Saudi Arabia’s silver lining in the US-China trade war
With the US and China descending into a no-holds-barred trade war, the best place to dodge the crossfire if you are a manufacturer might be Saudi Arabia.
Saudi Arabia and other energy-rich Gulf states could benefit as they become the new safe havens for manufacturers looking to reduce tariff risks, experts say.
"As tariffs rise in certain countries, we are likely to see a growing shift of business to the GCC [Gulf Cooperation Council], whether through nearshoring or friendshoring," Adel Hamaizia, a Gulf expert at the Harvard Belfer Center Middle East Initiative, told Middle East Eye.
On the surface, right now seems like a really bad time to be a Gulf monarch sitting on oil fields.
Oil prices, which Gulf states rely on to fund everything from investments in Artificial Intelligence to mega-projects, are getting pounded. Brent crude has fallen 16 percent since US President Donald Trump unveiled his “liberation day tariffs" in early April.
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The Gulf states cruised through that announcement with the lowest possible 10 percent rate - that’s a reflection of the fact that the Gulf buys much more from the energy-independent US than it exports to Americans.
Oil prices recovered somewhat on Wednesday after Trump announced a 90-day pause on tariffs. However, they got crushed again on Thursday, with Brent trading down 3.67 percent.
Trump’s pause did not apply to China, which has been slapped with an effective 145 percent tariff in response to Beijing's tariffs on US goods.
Oil’s battering reflects the fact that the world’s two largest economies and top geopolitical rivals are in uncharted waters as Trump pushes ahead with plans to upend the global trading system.
'Make it in Saudi Arabia'
Therein lies the opening for Saudi Arabia, Ellen Wald, the founder of the energy consulting firm, Transversal Consulting, and the author of Saudi Inc, told MEE.
'Saudi Arabia should be sending their trade representatives to the Trump administration right now asking, ‘What was China providing you. Tell us and we will make it'
- Ellen Wald, Author of Saudi Inc
“Saudi Arabia should be sending their trade representatives to the Trump administration right now, asking, ‘What was China providing you. Tell us what it is and we will make it in Saudi Arabia and provide a great trade deal',” Wald said.
Manufacturing is a key component of Saudi Arabia's Crown Prince Mohammed bin Salman’s plan to reduce his kingdom’s dependency on oil revenue.
Saudi Economy Minister Faisal Alibrahim told Bloomberg in late 2024 that the kingdom was working to boost non-oil exports so that in the long term, the kingdom’s economy wouldn’t be solely dependent on oil.
In March, Saudi Arabia said non-oil exports - not including re-exports - rose 13 percent year over year.
The kingdom has opened flashy new factories by enticing companies like EV maker Lucid with promises to buy product off the assembly line. But beyond the media hype, Saudi Arabia has struggled. Oil still accounts for 87 percent of Saudi Arabia's exports.
Trump’s tariff war could give the kingdom the jolt it needs by simultaneously crashing energy prices and making Chinese exports uncompetitive in the US.
Cheap energy, few regulations and lots of land
Analysts say that Trump’s efforts to revive American manufacturing through tariffs will struggle because opening factories is extremely capital intensive and takes years. The same applies to Saudi Arabia, but it has several advantages.
Saudi Arabia and the UAE have both been pouring capital into AI and robotics, which could help address labour shortages. But the Gulf's advantages in a more uncertain and nationalistic trading world are rawer. Unlike Europe, Saudi Arabia and other Gulf states have cheap energy, lots of open space and little regulations.
A case in point is aluminum. The Gulf region already accounts for 16 percent of US aluminum imports. Bahrain and Oman have been big suppliers of aluminum to the US, and the UAE has boosted exports to in recent years.
Of course, the metal underscores the challenges of navigating Trump’s tariff world.
His 90-day pause was not universal. The administration is still imposing 25 percent tariffs on steel and aluminum. However, with China tariffed by nearly six times that amount, experts say, the Gulf remains relatively competitive.
What can Saudi Arabia make?
The most obvious manufacturing for Saudi Arabia to tap into is petrochemicals. The refined polymers and compounds derived from oil are found in everything from fertilisers and plastics to laundry detergents, paper and clothing.
Saudi Arabia has been trying to expand its downstream production for years, and petrochemicals have been on the top of its agenda. Trump’s tariffs and spiralling energy prices are going to accelerate that trend.
Hamaizia said that low energy costs make the Gulf more competitive for "targeted manufacturing".
Experts say Saudi Arabia will be more competitve exporting petrochemicals, fertilisers, specific steel products and even mid-level appliances.
Of course, as the US and China square off in a trade war, the Gulf could also find itself on the receiving end.
China's exports to the Gulf have been on the rise for years. Experts say that Chinese manufacturers locked out of the US market are set to unload more of their cheaper products on the Middle East as American consumption is reduced by tariffs.
“China is likely to divert its trade flows and put more cheaply priced products in the Gulf,” Justin Alexander, director of Khalij Economics and Gulf analyst for GlobalSource Partners, told MEE.
However, Alexander sees the changing world order making Saudi Arabia and other Gulf countries more attractive to manufacturers in general.
“The Gulf states are open economies by design. They embrace free trade,” he said.
“If we are moving into a world of tariff uncertainty and economic nationalism, that could enhance the Gulf’s overall competitiveness. If you invest in a Gulf state, you can be relatively confident you won’t pay high tariffs on your imports or face high tariffs on your exports - that includes American manufacturers.”
A blurry Vision 2030?
Alexander says that any long-term pump in manufacturing is unlikely to offset the negative shock from the plunge in oil prices. Saudi Arabia’s state-owned oil company, Aramco, had already cut dividends in March. The kingdom’s sovereign wealth fund, PIF, uses the dividend to fund mega-projects.
The kingdom is already scaling back mega-projects like Neom. Instead of 1.5 million people living in the city by 2030, Saudi officials now anticipate fewer than 300,000 residents.
The International Monetary Fund says Saudi Arabia needs oil at $90 per barrel to balance its budget. On Thursday, Goldman Sachs painted a bleak picture for Saudi Arabia’s projects, projecting “pretty significant” budget deficits and more scaling back of mega-projects.
But if oil prices stay in the low $60 range and China remains tariffed, the impact could be to rightsize and refocus Saudi Arabia’s economic transformation plan. In sum, exporting boring petrochemicals and plastics could trump desert smart cites.
“The drop in oil prices is not great, but the Saudi budget is going to get what it wants from Aramco no matter what. The big picture is there are a lot of opportunities for Saudi Arabia,” Wald, the author of Saudi Inc, said.
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