x Abu Dhabi, UAEMonday 22 January 2018

Gulf states in danger from trade war crossfire

As global leaders struggle to come to terms regarding currency policies at Seoul's G20 summit, economists warn that the GCC could be caught in the middle.

The US president, Barack Obama, greets the South Korean president, Lee Myung-bak, at the G20 summit in Seoul.
The US president, Barack Obama, greets the South Korean president, Lee Myung-bak, at the G20 summit in Seoul.

Gulf states could be caught in the crossfire of a global protectionism war unless leading nations can resolve differences over currency policies, economists say.

The warning comes as global leaders struggled to resolve differences over currency policies blamed for distorting trade and investment on the first day of the Group of 20 (G20) leading and emerging economies summit in Seoul.

The former chairman of the US Federal Reserve, Alan Greenspan, and other high-profile figures have warned that a failure to agree on such issues could increase the risk of trade protectionism breaking out globally.

Any measures to limit international trade would have significant implications for the Gulf, which relies on flows of global goods and on foreign buyers of its oil.

Monica Malik, a senior economist at EFG-Hermes in Dubai, said: "If there was a marked increase in trade protectionism we would have lower global growth and demand for oil would decline."

G20 leaders have gathered in the South Korean capital to map out how to stop global economic imbalances and defuse rows over currencies.

Barack Obama, the US president, tried to set an upbeat tone for the talks by saying he hoped the G20 would outline mechanisms for broad-based and balanced global economic growth.

But doubts exist on how much the two-day meeting can achieve. Ms Malik said: "The G20 focus will be on addressing trade imbalances but there is likely to be little meaningful agreement to emerge."

At the heart of the disagreement are currency tensions between the US and China. The US is accusing China of not allowing the yuan to rise and accumulating currency reserves, leading to distortions in the world economy and trade.

China says quantitative easing measures by the US are weakening the US dollar and creating excess liquidity, which is swamping emerging economies with destabilising capital inflows.

Although Saudi Arabia is the only GCC nation in the G20, other economies in the region are closely monitoring the situation, as five of the six Gulf states have their currencies pegged to the greenback. China is also a large consumer of the region's oil.

Mr Greenspan, writing in yesterday's Financial Times, and the Bank of England governor Mervyn King this week became the latest to warn that unless a solution was found the row risked descending into a trade war.

Stephen King, the chief economist at HSBC, said: "There's a growing risk we will end up with protectionist policies."

Trade protectionism measures usually work by limiting the flow of goods through tariffs on imported products, restrictive quotas or other government regulations. They are intended to protect domestic businesses and jobs from foreign competition.

The German chancellor, Angela Merkel, has called for leaders to take a strong stance against trade protectionism by reviving the last round of Doha negotiations on liberalising trade.

The G20 will not address proposals put forward by the US last month to limit trade surpluses and deficits to 4 per cent of GDP to correct imbalances in the global flow of goods and capital.

Such moves could have a big impact on the Gulf, given its large trade surpluses from oil exports.