Trade, Tariffs, and Trump, a Trifecta for Turmoil

THE TIMES KUWAIT REPORT

From the ancient Spice and Silk Routes to modern day, global trade has facilitated the exchange of goods, ideas, and cultures, connecting civilizations and shaping human history. Trade and foreign policy of nations have also been intertwined throughout history, with foreign policies often tailored to promote trade and political interests. In addition, trade has been linked to national economies, with tariffs often serving to raise revenues or protect competitive advantages in trade.

Today’s open multilateral rules-based trading system supported by the World Trade Organization (WTO) has fostered global economic growth and enhanced the well-being of people worldwide. It has provided the framework for fair, equitable, and predictable global trade practices, expanded market access, encouraged innovation, increased productivity, and supported countries to adapt to changing economic conditions, and to amicably resolve disputes.

Although the multilateral trading system has played an influential role in promoting development, increasing prosperity and raising living standards of millions of people worldwide, as well as supporting peaceful relations among nations, it is not without shortcomings, of which arguably there are many.

But these flaws need to be addressed at the WTO and other global forums through discussions and cooperation, not by implementing global tariffs and trade barriers as the US has now chosen to do.

The recent trade protectionism policies rolled out by President Trump, is not the first time that the US has introduced trade barriers with catastrophic results for the global economy. Back in 1930, at the onset of the decade-long global economic depression, often referred to as the ‘Great Depression’, US President Herbert Hoover signed into law the now infamous Smoot-Hawley Tariff Act.

The Act which raised tariffs on thousands of imported goods, was aimed at shielding American jobs and industries from foreign competition. But the US tariffs then led to retaliatory tariffs by Canada, Mexico, United Kingdom, France, and a host of other countries. Eventually, these protectionist measures and counter.measures led to an overall fall in global trade by as much as 66 percent between 1929 and 1934.

To be fair, the fall in global trade cannot be attributed solely to the Tariff Act; the Great Depression was already well underway before the US enacted it in 1930. Moreover, unlike today, in 1929 trade accounted for only around 15 percent of global GDP, and less than 5 percent the GDP of the US. In hindsight many economists concede that there were several factors which may have contributed to the Great Depression, including the aftermath of World War I, financial instability, falling demand, and weak banking oversights, among others.

But a major factor for further exacerbating an already volatile global economy was the tit-for-tat tariffs imposed by several countries in response to US tariffs. For instance, France and the United Kingdom introduced retaliatory tariffs on imports from the US, but also on all its other trading partners. Tariffs on other nations were necessitated by existing bilateral trade treaties with the US, which included a ‘most-favored nation’ clause that prevented imposing tariffs only on American goods. Wide-spread tariffs then fueled a sharp contraction in global trade.

Eventually the Tariff Act was effectively reversed, when the newly sworn-in US President Franklin D. Roosevelt signed the Reciprocal Trade Agreements Act in 1934. The new Act reduced tariff levels, promoted trade liberalization, and enhanced cooperation with foreign governments. The Reciprocal Trade Agreement Act is considered to have laid the groundwork for the creation of the General Agreement on Tariffs and Trade (GATT) in 1947-48, and its successor the WTO, which was established in 1995.

Unlike in the 1930s, today, trade constitutes a bigger chunk of the global economy. According to the World Bank, trade accounted for over 58.5 percent of global GDP in 2023 with import and export figures contributing significantly to national GDPs. Today, imports account for around 14 percent of the GDP of the US, nearly 18 percent of China’s GDP, and more than 48 percent for the European Union (EU).

Meanwhile, exports contribute around 11 percent to America’s GDP, 20 percent to China’s GDP, and 52 percent to that of the EU. Thus the potential economic fallout from tariff wars could be much larger today than in the 1930s. In early April, Director-General of WTO, Ngozi Okonjo-Iweala warned that escalating trade tensions between the US and China, which together represent around three percent of total global trade, raised ‘significant risks’ of a sharp contraction, potentially by as much as 80 percent, in bilateral trade.

She stressed that reciprocal tariffs between the US and China could have broad repercussions on the global economy, particularly for least developed countries. Okonjo-Iweala.added that tariffs could negatively impact global growth and economic stability, increase risk of a worldwide recession, and a potential fragmentation of global trade along geopolitical lines, which could result in a long-term decline in global real GDP by around seven percent.
A recent report by the UN Economic and Social Commission for Western Asia (ESCWA) reiterated this vulnerability and noted that the global upheaval in trade following escalation in trade protectionism and higher tariffs by the US are significantly affecting Arab economies, and placing at risk over US$22 billion in non-oil exports from the region.

Between 2013 and 2024—even as overall trade between Arab countries and the US fell from $91 billion in 2013 to $48 billion in 2024—the value of Arab non-oil exports to the US surged by over 57 percent, from $14 billion in 2013 to $22 billion last year, According to ESCWA that progress is now under serious threat, with Jordan, Bahrain and the United Arab Emirates being at heightened risk.

Jordan is the most exposed with nearly 25 percent of its total exports destined for the US, while Bahrain, which is heavily reliant on aluminum and chemical exports to the American market, is also vulnerable to the new US protectionism. Additionally, the UAE faces disruptions to an estimated $10 billion in US-bound re-exports due to the tariffs levied on goods originating from third countries.

Kuwait is relatively less impacted by US tariffs, with exports to the US in 2024 totalling $1.6 billion, down from the $2 billion in 2023. Meanwhile imports from the US dropped from $2.8 billion in 2023 to $2.4 billion last year, and the US trade surplus with Kuwait decreased by 33 percent, from $1.2 billion in 2023 to around $768 million in 2024. Nevertheless, US tariff escalations have fueled a sharp drop in global oil prices, straining the resilience and fiscal revenues of the heavily hydrocarbon reliant economies of the Gulf Cooperation Council (GCC) states.

In addition, reduced imports by major global partners such as the EU and China are likely to add pressure to the region’s economies. China currently imports 22 percent of GCC oil and chemical exports. Kuwait has significant exposure to Chinese and EU markets. In 2024, Chinese exports to Kuwait amounted to $4.8 billion, while its imports from Kuwait totaled $11.5 billion. During the same period, exports from the EU to Kuwait totalled $5,7 billion, while its imports from Kuwait was $7.6 billion.

ESCWA urged the region to accelerate trade integration by advancing the Pan-Arab Free Trade Area, and achieving the GCC economic union. The Commission also called for accelerating structural reforms and deepening resilience through renewed investments in infrastructure, and regulatory reforms, to reintegrate with global supply chains. Kuwait needs to heed the ESCWA suggestions and accelerate its structural and fiscal reforms to ensure economic sustainability and continued welfare of citizens.