US economic relations with the Arab states have entered a new phase in the last two years, one that reproduces many of the features that characterized the end of the Carter administration. US exports to the region rose by about 13 percent from 1986 to 1987 with shipments to Iraq, Egypt and the United Arab Emirates accounting for most of the increase. But this was more than offset as US imports from the region jumped some 35 percent, largely due to greater imports of crude petroleum. As a result, by the end of 1987 the US trade deficit, which had stood at $179 million the previous year, totalled more than $2.1 billion. Only a doubling in the value of American military sales to the region prevented this figure from ending up even higher.

This period also saw the US trading position relative to that of the other Western industrial powers continue to weaken, despite a continuous devaluation of the dollar that effectively reduced the price of American goods. Even in the lucrative area of military equipment sales, British and French manufacturers have carved out substantial inroads into markets that had been largely American preserves. Only in the area of subsidized foodstuffs and other agricultural produce have US suppliers managed to improve their market share relative to that of their major competitors. At this point, any new administration faces the prospect of further increases in the flow of Middle Eastern oil into the US market, with little in the way of industrial or manufactured goods to offer in return.


Three basic trends characterize US petroleum imports at the present time. First, the total amount of crude oil and other petroleum products coming into the American market bottomed out in 1985 and has risen sharply since that time. Net petroleum imports by the other Western industrial powers have also grown over the last few years, but none so rapidly as the United States’.

Second, the quantity of imported petroleum coming from the Arab memberstates of the Organization of Petroleum Exporting Countries (OPEC) has grown dramatically, representing a steadily increasing proportion of US total oil imports. [1] By the spring of 1988 the US was importing virtually the same amount of crude oil and other petroleum products as it had eight years earlier. Oil from the Arab OPEC countries represented almost one quarter of all petroleum products coming into the US market from overseas producers, a higher proportion than at any time since 1981. Arab oil-producing states that are not members of OPEC have posted equally impressive gains: imports from Egypt rose by more than 300 percent between 1986 and 1987, when those from Oman jumped almost 450 percent.

Third, these imports are increasingly derived from a single source: Saudi Arabia. By late 1987, this country had become the third largest supplier of crude oil and other petroleum products to the United States, outpaced only by Canada and Venezuela. Riyadh’s position was further reinforced in the spring of 1988, when the Saudi government granted more favorable pricing arrangements to Ashland Oil, Marathon and the four firms making up the Arabian-American Oil Company (ARAMCO) — Exxon, Texaco, Mobil and Chevron — allowing these firms to lift new oil from the kingdom at prices equivalent to those on the Rotterdam spot market instead of at official OPEC-mandated prices. This differential provides them a considerable competitive advantage relative to European and Japanese oil companies operating in the area, although there were reports in September that the Saudis were giving discounts to those companies as well. This will also reinforce the trend toward greater imports of Saudi crude into the American market by undercutting domestic producers and further eroding efforts to promote conservation or alternative sources of energy.


While imports of Middle Eastern petroleum products are rising, the value of American exports to the region has declined markedly in recent years. Such longstanding purchasers of US-made mining and transportation equipment as Saudi Arabia, Kuwait and the United Arab Emirates have cut back sharply on their orders; markets in such non-oil-producing countries as Jordan and Tunisia have also contracted. Only with Egypt and Morocco has US trade remained relatively stable since 1981.

Product-by-product breakdowns of US trade for 1987 have not yet appeared, but it is most likely that agricultural products represent the greatest component of the short-term increases in exports to the Arab countries. Egypt has become the eighth largest market for American food exports, and the largest market for US wheat flour. Egypt is also a top market for US corn, tallow, tobacco, cotton, soybean meal and frozen poultry. [2] Data for 1986 indicate that sales of US agricultural produce to Algeria, Tunisia and Morocco virtually equalled those of non-agricultural goods. This contrasts with the pattern for total US exports, in which the value of American industrial exports amounts to some seven times that of agricultural exports. [3]

At the same time that US exports to the Arab world are shifting away from high value manufactures, other Western industrial countries have managed to adapt more successfully to changes in Middle Eastern commerce. The US share of the overall Arab market slid from 15.4 percent in 1984 to 13.7 percent two years later.


US direct investment overseas has generally grown since 1982. Investments in all countries increased from some $208 billion in that year to almost $309 billion in 1987. The overall pattern for American direct involvement in “the developing countries” mirrors that for the world as a whole: their value grew from $48 billion in 1982 to a little over $71 billion in 1987. But US direct investment in the Middle East in general, and in the Arab world in particular, has trailed off during this period. This drop in investment makes it more difficult for American firms to manipulate the operations of regional subsidiaries to offset the detrimental shifts that loom for US trade with this part of the world.

