How dependent on China is the Dutch economy, really?

Current issues related to economics, (responsible) investment, pensions and income: every week, an APG expert gives a clear answer to the question of the week. This time: chief economist Thijs Knaap on the question of how dependent on China the Dutch economy is. “An economic disconnection from China will have even greater consequences than the disconnection from Russia.”

Last week, Speaker of the U.S. House of Representatives Nancy Pelosi visited Taiwan. The controversial visit raised tensions between the US and China. A conflict of the two economic superpowers over Taiwan thus seems another step closer. “Open trade nations like the Netherlands, with the recent lessons from the Ukraine crisis, need to prepare for this new geopolitical reality faster,” Jonathan Holslag, a political scientist at the Free University of Brussels, argues in NRC. “We need to reduce our economic dependencies on China faster, or the price threatens to get even higher in the coming years.” But how dependent on China are we really, in the Netherlands?

Equity Blow

After Russia’s invasion of Ukraine, Western countries imposed hefty sanctions on Moscow. That move can serve as an example of what happens when the U.S. and the EU want to disengage economically from China, Knaap argues. “The example of Russia shows that there are different degrees of dependency. The first is ownership of - in this case - Western equity in Russia or China. Dutch investors have interests in Russian companies, and Russian companies and individuals have assets abroad. In other words, there are financial links. Is that dependence? Yes, because after the war broke out, it became clear to both Western investors and Russian oligarchs that their interests were not safe. If the West breaks off relations with Beijing tomorrow, so to speak, it is quite possible that an immense financial blow to both parties will follow. Although China’s share among Dutch investors is not huge, the amounts involved are substantial. And that loss will be instantaneous.”

The second form of dependence is trade relations, both of goods and of technology. Of everything we import into the Netherlands, 12.4 percent comes from China. A hefty portion, but it also masks the bigger picture, Knaap said. “The example of Russia really demonstrates very well the importance of the so-called second-order effects. For example, we are not that dependent on Russian gas, but the Germans are. And if they have a gas shortage, we will also have one. We can also see it in imports of, for example, fertilizer from Germany, because the chemical companies there need gas for their production. It is therefore very misleading to look only at the direct economic consequences for the Netherlands, because these days almost all production chains run through several countries. The indirect effects are therefore even greater.”

Corona crisis
“Whereas the severing of economic relations with Russia mainly shows how dependent Europe is on Russian fossil fuels, an economic disconnection from China will have even greater consequences," Knaap said. “You can already see that when you look at that Chinese share of 12.4 percent of Dutch imports. If imports were to shrink by such a percentage, that would be a huge economic blow. And that doesn't even include the fact that the other countries the Netherlands trades with also import a lot from China. At the time of the corona crisis, we noticed in Europe how dependent we were on Chinese products. Chinese ports were closed, and you couldn’t even get a bicycle in the Netherlands because we were out of parts. So, it’s very difficult to cut a country out of the supply chain, especially China.”

According to Holslag, in NRC, the Netherlands and other European countries need to become more self-sufficient so that we are prepared if things go wrong with China down the road. “That’s one way of looking at it,” Knaap responds. “For a very long time the prevailing thought was: as long as we have very strong economic ties, we can’t afford war. You can see that it works too, because despite the rhetorical arm-twisting between Beijing and Washington, the two countries are still doing plenty of trade. So that economic dependence is there, and that also applies to China. If the West stops buying Chinese products, they will have just as much of a problem there. So, it is costly for both sides to stop globalization.”

Yet companies seem more reluctant than before to invest in China. Causes are the strict lockdowns, particularly in Shanghai, and the somewhat disappointing growth figures. The tensions around Taiwan are also not going to increase enthusiasm about China among foreign investors. Knaap points to the “China+1” approach that some companies are taking. This means that they build one factory in China and one factory in another low-wage country such as Vietnam or India, which can then serve as a backup, should something go wrong in the (trade) relations with China.

Globalization
However, it is not an easy task to turn Europe into a manufacturing center again, like China is now, Knaap argues. “If we have to start manufacturing everything ourselves, the inflation we are seeing now is nothing compared to what we will be facing then. The downside of everyone earning well here is that it costs a lot to manufacture products here. Much of our prosperity is due to globalization. We got a little spoiled by getting lots of stuff for little money from low-wage countries. In recent decades they have become very good at manufacturing all kinds of products, while we have somewhat lost that art. It will therefore probably take years to set up a manufacturing industry here again.”

So, for the time being, the Dutch economy is largely dependent on China. There is the financial dependence, but especially the dependence on Chinese products, both directly and through trade with other countries that are also dependent on China. “The fact is that China has developed into an almost untouchably competitive manufacturing economy. They are more expensive than before but still not very expensive, super productive and they can deliver tomorrow if they have to. China's trade figures are only going up, right through all the economic crises. They know exactly what we want, and they sell it to us in large quantities.”