Netherlands Be Prepared: Trump’s choice is America First
Since the financial crisis of 2008 and more specifically the subsequent recession, the globalization that dominated the second half of the twentieth century has been under pressure. In many countries, politicians yielded to the tendency to protect their own markets, fully supported by employees in the more developed countries who saw their jobs transferred to lower-cost labor in other countries. This is not new: when globalization hits turbulent waters, politicians and citizens are quick to opt for protectionism. The opposing forces normally safeguarding free trade are, at the moment, however, weak. The traditional advocate of free trade, the United States, has been relinquishing this role in recent years. Under the first presidency of Donald Trump (2017-2021), the U.S. implemented various protectionist measures, mainly against China and, to a lesser extent, against European countries. This course was not substantially changed under President Joe Biden (2021-2024). Import tariffs on steel, for example, were maintained.
Buy American
Under a second Donald Trump presidency, the US will focus on a protectionist policy that prioritizes its own industry. The new administration wants to reduce dependence on foreign countries and strengthen its own industry, particularly by creating jobs in backward areas of the US. This is reflected in a clear preference for American manufacturing, with the central message being 'Buy American.' This message goes beyond rhetoric - there will most likely be new measures to bring manufacturing back to American soil, augmenting Biden's Inflation Reduction Act (IRA).
China as bogeyman
The new American policy sees China as the primary economic rival. The question is not whether America wants to reduce economic ties with China, but at what pace and how drastic this de-coupling will be. Dutch high-tech companies such as ASML find themselves in the eye of this geopolitical storm. ASML is still exporting machines for producing less complex chips to China, which accounts for an important part of its business revenue. Pressure from Washington to restrict this trade will only intensify. This will not only affect ASML itself, but also its extensive network of suppliers and the Dutch innovation climate as a whole.
This China policy will additionally have indirect effects that may be even more far-reaching. If America levies higher import tariffs on Chinese products - tariffs of up to 60 percent have been hinted at - China will inevitably seek new markets. Europe then becomes an obvious target for Chinese producers who see their American market evaporate. This shift in trade flows could lead to a wave of cheap Chinese products being dumped on the European market, with potentially devastating consequences for local industries.
Protectionism triumphs
The new US administration is fully focused on stimulating its domestic industry. This translates into import tariffs that will impact also European companies. A ten percent levy on all imports is not unlikely, with even higher tariffs on specific products. For the Dutch economy, which traditionally relies heavily on international trade, the consequences would be profound. Nor would the manufacturing industry escape the consequences. Higher import tariffs will make Dutch products more expensive on the U.S. market which will directly affect the competitive position. This not only affects large exporters, but also the broad network of suppliers which characterizes the Dutch industry.
Neither can it be ruled out that export tariffs will be imposed on products that the U.S. prefers to keep in their own country. What if America is indeed considering export tariffs on Liquid Natural Gas? Since the Netherlands moved away from Russian gas, Dutch dependence on American LNG has only increased. A disruption in this supply - possibly to force a three percent GDP contribution to NATO - could have major consequences for Dutch energy supplies and prices.
The technology sector should factor in possible American retaliation for European regulation of large tech companies. The new US administration is highly critical of European attempts to restrict companies such as Google and Meta. This could lead to targeted sanctions against European technology companies.
Inflation risk
A crucial factor in this economic chess game is the Federal Reserve, the U.S. central bank. Current chairman Jay Powell has indicated he will not stay on. His successor, to be appointed by the new president, could greatly influence monetary policy. This change of guard at the Fed comes at a critical time. A change in US monetary policy could have far-reaching consequences for international trade flows, exchange rates and global financial stability. The proposed interest rate cut later this year already appears to be off the table.
Several factors in any case point to a wave of inflation in the US. Import tariffs are in effect a disguised tax on its own population, as costs will be passed on to consumers. This could lead to significant inflation, as much as two percent on top of the existing. In addition, the proposed reduction in U.S. taxes will fuel the demand for money, leading to higher interest rates. The budget deficit is expected to increase to about six percent of GDP. A high budget deficit can cause inflation because the government spends more money than it brings in. If the new chairman of the Fed is ardently loyal to the president and has little independence, this could lead to less effective monetary policy and an increased risk of inflation.
An inflation wave in the US would also directly affect European companies. Not only can imports of goods and services from the U.S. become more expensive as prices rise, increasing U.S. inflation also adversely affects European companies' export opportunities and financing costs. Higher costs of living in the U.S. could make the U.S. market less attractive to European exporters, while a lower dollar could exacerbate this.
Four to dos for Dutch companies
While the new U.S. course may have profound implications for Dutch companies, there are some concrete ways to mitigate risks and seize new opportunities. Experts point to four crucial strategies that companies can implement right now.
1. Strengthen ties with individual U.S. states
The first and possibly most important step is to strengthen ties with individual U.S. states. These often have more power than is discernable from the outside and can provide a buffer against federal protectionist policies. States such as California, Texas and New York pursue their own economic policies in several respects and have an interest in attracting and retaining international companies, especially if these create jobs. Dutch companies that invest in local networks and develop an understanding of statewide regulations can thus build an advantage over competitors.
2. Make supply chains tariff-proof
A second crucial strategy is to make supply chains tariff-proof. Dutch companies must thoroughly examine their supply chains and adjust them where necessary to be less vulnerable to U.S. import tariffs. This may involve spreading production locations, creating new partnerships in the U.S. or actively seeking alternative markets.
3. Be prepared for Chinese dumping
The third challenge companies must prepare for is increasing Chinese competition in the European market. As the U.S. market becomes less accessible to Chinese products, China will increase its focus on Europe. This calls for proactive strategies to deal with this increased competition. For example, companies can focus more on niche markets, concentrate on superior quality and innovation, or form strategic alliances with European partners to strengthen their market position.
4. Help strengthen European competitiveness
According to the recent report ‘The future of European competitiveness’ by former ECB President Mario Draghi, enhanced cooperation among European companies and between companies and governments is essential to strengthen the EU's competitiveness. Indeed, due to US isolationism, this deserves all attention.
The biggest headache is underestimated
These four strategies for Dutch business vary greatly in their feasibility. Strengthening ties with individual U.S. states has already proved successful: the Netherlands has had success with connections at government level, with the royal couple and ministers visiting key trading states such as California, Texas and New York. States, to preserve jobs and support companies, often are keenly interested. Making supply chains tariff-proof, on the other hand, is a more complicated challenge, for which there is not always a one-size-fits-all solution. Perhaps the biggest headache is preparing for Chinese dumping, especially in the electronics sector. China has a strong starting position and many companies still underestimate this risk.
An uncertain future
By way of reassurance, although the new policies will be unaccountable and unpredictable, the dog’s bark most often is worse than its bite. America has a multitude of checks and balances to curb the worst excesses. Still, vigilance and proper preparation are key for companies doing business with the US. The future is uncertain!