The United States has long been the world’s leading advocate for free trade, promoting it as a means of expanding global commerce and specialization in production that links economies into diversified supply chains. This has led to an unprecedented period of economic growth and poverty alleviation, a period anchored largely in an international rules-based order with the U.S. dollar serving as the world’s premier reserve currency. Increasingly, however, high-growth countries and emerging economic competitors to the U.S. have pushed against America’s role in the global economy, particularly its ability to weaponize dollar access to secure its own geopolitical goals. In particular, members of BRICS economic bloc have been exploring the formation of a new currency and exchange system that frees their mutual trade and investment from U.S. control.
In large part, these efforts have been aspirational. Many economists—including this author—have argued that any alternative will meet with limited success because of continued demand for the dollar as a readily exchangeable asset for trade and a store of value for investors and monetary authorities. These perceptions are based on the trust that investors have in the rule of law in the U.S., the independence and dependability of institutions like the Federal Reserve, and the consistency of U.S. international policy over time and administrations.
What these arguments have not accounted for is the increasing disinterest of those in power in Washington to maintain this global role and the international order it underpins. But that is exactly what President Donald Trump is demonstrating. His untethered approach to policy and its rapid, often clumsy implementation, will have profound effects on the global economy. Here, Trump’s tariff threats and the vitriol of his application of them to traditionally close U.S. allies pose considerable risks, threatening to undermine trust in America, the dollar and the international trade system that took decades to put in place. This, in turn, increases the economic vulnerability of countries around the world, including those of the Middle East and North Africa (MENA).
Populist Protectionism: Trump’s Approach to Tariffs
Under the leadership of Trump—himself a long-time believer in tariffs and industrial protectionism—the Republican Party has taken a populist turn. Its political rhetoric now focuses on the need to protect American workers from unfair competition, eliminate unnecessary regulation and fraudulent government spending, and shift revenue generation away from the progressive income tax, which Trump loathes. In the context of his “America First” agenda, Trump has aggressively pushed for tariffs as a means of securing these gains and acquiring leverage in negotiations with foreign leaders.
Some critics were comforted after seeing Trump threaten tariffs against Canada and Mexico only to walk them back after appeasing statements were made by the two countries’ presidents—making Trump’s move appear like a negotiation tactic. Since then, however, Trump has proceeded with imposing tariffs on both countries and China, leading to retaliatory tariffs from all three. Trump has also stated that his government will raise tariffs to counter any country engaging in unfair trade practices, including tariffs, non-tariff barriers, currency manipulation, and even the value-added tax (VAT).
How Trading Partners Will React to American Protectionism
Although tariffs can play a constructive role in a broader industrial strategy, they introduce a host of domestic economic challenges, including raising costs and disproportionately harming consumers and small businesses, while decreasing overall market efficiency. Outside of the U.S., the impact of imposed tariffs will ultimately depend on the response of various trade partners and export-oriented economies, and the related responses of economic actors across the globe. As such, Trump’s tariffs will have a much more limited domestic benefit than the administration expects in terms of revenue generation, securing concessions or bringing manufacturing back while pushing long-term economic allies to seek out new partners and cooperative approaches.
Targeted economies also have a variety of responses they can take that weaken the efficacy of those tariffs. These include reciprocal tariffs, import and export controls and other non-tariff barriers. Firms also can bypass tariffs by exporting to a third country and re-exporting to the U.S. from there. China took advantage of all these approaches after Trump imposed tariffs in 2018.
Exchange rate dynamics will also undercut the efficacy of Trump’s tariffs. The rising cost of trade with the U.S. will push up demand for the dollar, increasing its value against other currencies. In turn, declines in the value of currencies in export-oriented countries will make their goods even cheaper in dollar terms, taking away a significant share of the added costs imposed by a tariff. This was seen in China in 2018 when the renminbi fell by 10% against the dollar after tariffs were introduced. Monetary authorities in export-oriented countries can strengthen this market response by lowering baseline interest rates to further increase demand for the dollar.
Impacts for MENA and the Wider Global Economy
Growing trade tensions will likely have a cascading impact on the international economy. The extent will depend on the scope of trade tensions and the variety of ways in which governments, international firms and organizations, like the World Trade Organization (WTO), respond. However, MENA countries—and other emerging regions and trade groups—will face increased risks associated with terms of trade, exchange rates and growth.
There will be immediate costs to countries maintaining exchange rates fixed to the dollar, including nearly every MENA country. As tariffs raise the value of the dollar, fixed exchange rate countries will see the value of their currencies increase against other currencies, making imports—in a region that is heavily dependent on imports—more expensive. Most middle-income MENA countries will feel pressure either to devalue their currencies or to defend their pegs more aggressively, at great cost potentially to accumulated reserves. MENA countries with high levels of external debt—like Egypt, Jordan and Lebanon—will face higher costs in servicing that debt, a burden they cannot avoid through devaluation. Oil and natural gas exporting countries, particularly the Gulf states, may benefit in the short term from the rising value of the dollar, boosting export earnings, particularly as U.S. sanctions on Iran and Russia continue to restrict international supply. However, international prices for oil and gas will fall significantly in the context of a wider trade war and a decline in demand for oil.
A collapse in global growth seems a hyperbolic concern. However, any uncoordinated trade war, particularly given current geopolitical tensions, could trigger a race to the bottom that leaves every economy in a weaker position. Moreover, the scope of this risk is aligned with Trump’s stated goals and the unpredictable approach he takes to international negotiations. Also, there is an historical basis for this concern: Protectionist efforts have long been linked with triggering or extending global economic crises, as seen in the context of depressions in 1870, 1893 and 1929. In each case, economic hardships and trade tensions also laid the foundations for global conflict, a warning that should not be underestimated in the current geopolitical environment.
Preparing for the Worst, Protecting What is Best
How should MENA countries be preparing strategically to boost their resilience to pending crises? Near-term inflationary pressures are likely. Some may also come under direct scrutiny by Trump, who has already put foreign aid on the table to pressure Egypt and Jordan to accept his terms for the future of Gaza; and he may seek other means for leverage on a wider set of MENA countries, including the Gulf states, in this regard. Most countries will have to look deeply at the costs and benefits of maintaining currency pegs, while taking steps to avoid inflation like devaluing their currencies, pegging to a wider basket or floating their currencies. They should also be working closely with creditors like the International Monetary Fund (IMF) to build a strategy for managing, delaying or restructuring external debt repayments and securing investment from abroad in the event of a wider trade war.
Here, the Gulf states may have to play a bigger role in helping maintain regional economic security, while individual countries will gain from closer coordination with China. The MENA may also find increasing alignment with Europe as the globe’s largest economies compete for influence. Small and medium-sized economies will benefit from new alliances and coordination efforts. These include cooperation on industrial policy, trade expansion, specialization and supply chain development, and cross-border transport infrastructure. Given its strategic location, MENA has unique options as the U.S. becomes a less-dependable partner and second-tier powers seek to build coalitions to counter its policies.
It is also important to realize the positive impact that a rules-based international order has had until now, and MENA countries should continue working actively within the WTO and the United Nations to leverage the remaining power of these institutions and to keep their cooperative frameworks from collapsing with the U.S. retreat.
With each of these issues, an alternative to the dollar becomes more relevant, giving prospects for a BRICS currency more weight. Building the institutional structural alignment and cooperation required for this may take decades, as exemplified by Europe’s path to a shared currency. But now may be the time to do so as the country who has underpinned this system for decades seems intent on undermining it.
