How Should Middle East Steel and Aluminum Producers React to Trump’s Tariffs? Do Nothing

Hussain Abdul-Hussain

While campaigning for the presidency two years ago, Donald Trump promised voters he would grow America’s GDP by four percent a year. The problem is, the various parts of his economic plans never quite added up. As the sitting president today, Trump bragged before world leaders at Davos about the “biggest” tax cut in US history, arguing that America was open for business and calling on the world’s investors to relocate to the US. (Chalk one up for globalization.) On the other hand, Trump can apparently succumb as much to nationalist twitches. His protectionist pronouncements on steel and aluminum eventually forced out his chief economic advisor, Gary Cohn. Now, confusingly, Trump disparaged him as a “globalist.” (Globalization isn’t so good after all, it seems.) But things are never quite as they seem with Trump. This president is intent on “disrupting” the way politics is played out. On this point, the Gulf may want to pause before taking any action on those tariffs.

Yes, all very confusing. Even more so when one considers the likely effect of the tariffs – 25 percent on imported steel and 10 percent on foreign-made aluminum. Will they benefit US producers, harm them or do nothing? And as such, will the tariffs stick or will they be quickly rolled back? There lies the conundrum for foreign suppliers. While Canada, Mexico and Australia have been exempted for now, others were not similarly privileged. In response, the EU has drafted a list of American imports it plans to tax, from Harley Davidson motorbikes to peanut butter. Of course, the EU and that other big steel and aluminum producer, China, have trade surpluses with the US and may feel the need to act in order to dissuade America from imposing further new costs on their exports. (More on this later.)

However, Gulf producers of aluminum and steel are nations that generally buy more merchandise from the US than they export to it. Among top aluminum producers are those in Gulf states like the UAE and Bahrain. They may want to see this dispute as essentially one between America and its economic rivals in Europe and Asia. But no dispute is free of costs, and the Gulf will bear some collateral damage. The key is to limit them.

So, first, what can Gulf producers do if they decided to do something? They have two options. First, they could maintain their aluminum prices in the US market by absorbing the 10 percent tax, provided that such an action will only shrink their margin of profit without completely wiping it out. Second, they can look for alternative markets. But such a move is harder said than done, given that America’s promised additional 700,000 tons of aluminum a year might squeeze the market and drive down prices.

Either action would be expensive. And perhaps unnecessary, given precedents. When former President George W Bush imposed tariffs of his own in 2002 on steel, the experiment failed and was eventually ended less than two years later. It is possible that Trump might be forced to do the same. Indeed, the Europeans certainly think they can tighten the vise on America as much as Trump is attempting to do the same to them. A trade war, in other words.

But return to that trade surplus Europe and China benefit at the expense of America. Trump and his allies believe that Europe and China benefit from unfair advantages in the form of non-tariff barriers and a managed currency, respectively. Trump may be betting that instead of upping the trade-war ante, Europe and China might fold by agreeing to negotiate out of the current impasse. Things are never quite what they seem with Trump, the “disrupter” of politics-as-usual.

The Gulf, thus, may only be a bystander in a battle that involves more than steel and aluminum. And as a bystander, it might be able to negotiate a deal to control the damage.

In 2016, the UAE, for example, imported $22.4 billion worth of American products, while its exports, on the other hand, stood at $3.4 billion ($1 billion of which was accounted for by UAE-made aluminum and $100 million of steel). There is indeed, then, an argument to be made for nations running trade deficits with the US to do nothing at all with regard to their aluminum and steel industries. Instead, because America has more to lose from aggravating trade partners to whom it sells more than it buys, it might be more beneficial for Washington to give these producers an exemption. For if Mexico, Canada and Australia can be given a pass, why not others?

People may not like Trump. And certainly, a great deal has transpired in the last year that make many throw up their hands in despair. But the last thing one would be advised to do is to take him at face value. For good or bad, often nothing is as it might seem with Trump.

Hussain Abdul-Hussain is the Washington bureau chief of Kuwaiti daily Al-Rai and a former visiting fellow at Chatham House in London.