American - Arabian tensions
Relations between the US and Saudi Arabia have soured following the death of the journalist Jamal Kashoggi. President Trump has to decide how to respond and how much credence to afford to the relationship the US has with a major international trade partner that supports 165,000 US jobs as mid-term elections approach.
Jamal Kashoggi is widely presumed to have died, though the circumstances remain the preserve of speculation. Mr. Kashoggi was a Saudi Arabian national with an impressive career in journalism and news media. Most recently, he was working for the Washington Post. Before that, he was Editor-in-Chief at Al-Arab News, later becoming an editor at Saudi Arabian newspaper Al Watan where he developed his reputation as a progressive, seeking the liberalisation of Saudi laws including the need for free expression. In his final article for the Washington Post, published posthumously, he stated that most people in the Arab world “are either uninformed or misinformed”.
This, and other pieces, were frostily received by Saudi authorities and have given rise to growing speculation of Mr. Kashoggi’s allegedly brutal demise in the Saudi Arabian embassy in Istanbul.
What might the implications of this be?
The value of trade between the US and the Kingdom of Saudi Arabia exceeded $45bn in 2017 according to the Office of the United States Trade Representative (USTR)1. The US bought $13.0bn-worth of oil from Saudi Arabia constituting around 90%2 of total US imports from the Middle Eastern country. That also equated to around 11% of the total quantity of oil that the US imported in 20173.
At the same time, the US exported $25.5bn worth of goods and services to Saudi Arabia. The two biggest components of sales were motor vehicles and what US Trade Numbers defines as “bombs, grenades, cartridges, parts”4. But these only accounted for around 9% of American exports to Saudi Arabia in 2017. The rest include a myriad of goods and services ranging from corn and compressors to fridges and furniture.
This trade relationship supported 165,000 jobs in 2015 (latest data available)5. Since then, the US economy has grown as has the employment rate, so that job total could well have risen. The income generated by those jobs will help to support thousands of communities and account for a sizeable number of votes.
So there is a conflict of interest on the part of the US government. How does it react to an allegedly appalling act of aggression on an investigative journalist without risking the welfare of thousands of Americans?
Political leaders in the US are elected by the country’s citizens to protect those citizens and nurture the optimal combination of freedom and government support. Although he wrote for a US publication, Mr. Kashoggi was not a US resident, nor even a US citizen.
By way of context, according to the United Nations Office on Drugs and Crime, there were 17,250 “intentional homicides” in the US in 20166. That equates to more than 47 every day. The vast majority of these deaths receive no media coverage. They are not considered by the media to be sufficiently politically striking or emotionally shocking.
President Donald Trump has to weigh the implications for thousands of US families and voters from trade with Saudi Arabia against the any action he takes in response to Mr. Kashoggi’s death.
The US administration’s response has escalated from awaiting an internal Saudi investigation, to acknowledging that Mr. Kashoggi has been killed and President Trump saying that the Saudis could face “severe punishment”. This was met with a defiant response from the Saudis who vowed to reciprocate with “greater action”.
The response among investors to the rising tensions has been negative. On Thursday 18 October, US Treasury Secretary, Steve Mnuchin, pulled out of a Saudi Arabian investor conference which contributed to the benchmark S&P 500 stock index dropping by 1.5% during trading.
But it’s not just in the US that companies could be affected. The Saudi Arabian Public Investment Fund (PIF) has assets worth around $220bn. These include investments in stocks and bonds across the world. While it might erode the value of the Fund, it is not inconceivable that the PIF could be instructed by Saudi leadership to withdraw partially or entirely from select investments. For example, PIF has substantial investments in Uber Technologies, Nvidia and Tesla in the US, as well as Japan’s SoftBank, the UK’s Virgin Group, France’s Accor and around $65bn spread across a range of investment funds7.
A more direct approach open to the Saudi authorities would be to curtail oil production, though the Saudi leadership has said that it would not do this. If it were to change its mind, such action would push oil prices up and test the ability of North American producers to make up the shortfall. The rise in costs would do the US no favours, especially if it were to be sustained for more than a few months. Inflation in the US has been above the target level of 2% for some months. This has spurred the US central bank, The Federal Reserve (Fed) to raise interest rates over the past two years, much to the disapproval of President Trump. If inflation were to spike again as a result of US-Saudi relations then US monetary policy would become more difficult to administer than it already is.
However, President Trump has been through such trade stand-offs before. Indeed, he has provoked them with China, Mexico, Canada, Japan and the European Union all of which sell more to the US than they buy from it. It’s not in his make-up to back down. Americans voted for Trumpism which, so far, the president has delivered, albeit with some controversy.
To date, while garnering considerable media coverage, the other spats do not appear to be sufficient to trigger a recession in 2019, though we could well see a drop in corporate profits and economic growth. In the meantime, it will not have escaped President Trump that Saudi Arabia is yet another country with which the US has a trade deficit on goods, though not if services are also included. Nonetheless, there is some political mileage there for him to employ.
Political mileage is exactly what the president needs in the run up to the mid-term elections taking place in early November. If he is able to retain control of both houses of Congress then he will be able to continue pushing his agenda through. If not, the Democrats could be expected to do what they can to stymie his efforts and expose what they see as his weaknesses.
If investors have considerable holdings in companies that consume large amounts of oil, such as aviation and heavy industry, then a continued rise in oil prices could eat into profits over the short- to medium-term.
Also, if President Trump’s position suffers during the mid-term elections then the spat with Saudi Arabia is likely to be eclipsed by more immediate issues facing economic growth in the US and its influence on the global economy.
On a more humane level, the situation derives from a tragedy for Mr. Kashoggi’s family and fiancée. With this in mind, President Trump appears to be of the opinion that the events demand a serious response.
The harsh reality in the cold world of investments is that this tragedy will, in our opinion, probably have minimal effect on economics and investments.
1Respective sources: USTradeNumbers.com and USTR.gov accessed on 19 October 2018
2Source: US Trade Numbers website accessed 19 October 2018
3Source: US Energy Information Administration, top sources and amounts of US petroleum imports…2017
4Source: US Trade Numbers website accessed 19 October 2018
5Source: USTR website, US-Saudi Arabia Trade Facts, accessed on 19 October 2018
6Source: UNODC.org, sourced 19 October 2018
7Source: PIF.gov.sa, sourced 19 October 2018
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