exports to the United States were just under $2 billion, and they were dominated by metals. Bahrain’s local aluminum sector remains competitive in spite of the tariffs, and the sector is unlikely to be affected by any new tariff policy. Meanwhile, nonmetal exports stood at approximately $430 million, around 1% of GDP. The main nonmetal industries include refined petroleum, plastics, and textiles, none of which have particularly high value added or a large potential for expansion.
Instead, Bahrain’s strategy should focus on attracting manufacturing ventures from friendly countries that export heavily to the United States and are geographically close to Bahrain but do not have the protection of an FTA. By locating factories and other elements of the supply chain in Bahrain, these countries can legally evade the tariffs that might otherwise stifle their ability to export to the United States. Such countries could include: India ($82 billion of exports to the United States), Saudi Arabia ($24 billion), Bangladesh ($12 billion), Iraq ($10 billion), the United Arab Emirates ($7 billion), Pakistan ($6 billion), and Sri Lanka ($4 billion).
While many of the goods that these countries export to the United States are not suitable for a Bahrain-based joint venture, some certainly are. For example, among India’s voluminous exports to the United States are $14 billion of pharmaceuticals and $10 billion of textiles. The presence of over 300,000 Indians in Bahrain, in addition to numerous Indian businesses and strong historical ties, would facilitate the forging of a Bahraini-Indian cooperative agreement of this kind.
Bahrain’s accumulated efforts in making its economy attractive to foreign investors would also play an important role. Since the start of the new millennium, it has secured more than $15 billion in foreign direct investment. Many factors have contributed to this success, including making it easy for non-Bahrainis to purchase property and obtain licenses to operate businesses and the assuredness provided by a currency peg to the U.S. dollar that has been operating for over four decades.
The Risks
Even if Bahrain were to secure the coveted tariff exemption, there are two issues that Bahrain would still have to grapple with for it to realize the full benefits of the opportunities on the table. First, Trump’s bolder policies do not always stand the test of time. For example, the U.S. decision to withdraw from the Paris climate accords was a big deal when it happened in 2017, but it was fully reversed in January 2021 by President Joseph R. Biden Jr. on his first day in office (a mere two months after the decision went into effect). Given that Trump’s upcoming term should be his last, investors will certainly be wary of committing capital to a project whose value depends on tariffs that may be lifted in a few years. Further, beyond what subsequent administrations might do, there is also the risk that Trump’s administration develops a new tariff policy, especially if it feels that the targeted economies are using FTA members such as Bahrain to evade the new tariffs.
The second issue for Bahraini policymakers to ponder is the potentially negative role played by the country’s continuing fiscal challenges. While Bahrain’s fiscal situation has improved significantly since 2018 due to internal reforms and assistance from Kuwait, Saudi Arabia, and the UAE, its public debt remains high, and it has yet to present a detailed plan on how that debt will be reduced to the level of comparable economies. Prospective investors tend to be farsighted, and so their willingness to commit capital will be sensitive to Bahrain’s ability to convey fiscal stability. Ironically, attracting foreign capital and creating local jobs via the leveraging of the FTA with the United States may be one of the most compelling paths to fiscal sustainability, creating a chicken-and-egg dilemma for Bahraini policymakers.
New Opportunities?
Given that the majority of Bahrain’s exports to the United States are already subject to U.S. aluminum and steel tariffs, the economic threat to Bahrain posed by Trump’s proposed tariff policy is somewhat muted, even if Bahrain’s FTA with the United States fails to shield it from the tariffs. However, if the exemption that defines an FTA holds firm, Bahrain will be presented with a potentially golden opportunity to attract foreign capital and produce a diverse range of merchandise exports. While Democrats and Republicans disagree on many policies, one area of consensus for the foreseeable future is an aversion to granting any new countries FTAs with the United States, offering Bahrain the chance to base its economic strategy on being a conduit to the U.S. economy.
Nevertheless, nothing is ever straightforward in geopolitics and geoeconomics, especially when Trump’s team of heterodox advisors and executives are drafting trade policies for the United States. Investors dislike tariffs, but they hate unpredictable policies even more, and so Bahrain will have to work hard to convince friendly countries, such as India, Saudi Arabia, and the UAE, that relocating their manufacturing to Bahrain will yield long-lasting returns.
