Eight weeks into the second Trump presidency, the world’s governments—including those in the Gulf—are still trying to make sense of the chaos in Washington. Domestic politics aside, the new administration’s economic policies have sparked fears of a “Trumpcession” amid an escalating trade war and a falling dollar and stock market. Both consumer and business confidence in Trump are in decline, as is his economic approval rating. Diplomatically, the hostility towards long-term allies indicates that governments would be ill-advised to depend too heavily on U.S. financial or military support. In the face of this pandemonium, the question arises: Does the Gulf need to revisit its economic relationship with the United States?
The Gulf and the U.S.: Close allies, softly decoupling
The countries of the Gulf Cooperation Council (GCC) have traditionally been part of the Western sphere of influence. As the United States replaced Britain as the dominant power in the Gulf region during the mid-to-late 20th century, the Gulf states increasingly aligned their security and economies accordingly. Saudi Arabia, in particular, established an oil-for-security pact with the U.S. at the tail-end of the Second World War that has largely endured to this day. Additionally, all GCC countries have, in practice or by law, pegged their currencies to the U.S. dollar for decades.
While each state maintains a distinct bilateral relationship with Washington, there is an across-the-board strategic interest in keeping the U.S. security architecture in place. Gulf militaries are also locked into the U.S. defense industry through the purchase of heavy armaments like fighter jets, missile defense systems, drones, tanks, and ships, and the use of consultancies and private military contractors.
Yet, the strategic and economic ties have not always been unshakeable, and the Gulf has occasionally run an independent course. In 1973, for example, the Gulf states hit the U.S. with a crippling oil embargo in support of Egypt and Syria during the October War. However, relations were quickly mended with the 1974 petrodollar agreement, which tied U.S. security guarantees and weapons supply to oil trade guarantees and the recycling of Saudi petrodollars in U.S. debt and assets. Similarly, all GCC members nationalized their oil industries—while being very careful to appease the U.S. as much as possible to avoid the fate of Iran’s Mohammad Mossadegh, who was ousted from power in a 1953 coup d’etat orchestrated by U.S. and UK intelligence.
Recent years have added cause for Gulf states to pursue diversification strategies and a “soft” decoupling to avoid the risks of over-reliance on the U.S. an over-exposure to related risks. For example, the U.S. shale oil boom and the stratospheric growth of the Chinese economy shifted demand for hydrocarbons away from the U.S. and towards Asia. Today, China has surpassed the U.S. as the most important trade partner of the Gulf.
Concurrently, Riyadh began structuring some oil contracts with Beijing in the renminbi, instead of the dollar, as China made headway in the region with its infrastructure-based Belt and Road Initiative. In 2023, Saudi Arabia flirted with joining the BRICS economic bloc, while the UAE became a member in 2024. All of this is flanked by the GCC’s diversification away from U.S. assets and debt to global investments in strategic mineral resources, food security, and countries of regional importance like Egypt and Türkiye. The Gulf, and particularly Dubai, is also welcoming Russian, Indian and Chinese nationals who find refuge for their embattled assets, progressively overshadowing the importance of Western high-net-worth expatriates.
In addition to the economic shift towards China, the GCC countries have also been losing confidence in U.S. security guarantees, which has led the UAE and Saudi Arabia to repair relations with Iran. Washington’s desire to “pivot toward Asia” coincided with a more hostile approach to the Gulf from successive Democratic administrations, with Barack Obama accusing Gulf states of “free riding” and Joe Biden promising to make the Saudis “pariahs.” The Gulf countries are also increasingly looking to diversify their defense needs away from U.S. dependence, seeking suppliers like France, Britain, Türkiye, Russia and China.
This parallels global efforts—such as those by Germany, the Netherlands, Italy, Türkiye and others—to repatriate their gold reserves from New York. At the same time, the BRICS group is increasingly looking for an alternative to the dollar as the global reserve currency, as some of its members have been hit hard by U.S. sanctions and tariffs, while others risk doing business with them as a result. As such, the Gulf’s “soft” decoupling from the U.S. aligns with broader trends. The question is, does the Trump presidency warrant extra steps in this direction?
