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Earning more from abroad

09 May 2017 - 11:31
Source: Wikipedia

Statistics Netherlands, the Dutch Central Bureau of Statistics, recently worked out that Dutch industry’s dependence on exports has again increased. In 2015, this dependence was at its highest level in the last 20 years: of every euro earned in Dutch industry, 70 cents is earned through exports. The Netherlands’ figure is very high compared with other countries.

In itself, this is good news, because around 99% of all the world’s economic growth is generated outside the Netherlands. The better-known countries such as India (around 7.5% average growth in the coming years), China (6.5%) and the Philippines (6.8%) contribute significantly to this, but there are also Iceland (5.7%), Romania (4.2%), Uzbekistan (6.0%), Pakistan (5.0%) and Bolivia (4.0%). It would be good to try to hitch up with the growth outside the Netherlands.

However, as is always the case in economics, higher yield is generally associated with greater risks. Here things are no different. To gain extra profit from the greater growth abroad, extra risks need to be accepted. These could be economic risks. This might cause the Dutch economy to become more dependent on the development in the relevant world trade. The relevant world trade is the international trade in the same goods and services in the same market areas as those of Dutch exporters. If the economic growth in the primary market countries levelled off, this would lead to lower economic growth in the Netherlands. Another risk that plays a role with increasing export-dependence is exchange rate movements – these very heavily affect Dutch exporters’ price competitiveness. Exports have profited since 2015 from an improved competitive position due to the dollar’s increase in value against the euro.

Besides the economic risks mentioned above, developments in international politics are of great importance to exporters.

In the geopolitical arena, trade and economics are extremely effective instruments in a country’s foreign policy. Countries are quick to threaten economic sanctions if they are in conflict with another country. The Netherlands experienced this recently during the diplomatic squabbles with Turkey. Often the threat is enough, but sometimes actual economic sanctions are imposed, such as by the European Union against Russia. The affected country then often takes countermeasures and many businesses suffer.

As well as the direct effect of sanctions mentioned above, indirect effects exist. What is meant by this is that businesses in a third country suffer damage if sanctions are imposed between two other countries. An example of this is the financial sanctions that the US is still imposing on Iran. Due to these sanctions, Dutch banks do not risk doing business in Iran and money transfers between Dutch businesses and Iran proceed with extreme difficulty. Because sanctions are usually complex and it is largely unclear what sanctions are still in force, many companies simply do not take the risk and avoid trade with the country in question.

Another political risk that exporters must take into account is protectionism. Increasing numbers of countries are threatening more severe trade restrictions to protect their own industry against what they see as unfair external competition. Particularly the US under Trump is focusing on bilateral trade positions: how large is the trading deficit with China, Germany or Mexico? If this trading deficit is too large, then the US’s protectionist policy aims to ensure a correction. If the countries affected then take counter measures, a real trade war arises. It applies here too though: other countries may be affected indirectly. If the US proceeds to raise import tariffs on Chinese goods, the Chinese exporters will look for alternative markets. Not only the European market might be flooded by dumping of Chinese products, but the competition Dutch companies face in other countries – for example Egypt or Brazil – could increase. Europe would then have to formulate its own answer to these developments. Also, American importers of Chinese products would go looking for alternatives. American imports from Vietnam, Thailand and Indonesia would be likely to increase. Then the American trade balance with these countries would worsen, obliging Trump to introduce trade restrictions with them too. Selective protectionism is therefore impossible and protectionism would spread unchecked throughout the world economy. Bad news for exporters.

A third risk in the area of international politics concerns a change in the system of world trade: how is world trade regulated? In recent decades, a system has been rolled out worldwide in which agreements, rules and norms defined international trade. A level playing field was created in which impartial and generally accepted ‘referees’ such as the WTO kept watch on whether everyone kept to the agreements made: Rule by Law. If one country thought that another was imposing unjust trade restrictions, the case could be laid before the WTO which then made a binding pronouncement on the matter. In this way, in recent years, the WTO has protected countries against the misuse of technical trade restrictions, harmful dumping and various forms of subsidies and state support.

Such a multilateral framework is of course very important to small open economies such as that of the Netherlands. The Netherlands has insufficient power to enforce compliance with agreements independently, and so gains great benefit from the existing system.

However, this system of agreements, rules of play, norms and referees is under pressure. Great powers and populist leadership are taking less notice of the WTO and similar institutions, and are imposing their positions unilaterally and autocratically. As an example, Trump stated in January that American law takes precedence over WTO pronouncements.

More than 70% of Dutch exports are sold within the European Union. This has been a stable market area for a very long time and so possible fears of geopolitical risks were groundless. However, with Brexit and also the coming elections in France, the UK, Germany and Italy, geopolitical developments in this area too are now playing an important role.

And do not forget: with almost 24% of the world’s GDP, Europe has a significant share of the world economy. If the German export sector is hit by Chinese sanctions or a boycott, Dutch exports to Germany will also be affected. This is because many products are manufactured in the Netherlands for German vehicle manufacturers with a market in China. The added value chains of international businesses ensure that the ‘risk of contamination’ rapidly spreads. Because problems in one country can frustrate a company’s entire production chain. It is a misconception to think that by exporting only within Europe you are insensitive to developments outside Europe.

So Dutch industry’s increasing focus on foreign markets offers growing market opportunities, but the risks are increasing too. What can exporters and the Netherlands do to reduce the risks?

It is crucial to be well-informed about developments in the international political arena. What tensions are at play, how are they being dealt with, and how does all this affect the Dutch economy and businesses? By paying close attention to what is going on, you can take advantage of it and work on alternatives.

Dutch businesses can take a number of actions to be prepared for the expected geopolitical turbulence: obtain stocks of essential raw materials and build up sufficient financial buffers to accommodate any shocks. Exporters can also try to introduce more diversification with regard to their market countries. The Dutch fruit and vegetable sector scored a significant success here after the Russian sanctions in 2015. The focus was shifted to other countries such as Vietnam, Panama, China and Indonesia, and this sector’s exports again demonstrated healthy growth of 4.4% in 2016.

The Dutch government’s policy should be aimed at acting with the EU as far as possible. If other countries impose sanctions or introduce protectionist measures, the Netherlands must formulate answers to this together with the other EU countries. The same applies to keeping the multilateral framework central and continuing to renew it: this must be fought for in a European context too. Dutch trade can only thrive properly in a system where agreements, rules of play, norms and referees are conclusive. Otherwise the risk-yield ratio in this context ends up less attractive.