A Look at the Potential Impact of Brexit on the Dutch Economy
Written by Jan Lammersen, Economist
The effects of Brexit on both individual Eurozone countries and the area as a whole remain shrouded in uncertainty. While negotiations on the United Kingdom’s divorce from the European Union are still under way, Westminster has released several policy papers to date, none of which were found to be “satisfactory” by the president of the European Commission, Jean-Claude Juncker. Speaking at a conference of EU ambassadors in late August, Juncker commented:
“We need to be crystal clear that we will commence no negotiations on the new relationship—particularly a new economic and trade relationship—between the UK and the EU before all these questions are resolved.”
The Netherlands is one of the countries that is highly vulnerable to the economic consequences of Britain’s planned exit from the EU. As the Netherlands’ third-biggest trading partner, the UK accounts for roughly 3.3% of total employment and nearly 3% of nominal Dutch GDP through trade. Preliminary government studies posit that Brexit could shave between two and three percentage points off nominal GDP. Negative effects could extend, however, beyond that. The contribution of net exports to GDP growth in the Netherlands has grown over the years at the expense of private consumption (see figure 1). Private consumption, in addition, depends in large part on the performance of export-related sectors, so the economic fallout of Brexit is likely to extend beyond the loss of net export income.
Figure 1: Contributions to Growth
Source: Central Bureau of Statistcs (CBS)
Click on image to see larger version
Although the UK will remain a part of the EU and its single market until at least March 2019, meaning that business should continue somewhat as normal until then, some effects are already beginning to appear. Reports have emerged that British orders and investments in the Netherlands are being postponed or cancelled, while Dutch investments in the UK are also taking a hit. The prospect of Brexit has resulted in a rapid depreciation of the pound, which continues to linger at low levels; a weak pound reduces the return on investment for Dutch firms with investments in the UK. Of all Dutch foreign direct investments, 11% are directed towards the UK. At the end of 2015, Dutch firms had EUR 454 billion invested in the UK.
The weak pound is also a detriment for Dutch exports to the UK. In the first half of the year, exports of goods to the UK fell 2%, lagging behind the rest of the EU. Furthermore, the Dutch manufacturing sector has an export dependency rate of around 70%: For every euro earned, 70 cents result from export-oriented activities. The manufacturing sector is particularly interwoven with the British economy and more vulnerable to exchange rate volatility; it also has greater export dependency than other sectors (the export dependency rate of the Dutch economy as a whole is 32%). While policymakers in Westminster speak of creating a special relationship with the EU, historical precedence dictates that in terms of trade deals with the EU, there are roughly three options.
One option would be a hard Brexit, in which the UK walks away without a deal and trade resumes under World Trade Organization (WTO) rules. In this scenario, the UK would likely apply the EU’s current WTO schedule of tariffs for Most Favored Nations, through a process known as rectification. Going beyond rectification, modifying the tariffs and quotas would require lengthy negotiations . The current WTO schedule assumes that the 28 members operate as a coherent economic bloc. Keeping the common external tariff of the EU while breaking free from Brussels would leave supply chains very susceptible to disruption: Every time goods or parts would move to and from the UK, they would be hit with a levy.
Goods are particularly prone to import tariffs, and roughly 60% of Dutch exports to the UK consist of goods. The simple average WTO tariff the EU uses for countries with which it does not have a trade agreement currently stands at 5.2%, although levies vary per product group . Dairy products are taxed 37.4 %, while wood and paper products are only subject to a 0.9% import tariff. In terms of net earnings, Dutch-made goods and services are more important than so-called “re-exports”, accounting for 2% of nominal GDP. However, re-exports, which begin as imports before being exported to the UK, are significant in terms of export value: Nearly half of Dutch export value is derived from re-exports. Moreover, the multiplier effect is reversely applicable in the scenario of a hard Brexit without a trade deal. As trade with the UK decreases, the income of people associated with it would also fall, leading to a decrease in private consumption. There would also be less demand from exporters for products and services further down the supply chain.
A second option would be for the UK to become a European Free Trade Association (EFTA) member and retain access to the European Economic Area (EEA), akin to Norway, Iceland and Liechtenstein. When the UK exits the EU, and by default the single market, EFTA membership would be a prerequisite for re-accessing the single market. While most trade would continue on the tariff-free path per Article 10 of the EEA Agreement, some sectors would be excluded. Specifically, sectors such as agriculture and fisheries will be subject to levies and quotas since the EFTA does not include freedom of movement of these goods. One in ten Dutch agriculture exports are destined for the UK across the North Sea. Though a “Norway”-style agreement would soften the blow of a fall back to WTO rules, it would not be without its own pains.
The third option would be to follow the example of Switzerland: joining EFTA without joining EEA and signing multiple bilateral agreements with the EU. Switzerland signed seven sectoral agreements, which is not allowed under WTO rules, with the EU in 1999 called Bilateral Agreements I. Those agreements were followed by a second installment in 2010. Although they include freedom of movement of agricultural goods, they also include provisions for freedom of movement of people, provided they meet certain criteria. A Swiss-style EFTA deal would enable both sides to concede a bit from their firm positions.