What are the economic threats of the Trump presidency?
There are three risks that are plausibly higher after Trump re-entered office: an escalating global trade war, a chaotic foreign policy that may embroil the Gulf in economic warfare, and an economic crisis starting in the U.S. that could proliferate globally.
So far, GCC countries have not been on the receiving end of Trump’s tariff policies. In fact, they may even be short-term beneficiaries of a weakening dollar or retaliatory measures against U.S. exports on oil and liquified natural gas (LNG). However, a general erosion of trade and accelerating deglobalization may disrupt global supply chains and depress overall economic activity in ways that hurt Gulf interests.
While the Gulf states currently maintain good relations with Trump, they are not immune to U.S. sanctions, and it is not a stretch to imagine Trump returning to “coercive diplomacy” for any number of reasons, especially given the current president’s volatile personality. Indeed, in today’s geopolitical context, conflict over Mideast policy in any number of areas—from Israel-Palestine to Lebanon to Syria to Iran—is ripe.
Finally, Trump and Elon Musk could trigger a new economic crisis. Years of low interest rates and quantitative easing have inflated debt and asset prices. In his first term, Trump contributed to major bank collapses by weakening financial regulations. Further deregulation, trade wars, inflation, interest hikes, supply chain interruptions, austerity, and the decimation of the federal administration will heighten financial risks.
A worst-case scenario might see a financial crisis coincide with a currency crisis—historically unthinkable due to the dollar’s global reserve status. However, this status depends on global confidence in U.S. dependability and good governance, which Trump’s erratic policies are quickly undermining.
While panic may be premature, the U.S. economy’s best days may be behind it. Market concentration and monopolization are rising; labor productivity has been growing below average since 2005; gross capital formation is languishing below pre-2008 levels; and investment in non-financial assets peaked back in 2010. Meanwhile, China is surging in renewables, electronic vehicles, artificial intelligence and semiconductors—despite U.S. sanctions.
Although, the UAE and Saudi Arabia have both announced major investment plans in the U.S. since Trump took office, these declarations are motivated more by politics than economics and there is very good reason to be skeptical they will ever be delivered.
How should Gulf states react?
If we accept that most announcements are nothing more than bluster and that actual policies and outcomes follow the same long-term trend, we might conclude that Gulf governments can continue their current strategy of “soft” decoupling. The two major hurdles are the enormous military leverage of the U.S. over the GCC and the lack of dependable alternative currencies, securities and institutions.
Yet, this absence should not diminish efforts to decrease dependence on the U.S. economy. The Trump presidency’s literal and figurative senescence, its erratic course and erosion of state capacity increase the country’s brittleness and, consequently, the danger of a sudden, cascading failure and, in the worst-case scenario, a run on the dollar. In a global environment of secular stagnation, deglobalization, and polycrisis, this could prove fatal for unprepared countries, especially for countries in a complex economic transition away from hydrocarbons.
Therefore, the moment demands new contingency plans for diversification and de-risking. Some GCC countries may currently exhibit more risk appetite than prudence towards the U.S. But Gulf states must prepare for the previously unthinkable, including scenarios of direct or indirect sanctions or tariffs and restricted access to U.S. markets and payment systems. Increased protectionism will necessitate more diversified supply chains and more economic self-reliance. The threat of a profound U.S. economic crisis should warrant plans to decouple from the U.S. and European economies, as well as un-pegging Gulf currencies from the dollar and potentially replacing it with a currency and/or commodity basket. Finally, to limit exposure of domestic financial sectors, part of the investments in U.S. debt, assets, and currency should be rerouted to diversify not only into global markets but also into productive domestic investments, such as green energy and freight and high-speed rail—while avoiding pitfalls.