Through the mid-1980s, American direct investment in the Middle East continued to grow. Both Saudi Arabia and Egypt received considerable injections of US capital, particularly in their petroleum sectors. By mid-decade, though, investments and income from investments started to drop. Total investments in the Middle East stagnated in 1985 and 1986, but then sank by 11 percent in 1987. This left total US investments in the region at about 9.4 percent of those in “the developing countries” as a whole, down from 10.3 percent five years earlier.

Military Sales

By the mid-1980s, American arms sales to the Arab world had begun to fall off, due to the termination of several multi-year contracts to supply aircraft and other sophisticated weapons systems and to greater competition from European and East Bloc manufacturers. Military transfers carried out by the Foreign Military Sales program of the Department of Defense (DoD) peaked in 1983 at just under $7 billion, with the Saudi armed forces accounting for $2.6 billion. US sales to Egypt dropped from $966 million in 1982 to $516 million in 1985, while sales to Jordan dropped from $245 million in 1983 to $39 million in 1986.

Direct expenditures by the DoD for such things as base construction, personnel support and locally produced supplies also fell. In 1983, the US paid some $1.85 billion for goods and services to the Saudi government; three years later this figure had dropped to $478 million. The total cost of personnel and troop deployment expenses in the Arab world was $388 million in 1987, down from $2.2 billion in both 1981 and 1983.

In an attempt to reverse this slide, the US steeply raised its allocations of FMS monies in 1987. Egypt, which had been granted only $676 million in 1986, was authorized to spend some $1.1 billion the following year; Bahrain’s contracts were raised from $40 million to $147 million; Jordan’s from $39 million to $68 million; and those of the United Arab Emirates from $16 million to $240 million. Washington proposes doubling military sales to Israel in 1989. For the most part, these funds were used to purchase sophisticated aircraft systems from American manufacturers. They have been complemented by even larger contracts between local armed forces and American telecommunications firms to provide equipment and operational assistance for air defense facilities. Such projects have revived flagging US military sales to the region; US arms ex-ports to the Middle East as a whole doubled in 1987.

But US manufacturers no longer hold a predominant position among suppliers of advanced military equipment to the Arab states. Beginning in 1985, European arms companies redoubled their efforts to expand into Arab markets. In late 1985, the West German aircraft and armored vehicle conglomerates Messerschmitt-Boelkow-Blohm and Krauss-Mafei dispatched a joint delegation to Saudi Arabia to line up new orders for their helicopters and medium tanks. A shift in Bonn’s attitude toward supplying the Arab states with advanced weaponry allowed a consortium of German engineering firms to bid for the rights to supervise construction of a $5.2 billion munitions complex intended to make the kingdom self-sufficient in 155mm artillery shells and 105mm and 120mm tank shells. Even these successes failed to match those of the French, whose representatives won a $546 million contract to provide extended maintenance for Saudi Arabia’s air defense system last February, a $1.5 billion deal to supply the Jordanian air force with 20 Mirage 2000 fighters and refit its aging Mirage F-1s, and a further $430 million for 12 attack helicopters and ten missile patrol boats for the Saudi navy in April and June, respectively.

But it is the United Kingdom that has emerged as the primary US competitor to the United States in selling sophisticated military equipment to the Arab states. In early July 1988, the Saudi minister of defense and aviation signed a memorandum of understanding with the British secretary of state for defense, committing the kingdom to purchase at least 48 Tornado fighter-bombers, 80 Blackhawk helicopters, six Sandown minesweepers and 60 jet trainers worth a total of almost $8 billion. The agreement also hints that the British engineering firms will be engaged to supervise construction of one or two new air bases to house the planes, a project that may cost some $3 billion by itself. [4]



[1] US Department of Energy, Monthly Energy Review, March 1988.
[2] US Department of Commerce, International Trade Administration, Foreign Economic Trends and Their Implications for the United States: Egypt, FET-88-49, May 1988, p. 18.
[3] See “America’s New Realism,” Middle East Economic Digest, April 29, 1988, p. 16.
[4] “The United Kingdoms,” Middle East Economic Digest, July 22, 1988.

How to cite this article:

Fred H. Lawson "US-Arab Economic Trends in the Reagan Period," Middle East Report 155 (November/December 1988).

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