Despite all the downside risks presented by Brexit, there could also be some benefits for the Netherlands. As the UK is adamant to take itself out of the EU, many banks wishing to continue operating in the European market will have to relocate. In early August, news broke that the Royal Bank of Scotland will move to Amsterdam to continue its post-Brexit European operations. In addition, a major Japanese bank, Mitsubishi UFJ Financial Group , announced in mid-September that it plans to move to the Dutch capital following the Brexit. Two U.S. trading companies based in London, Tradeweb and MarketAxess , have also decided to move to Amsterdam after Brexit. Although luring banks and companies to the Netherlands could bring some employment opportunities, in all likelihood it would not be enough to offset the losses suffered from a hard Brexit.
5-year economic forecasts on 30+ economic indicators for 127 countries & 33 commodities.
Date: October 3, 2017
TagsAgricultural Commodities Economic Growth (GDP) Trade IMF UK oil prices Brexit Energy Commodities Canada Major Economies Spain United Kingdom Consensus Forecast Vietnam Commodities Mexico South Africa Russia G7 India Greece Bitcoin Latin America OPEC Ukraine Gold Precious Metals Commodities Banking Sector Argentina precious metals TPP Exchange Rate Housing Market Africa Infographic Portugal Brazil Oil Venezuela Iran Forex Unemployment rate Inflation MENA Turkey Healthcare Cryptocurrency Italy United States China Company News Australia Japan Eastern Europe Base Metals Commodities Nordic Economies European Union Tunisia Euro Area Sub-Saharan Africa USA Investment France Emerging Markets Asia Colombia Germany
In FY 2018 economic growth in India should accelerate thanks to fading disruptions from the demonetization of Novem… https://t.co/4C9xYnZLQf
1 hour ago
Economic growth in Sub-Saharan Africa is set to accelerate in 2019. Get more details: https://t.co/J6UhL4HDEf
4 hours ago
Despite mounting economic headwinds, the Chinese economy is expected to comfortably meet this year’s growth target… https://t.co/uePHyDNwaK
6 hours ago
7 hours ago
Looking ahead, growth should be robust across ASEAN. Get the latest 2018 and 2019 growth forecasts for major player… https://t.co/A9A2jYONnH
7 hours ago
- Which ASEAN countries are most exposed in the event of a U.S.-China trade war?
- 75 Top Economics Influencers to Follow
- Emerging Markets Economic Outlook 2018 and 2019
- The Faces Behind Latin America’s Key Institutions
- 2019 Economic Outlook for the Top Oil Producing Countries
- Is your cup of coffee about to get more expensive going in to 2019?
- The Economic Implications of an Aging Global Population
- Can the Wisdom of the Crowds predict the results of the 2018 World Cup?
- Railway Mania: The Largest Speculative Bubble You’ve Never Heard Of
- From Riches to Rags: Have Cryptocurrencies Crashed for Good?
- Investment looks to Latin America, but forecasts are not encouraging
- Turkey: Erdogan has cemented his grip on power - now what about the economy?
- Mexico: A look at the past, present and future as elections yield AMLO victory
- How can Latin America’s business environment benefit from technological change?
- Italy’s New Populist Government and the Eurozone: Prelude to a Crisis?
- Latin America moves toward increased integration as U.S. protectionism grows
- How can Latin America increase productivity without affecting the quality of employment?
- How will Saudi Arabia's economy benefit from lifting the women's driving ban?
- Which countries are the most prepared for the upcoming digital revolution?
- India Under Pressure from the U.S. on Trade Policy
- The Story of Steel
- Latin America is the World Leader in eCommerce Growth Despite Serious Challenges
- What the TPP means for trade in Latin America
- Elections in Russia: Analysis and Implications
- Nearly a Third of Latin Americans Have No Right to a Pension
- A Look at Healthcare Models Around the World
- The Poorest Countries in the World
- Newly-elected Chilean President Sebastian Piñera faces a myriad of challenges - economic and otherwise
- The Economic Effects of Trade Protectionism
- Regional Disparity: The Dark Side of Inequality in Latin America
- Coal: The story of the world's most abundant fossil fuel
- Venezuela's Electoral Conundrum
- Gold: The Most Precious of Metals (Part 3)
- Trump's 1st Year: 95 Analysts Surveyed on U.S. Economy
- The Latest on China and What's in Store for 2018
- An in-depth look at the Eurozone’s booming economy and the challenges that lurk in the shadows
- Increasing poverty in Latin America takes a breather thanks to improving economic dynamics
- What will be the most miserable economies in 2018?
- The World's Top 10 Largest Economies
- Is Spain doing enough to address its high youth unemployment rate?
- Has Latin America gone far enough in reducing barriers to international trade?
- Commodities Outlook: Oil, Natural Gas, Coal, Lead & Tin
- 21 experts tell us what the future looks like for cryptocurrencies and blockchain
- Turkish lira plummets to all-time low on Erdogan’s monetary feud and tense U.S.-Turkey relations
- Copper: The first metal mastered by man
- Nigerian Economy Still Treading Water Thanks to Oil Sector
- The Mercosur-EU Free Trade Agreement: Obstacles & Opportunities
- Elections in Chile: What the results could mean for the economy
- QE’s Untold Story: A Chart That Fed Correspondents Need To Investigate
- Holland’s fragile one-seat majority government targets economic growth at the expense of fiscal sustainability
- South Africa: Economy at a tipping point?
