The U.S. Election and the Saudi Economy

This publication is part of AGSIW’s U.S. Presidential Election series.

As they campaign ahead of the November 5 presidential election, Democratic candidate Vice President Kamala Harris and Republican candidate former President Donald J. Trump have outlined very different economic policy agendas. Because Saudi Arabia has close ties with the United States through the global oil market and its long-standing exchange rate peg to the dollar, its economy would be affected by any large post-election shifts in the U.S. economic outlook caused by these policy differences.

Key Macroeconomic Policy Differences

There appear to be four important macroeconomic policy differences between Harris and Trump that could impact the U.S. economy after the election.

Fiscal Policy

Both candidates have announced costly new fiscal initiatives and have avoided a discussion of the long-term fiscal challenges facing the United States. Harris is proposing a combination of tax cuts, tax hikes on the wealthy, and higher spending, while Trump’s proposals are mainly focused on tax cuts for individuals and businesses. According to the Committee for a Responsible Federal Budget, Trump’s proposals will likely result in a larger increase in the federal government debt than Harris’ – $7.5 trillion (17% of gross domestic product) compared to $3.5 trillion (8% of GDP), respectively, by 2035. These increases are in addition to the estimate that the federal government debt will rise from 99% of GDP in 2024 to 125% of GDP by 2035 based on current policies.

Bottom line: Federal government debt will remain on an upward trajectory whoever wins the election but will likely rise at a faster pace under a Trump administration.

Monetary Policy

Harris has said she will respect the independence of the U.S. Federal Reserve. This stands in contrast to Trump who has been a vocal critic of Fed policy. He has gone as far as to suggest that the president should have a say in interest rate setting decisions. While it is unclear how he may try to influence the Fed beyond his words and his ability to nominate the Fed chair and other board appointees (subject to Senate confirmation), any perceived weakening of Fed independence would be detrimental to the U.S. economy and its standing in the global financial system.

Bottom line: Federal Reserve independence and U.S. monetary policy credibility will be under the spotlight if Trump is elected.

Energy Policy

“Drill baby drill” and “I hate wind” are two phrases that have become associated with Trump’s approach to energy policy. A second Trump administration could be expected to ease licensing restrictions on fossil fuel development, pare back environmental regulations, and reduce or eliminate federal support for clean energy. Having backed away from her previous calls to ban fracking for extraction of oil and gas from shale rock and hold oil companies accountable for the cost of climate change, Harris is likely to continue with the policy of the administration of President Joseph R. Biden Jr. of encouraging clean energy development and electric vehicle usage while recognizing that fossil fuels remain an essential part of the energy mix. Despite its ambitious climate agenda, the Biden administration has presided over an increase in U.S. oil production to an all-time high, and the United States is the world’s largest oil producing country.

Bottom line: U.S. oil output will grow faster, and clean energy will grow more slowly under a Trump administration.

Trade and Foreign Investment Policy

Harris is likely to continue the trade and foreign investment approach of the Biden administration. The administration has maintained most of the tariffs imposed by the previous Trump administration, added selective new tariffs, used subsidies to encourage domestic production in key industrial sectors, and blocked foreign investment in sectors deemed central to national security. Trump has said he will implement an across-the-board tariff increase and has singled out Chinese imports for particularly high tariff rates.

The exportation of advanced technology is likely to be a source of growing concern under either administration. U.S. trading partners will need to carefully navigate their relations with third parties, particularly China, to have access to such exports.

Bottom line: The shift to greater trade protectionism will not reverse under either candidate, but Harris is likely to be less confrontational on trade than Trump.

Impact on U.S. Economic Growth

It is difficult to judge how the policies that have been outlined by the two candidates would affect the U.S. economy. First, promises made on the campaign trail often do not turn into policy because either the winning candidate backtracks once elected, their policy agenda is diluted or blocked by Congress, or the policy is successfully delayed or blocked by challenges in the courts. Second, it is difficult to know how any policy change will affect growth when there are many other crosscurrents influencing the economy at the same time. Third, some of the policy proposals push in different directions. For example, a more expansionary fiscal policy may boost growth in the near term, but higher tariffs would raise costs, possibly slowing growth, while the higher inflation that is likely to result may constrain the ability of the Fed to ease monetary policy.

Several forecasters, including Goldman Sachs and Moody’s, have suggested that a Harris administration would be better for U.S. economic growth in the near term, although this is disputed by economists close to Trump. Perhaps of most concern from a growth perspective is the risk that the significant hike in tariffs envisaged by Trump could spark a global trade war if U.S. trading partners respond in kind. Such a scenario would have a significant negative impact on U.S. and global growth.

