Global trade tensions have been a significant feature of international relations over the past decade, affecting economies worldwide. Saudi Arabia, a key player in the global oil market and a country actively pursuing economic diversification, finds itself uniquely positioned amidst these tensions. This blog delves into the impact of global trade tensions on Saudi Arabia from a risk advisory perspective, exploring economic implications, geopolitical shifts, and strategic responses.

Global trade tensions, particularly between major economies like the United States and China, have led to shifts in trade policies, tariffs, and international relations. These tensions impact global supply chains, commodity prices, and economic stability. Saudi Arabia, with its strategic geographic location, significant oil reserves, and ambitious Vision 2030 initiative, faces both challenges and opportunities in this evolving landscape.

Economic Impact on Key Sectors

Dependency on Oil Exports

Saudi Arabia’s economy is heavily reliant on oil exports, which account for a significant portion of its GDP and government revenues. Global trade tensions can lead to fluctuations in oil prices due to changes in demand and supply dynamics.

• Price Volatility: Trade disputes, particularly between major consumers like the US and China, can reduce global demand for oil, leading to price drops. Conversely, tensions in oil-producing regions can lead to price spikes. During heightened trade tensions, oil prices can fluctuate significantly. For instance, in 2022, the average crude oil price dropped by 28% during periods of escalated trade disputes (IEA, 2023).
• Market Diversification: To mitigate risks, Saudi Arabia has been diversifying its oil markets, seeking new partners in Asia and beyond. As of 2023, Asia accounted for 63% of Saudi Arabia’s total oil exports, up from 58% in 2018.

OPEC+ Dynamics

The Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, plays a crucial role in stabilizing oil markets. Trade tensions can strain OPEC+ relationships, particularly with non-OPEC members like Russia.

• Production Cuts: In response to decreased demand, OPEC+ has implemented production cuts to stabilize prices. Saudi Arabia’s share of these cuts averaged 550,000 barrels per day in 2022.
• Strategic Alliances: Maintaining strong alliances within OPEC+ is vital for Saudi Arabia to navigate market uncertainties.

Non-Oil Economy

Vision 2030 and Economic Diversification

Saudi Arabia’s Vision 2030 aims to diversify the economy, reducing dependence on oil revenues. Trade tensions present both challenges and opportunities for this initiative. Non-oil exports grew by 9% year-on-year in 2022, driven by increased exports of petrochemical products.

• Investment Climate: Uncertainty in global markets can deter foreign investment, which is crucial for Vision 2030 projects. Despite global economic uncertainties, foreign direct investment (FDI) into non-oil sectors under Vision 2030 increased by 32% in 2021, reaching $8.2 billion
• Export Opportunities: Diversifying exports beyond oil, such as petrochemicals and minerals, can buffer against oil market volatility.

Key Sectors Affected

• Manufacturing: Trade tensions can disrupt global supply chains, affecting Saudi manufacturing sectors reliant on imported raw materials and technology.
• Tourism: Initiatives to boost tourism could be hampered by global economic downturns and reduced international travel.

Geopolitical Shifts and Implications

Strategic Alliances

The US-China trade war has significant implications for Saudi Arabia’s geopolitical strategy.

• Balancing Relations: Saudi Arabia must navigate its relationships with both the US, a long-term ally, and China, a key economic partner. Trade with China reached $72 billion in 2022, accounting for 17% of Saudi Arabia’s total trade volume.
• Economic Partnerships: Strengthening economic ties with China, particularly in energy and infrastructure, can provide alternatives to US partnerships.

Impact on Regional Stability

• Middle East Dynamics: Trade tensions can exacerbate regional instability, impacting Saudi Arabia’s security and economic interests.
• Oil Market Influence: The US-China trade war influences global oil demand, directly affecting Saudi Arabia’s oil revenues.

Iran and Regional Tensions

Economic Sanctions

Sanctions on Iran, driven by US trade policies, have ripple effects on Saudi Arabia.

• Oil Market Competition: Sanctions limit Iran’s oil exports, potentially benefiting Saudi Arabia by reducing competition.
• Regional Security: Increased tensions with Iran can impact Saudi Arabia’s security and economic stability.

Global Trade Policies

Tariffs and Trade Barriers

Global trade policies, including tariffs and trade barriers, affect Saudi Arabia’s export and import dynamics.

• Export Challenges: Tariffs on Saudi exports can reduce competitiveness in international markets.
• Import Costs: Increased costs for imported goods can impact domestic industries and consumer prices.

Free Trade Agreements

• Regional Agreements: Participation in regional trade agreements, such as the Gulf Cooperation Council (GCC), can provide stability and market access.
• Global Alliances: Strategic alliances with emerging markets can mitigate risks from traditional trade partners.

Strategic Responses and Risk Management

Fiscal Policies

Saudi Arabia has implemented various fiscal policies to mitigate the impact of global trade tensions.

• Diversification Funds: Establishing sovereign wealth funds to invest in diverse sectors reduces reliance on oil revenues.
• Tax Reforms: Introducing value-added tax (VAT) and other non-oil revenue sources enhances fiscal stability.

Investment in Infrastructure

• Mega Projects: Investment in infrastructure projects, such as NEOM and the Red Sea Project, attracts foreign investment and stimulates economic growth.
• Technology and Innovation: Emphasizing technology and innovation through initiatives like the Saudi Data and Artificial Intelligence Authority (SDAIA) promotes economic resilience.

Diplomatic Strategies

Strengthening Alliances

• US Relations: Maintaining strong diplomatic and economic ties with the US ensures continued security and economic cooperation.
• China Partnerships: Expanding partnerships with China in energy, technology, and infrastructure diversifies economic dependencies.

Regional Cooperation

• GCC Collaboration: Enhancing economic and security cooperation within the GCC strengthens regional stability and market integration.
• Middle East Diplomacy: Engaging in diplomatic efforts to reduce regional tensions promotes a stable environment for economic growth.

Risk Mitigation

Diversified Investment

• Global Portfolios: Investing in global markets and sectors through the Public Investment Fund (PIF) reduces exposure to domestic economic risks.
• Private Sector Growth: Encouraging private sector growth and entrepreneurship fosters economic diversification and job creation.

Supply Chain Resilience

• Local Production: Promoting local production of goods and services reduces dependency on global supply chains.
• Strategic Stockpiles: Maintaining strategic stockpiles of essential goods ensures stability during global disruptions.

Summary of Key Points

Global trade tensions present both challenges and opportunities for Saudi Arabia. The economic impact is significant, particularly on the oil and energy sector, while the non-oil economy faces both risks and growth prospects. Geopolitical shifts necessitate strategic alliances and regional cooperation. Saudi Arabia’s strategic responses, including economic reforms, diplomatic strategies, and risk mitigation, are crucial in navigating these complexities.

Future Outlook

Saudi Arabia’s ability to adapt to global trade tensions and leverage its strategic initiatives will determine its future economic stability and growth. By continuing to diversify its economy, strengthen international partnerships, and implement robust risk management strategies, Saudi Arabia can mitigate the adverse effects of global trade tensions and capitalize on new opportunities.

As global trade tensions continue to evolve, Saudi Arabia’s proactive and adaptive approach will be key to sustaining its economic resilience and achieving its Vision 2030 goals. By balancing traditional economic strengths with innovative strategies and diversified investments, Saudi Arabia can secure a prosperous future amidst global uncertainties.