- Latin American Commodities: What’s behind the increase in demand and prices?
- Is the UK really "shackled to a corpse"?
- Spain-Catalonia: 7 economic experts weigh in on how the situation will affect the outlook
- How well is Spain's labor market doing since the crisis?
- Which countries will have the highest and lowest inflation in 2017?
- How vulnerable is Latin America to economic crises today?
- Iron ore facts and common questions answered
- The bulging economic costs of obesity
- How much investment is needed to salvage Latin America’s crumbling infrastructure?
- A Look at the Potential Impact of Brexit on the Dutch Economy
- Emerging Markets Are Kicking Into Higher Gear In 2017
- Why is foreign direct investment in Latin America falling again?
- Are Central Banks Nationalising the Economy?
- Bounty or burden? The impact of refugees on European economies is far from clear
- What’s the future of U.S.-Latin America trade relations?
- Taxes or cutbacks? Latin America's challenge of sustaining spending without causing debt to skyrocket
- Are uranium prices making a comeback?
- Taxing the Economy: Achieving a Delicate Balance
- How will emerging market economies perform in 2017?
- How will Latin America’s upcoming lengthy election cycle affect the reform agenda and credit ratings?
- Chilean Economy in Focus: Interview with Senior Economist of the Chamber of Commerce of Santiago
- CEOs Rank Top Economies for Growth Opportunities
- The Mobile Ecosystem & Latin America's Economy
- Prospects and Challenges for the Global Economy: Interview with Tim Cooper from BMI Research
- How will the Fed reduce its balance sheet & and how will the ECB end QE? - 19 economic experts weigh in
- Thoughts on "unwinding" QE from Frances Coppola
- The Fed and ECB at a crossroads: Unwinding QE
- Spain: The economy that continues to silence the critics
- Latin America: The Most Unequal Region in the World
- The History of OPEC: Has it been a Success?
- FocusEconomics Announces 2017 Analyst Forecast Awards Winners
- Latin America’s rising unemployment bucks nearly decade long trend
- Escape from the Central Bank Trap by Daniel Lacalle
- China's economic rebalancing act: What to look out for in 2017
- Driving Growth in Latin America: Challenges & Priorities
- Is the Global Economy Rebalancing?
- Commodity exporters face challenging times
- Recent Global Events Facilitate Mercosur-Pacific Alliance
- 23 economic experts weigh in: Why is productivity growth so low?
- Mexico's outlook as Trump nears 100-day mark
- Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election
- The anxiety of the small saver in a world of negative interest rates
- Brexit negotiations. Between Uncertainty and Urgency
- An Economic History of the EU from El Blog Salmón
- Baby Boomin': Implications of high population growth in Latin America
- Survey of International Economists Predicts a Le Pen Defeat in French Elections, Says Macron has Best Economic Plan
- Spain in a global context: developed economy with some challenges
- How much is crime costing Latin America?
- Predictions & Estimates from Economist Daniel Lacalle
- What economy will the new Dutch government inherit?
- “The data is not a true reflection of reality in India” Interview with Société Générale India Economist
- What are the prospects for Emerging Economies in 2017?
- What to expect in Asia for 2017
- Top Economics & Finance Blogs of 2017
- Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook
- 4 Key European Elections That Will Impact the Economy in 2017
- How are security concerns and political chaos affecting Turkey’s economy?
- Global growth to edge up in 2017
- Set to breach targets again? Debt and deficit outlooks for Southern European Eurozone countries in 2016 & 2017
- What does Donald Trump mean for the U.S. economy?
- How will emerging markets perform in 2017?
- The economic impact of a break in U.S.-Philippines ties
- Trump election: Base metals surge due to infrastructure plan
- 5 updates on the Venezuelan economic crisis
- Canada: When your neighbor’s house is on fire…
- Short-term pain before long-term gain? A look at French labor reform and economic growth
- Asia: Unremarkable growth & unfulfilled promises?
- How India's latest monsoon is affecting the economy
- Innovation in Latin America: Potential Goes Untapped Due to Weak Economic Conditions
- Russian economy update in wake of OPEC deal announcement
- The Wisdom of the Crowds and the Consensus Forecast
- Can the peso predict the U.S. election results?
- There's no end in sight to the Venezuela crisis
- A Look at the European Union Political Calendar
- Survey of international economists shows uncertainty surrounding elections damaging U.S. growth prospects
- FocusEconomics partners with leading online statistics provider Statista
- Sub-Saharan Africa's 2016 & 2017 growth rates
- China: Recent postive economic data may be papering over the cracks
- The Italian Dilemma: Weak banks pose risk to already faltering domestic demand
- How much money do migrants from Latin America send home?
- The U.S.' (Not So) Mysterious Case of the Missing Men
- What to expect from the G20 economies by 2020
- The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit