How Could A U.S. Trade War Impact The U.A.E. Economy And AED?

March 19, 2018

Last week, President Trump implemented his promised trade tariffs, imposing 25% and 10% on steel and aluminium imports, respectively. Two countries, Canada and Mexico, were granted exemptions from the tariffs in a move that was branded a “disruptive shock to the global trading system.” Concerns that China and the E.U might retaliate have ignited fears of an international trade war, exposing global equities to risk of losses.

 

The U.A.E. would find itself in an interesting position if concerns of a trade war increased. The local economy is not seen as being at immediate risk following President Trump imposing tariffs on steel and aluminium, although the economy might face headwinds if fears over a trade war did intensify down the road. The world economy in 2018 relies heavily on global trade, and it has taken a decade since the beginning of the global financial crisis to bring optimism over the world economy back to the level where it currently stands. A trade war would risk putting the global economy on the wrong path and although it might not lead to a financial crisis, it would be seen as a strong negative for global growth. If other markets began adopting a protectionist stance, it might lead to less demand for some of the U.A.E.’s exports. This is the same for goods from markets around the world, and the main reason a trade war would threaten global economic health.

 

Potential fluctuations in the financial markets are another factor that could impact the U.A.E. One positive is that, with the Dirham pegged to the Dollar, the AED is unlikely to notice as much volatility as many other currencies across the world. Higher-yielding currencies, like the South African Rand and Turkish Lira, are likely to be negatively squeezed by a trade war, while we would also expect losses for the emerging market currencies across Asia. This would include the Chinese Yuan, Malaysian Ringgit, Thai Baht and Korean Won, to name a few. Where the Gulf and GCC might also see repercussions from a trade war would be in the equity markets and local stocks. Emerging markets rely heavily on risk appetite from investors, and it is highly probable that in the event of a trade war investor attitude towards risk would diminish.

 

Even if the U.A.E. looks to be isolated from the “America First” narrative at the center of President Trump’s administration, a trade war between the U.S, E.U and China, three major world economies, would have a significant impact on the rest of the world.

 

If history has taught us anything, it’s that no one benefits from a trade war. President Trump’s steel tariffs are not the first imposed by America. In 2002, President George W. Bush took a similar approach, imposing tariffs of 8-30% on steel. His intention was to revive the domestic industry and again, Canada, Mexico and a couple of others were exempt. These temporary duties were scheduled to remain in place for three years.

As a result, the E.U threatened to impose retaliatory tariffs on U.S. products; a case was filed at the World Trade Organization, which threatened to levy more than $2 billion in sanctions if the U.S. did not lift the tariffs. Less than a month after the ruling, President Bush backed down and withdrew the tariffs.

 

Will history repeat itself? President Trump is not known for his tendency to back down. While a retaliation is still a possibility, particularly from China, news late last week suggested that some countries would seek an exemption from U.S tariffs rather than combat them with duties of their own. The U. K’s Trade Secretary, Liam Fox, announced plans to visit Washington to seek exemption from the tariffs for U.K steel, which currently exports around £360 million worth of produce to the U.S each year. The E.U has made similar declarations and is expected to seek exemption for all 28 member states.

 

With world leaders clamoring for an audience, and now the leverage to negotiate individual exemptions, many will argue that President Trump has just dealt a masterstroke in support of American steel and aluminum. The coming weeks will decide whether this was a carefully calculated risk or the fulfilment of a brash campaign promise; I am expecting continued volatility in the equity and currency markets in the near-term, at least until the E.U and China clarify their positions.

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