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?
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.”
“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.”