Implications for Saudi Arabia

Given its central role in the global economy, what happens in the United States is of great importance to the rest of the world. Saudi Arabia is no exception given its close ties to the United States, central role in the global oil market, and long-standing exchange rate peg (along with the other Gulf Cooperation Council countries except Kuwait) to the U.S. dollar, which allows it to benefit from the credibility of U.S. monetary policy. Economic studies have highlighted that the health of the U.S. economy is an important determinant of Saudi economic growth.

The main channel through which the U.S. election could affect the Saudi economy in 2025 is the demand for oil. Changes in U.S. economic growth post-election will impact the demand for oil in the country, with implications for oil prices and potentially Saudi Arabia’s own oil production if it continues to seek to balance supply and demand in the global oil market. The path of U.S. monetary and fiscal policy will also matter. Interest rates in Saudi Arabia closely follow the United States because of the exchange rate peg. An overly expansionary fiscal policy or a sharp increase in tariff rates following the election may put renewed upward pressure on inflation and reduce the ability of the Fed to continue to cut interest rates. This will affect monetary policy in Saudi Arabia with implications for credit growth and the economy. However, the impact of the election on the Saudi economy in 2025 is unlikely to be large, unless a global trade war is sparked by the imposition of high U.S. tariffs. In such a scenario, a substantial slowdown in global growth would have a material impact on oil demand.

Beyond 2025, differences in U.S. energy policy could affect Saudi Arabia. While Trump’s pro-fossil fuel strategy that would allow for a significant increase in drilling and fracking may result in an increase in U.S. oil production relative to a Harris administration, its policies would also likely see the slower development of clean energy. These effects would not be immediate because new investment decisions spurred by post-election policy changes would take time to impact oil and clean energy output. It is not immediately clear, however, if these differences in energy policy would be positive or negative for Saudi Arabia. If a higher path of U.S. oil supply under Trump is also met with higher U.S. demand for oil (because clean energy supply is lower, for example), the impact on the global oil market is unclear (supply and demand are both increasing) and will be determined by the relative strength of the two effects. It remains unclear how the Saudis themselves assess the possibility of even higher U.S. oil production and exportation under a Trump administration.  Increased U.S. oil output in recent years has been one factor behind the significant production cuts that Saudi Arabia has implemented under the OPEC+ agreement to try and ensure that the global oil market remains in balance.

U.S. trade and foreign investment policy post-election will also be important for Saudi Arabia. Developing its own technology and military industries is a key component of the Vision 2030 reforms. To support this, the kingdom is keen to obtain high-end computer chips and other advanced technology from U.S. companies. It has also been investing in U.S. companies to encourage technological transfers to the kingdom. However, U.S. concerns about security risks coming from China and elsewhere will likely deepen under the next president and could result in further restrictions on high-tech exports when there are concerns about where the technology could end up. For Saudi Arabia, where relations with the United States and China are both economically important, this could make for some tough decisions. In an increasingly fragmented global economy, navigating a middle ground between the two dominant economic powers may become more difficult. And missteps could have consequences for the diversification of the economy.

Last, perhaps the biggest potential impact on Saudi Arabia in the longer term could come from the lack of focus by either presidential candidate on the fiscal challenges facing the United States. Federal government debt has risen sharply over the past five years and is projected to rise significantly further over the next decade no matter who wins the election. With both candidates proposing policies that will add to the debt, there appears to be no political appetite for fiscal prudence. This may not be an immediate concern given the strong standing of the United States in the global financial system, but eventually investor concerns about the sustainability of the U.S. government debt will grow if there is no action taken to address the root causes of its increase. These fiscal concerns would be compounded by any perceived weakening of Federal Reserve independence.

For a country such as Saudi Arabia with its currency pegged to the U.S. dollar, the credibility of U.S. monetary and fiscal policy is essential if the benefits of the peg are to outweigh the costs. The increased economic and financial volatility that is likely to eventuate if financial markets become concerned about the sustainability of U.S. government debt would make pegging to the U.S. dollar a less attractive policy option than it has been in the past. Together with the ongoing efforts under Vision 2030 to diversify the economy away from oil, this could hasten a move away from the peg and toward a more flexible exchange rate policy in the kingdom.

The views represented herein are the author's or speaker's own and do not necessarily reflect the views of AGSI, its staff, or its board of directors.