Introduction[1]

For its economic prosperity the Netherlands is very dependent on its international environment. and is therefore not immune to external events and developments. As the recently published annual review of the 2015 Clingendael Monitor, ‘A world without order?’, revealed today’s international relations are characterised by two important trends, i.e. the changing global balance of power and mounting tensions between superpowers.[2] In light of the global interconnectedness of the Dutch economy, the question arises as to what these geopolitical developments (could) mean for the economic position of the Netherlands.

This study distinguishes between the economic susceptibility of the Netherlands and its economic vulnerability.[3] Economic susceptibility is an inherent aspect of the extent to which the Netherlands has integrated into the European market and the global economic system. This study focuses on whether the Netherlands is economically vulnerable or in danger of becoming so as a result of such geopolitical developments: vulnerable in the sense that harmful effects occur which seriously hamper the smooth functioning of the Dutch economy and which may also have harmful political consequences due to other countries politically (mis)using economic relationships of dependence. From this point of view, economic vulnerability is closely related to the concept of economic security: the lower the level of vulnerability, the greater the economic security. The Dutch government has considered national economic security, i.e. the unhampered functioning of the Netherlands as an effective and efficient economy, to be one of the five vital interests of national security.[4] Economic security is also one of the three strategic interests which are key to the Netherlands’ international security strategy.[5]

The basic assumption of this study is that the strong external economic dependence of the Netherlands does not necessarily imply (greater) vulnerability. This depends, first of all, on the nature of the relationships of dependence. If these are asymmetrical, i.e. the Netherlands is unilaterally dependent, the risk of vulnerability is greater, partly due to the (mis)use of these relationships for political purposes. However, also as a result of the greater interconnectedness, these relationships of dependence are often more complex and mutual, thereby reducing the likelihood that ill-willed parties will effectively take political advantage of them. As a result of the process of economic globalisation there is a strong tendency within the current global economic system towards production in chains, in which several countries are involved and the mutual dependencies are greater. Globalisation has brought with it a lower risk of vulnerability sincet there are more opportunities to diversify suppliers and markets.[6]

A second important factor is whether relationships of dependence are embedded in internationally agreed rules (WTO, IMF, etc.) which set limits on the conduct of States. Finally, the extent to which the Netherlands is economically vulnerable is strongly determined by its resilience and flexibility, i.e. its ability to prevent potential vulnerabilities or to redress the consequences.

The scope of this study is limited to economic vulnerability as a result of geopolitical developments. It is obvious that economic vulnerability can also result from non-geopolitical factors and events, such as serious natural, economic or financial shocks.[7] Looking ahead to the next 5 to 10 years, this in-depth study of the Clingendael Monitor aims to gain a better understanding of the following two issues:

This theme has extra significance for the following three reasons. Firstly, the Netherlands has always tried to secure its interests in an open, global economic order based on market principles through multilateral agreements, procedures and regulations, particularly within the framework of the GATT/WTO and the EC/EU. However, the changes in the global playing field imply a decline in the influence of the Netherlands (and its partners) on the international rules of the game, rules moreover with which the emerging countries do not always comply.

Secondly, among the emerging powers are countries, in particular China, whose governments have a strong tendency to interfere in the markets and in the business operations of companies, with the inherent risk of political manipulation of economic relations and dependencies. Thirdly, as shown by the various editions of the Clingendael (Strategic) Monitor, this risk is greater in today’s world characterised by mounting tensions between the superpowers, in particular the relations between Russia and the West (the European Union and the United States) and between China and the United States.

The above questions will be addressed in Sections 1 and 2 respectively. Section 1 briefly outlines the economic susceptibility of the Netherlands from different perspectives, while Section 2 explores the potential effects of geopolitical developments on this economic susceptibility. To gauge the actual effects would require considerably more data than currently available within the scope of this study. Yet, a survey of the possible effects will give a picture of the consequences of geopolitical developments for the susceptibility of the national economy over the next 5 to 10 years. Section 3 looks at how the Netherlands can boost its immune system in response to this susceptibility.

This study, the summary report ‘A world without order?’ and the previously published in-depth study ‘Deterrence as a security concept against non-traditional threats’ together constitute the 2015 Clingendael Monitor. The Clingendael Monitor is published annually as part of the Strategic Monitor of the Netherlands government.

Integration of the Netherlands into the Global Economic and Financial System

The susceptibility of the Dutch economy to harmful effects as a result of international factors and developments is strongly determined by the level of integration of the Netherlands in the European and global economic and financial system.

This section uses several dimensions to analyse the interconnectedness and position of the Netherlands in greater detail: trade and international value chains; foreign direct investment; the international financial system; raw materials and energy; and the role of the internet in the economy.

Trade and International Value Chains

A country’s economic susceptibility is to a considerable extent determined by the export dependency of its economy.[8] For the Netherlands this dependency is relatively high; in 2013, Dutch exports accounted for over 64% of GDP[9] while over the past few years their share in the GDP has increased significantly.[10]

Since the Second World War, and especially since the loss of Indonesia as a colony, the Netherlands’ economic dependency has primarily focused on the European hinterland and the North American market, in particular as far as trade, investment and logistics are concerned. The European Union and the United States are still important partners for the Netherlands. Trade with EU partners and the United States accounts for 52% and 7% of Dutch imports, and 73% and 4% of Dutch exports respectively.[11] However, for a long time now, non-Western countries and regions (e.g. Russia, the Middle East and parts of Africa) have been the Netherlands’s main suppliers of raw materials and energy. In addition, as a result of the changing economic relationships and the emergence of countries like China and India, non-traditional markets are becoming increasingly important for the Netherlands. The export of Dutch products to countries outside the EU has more than doubled within the space of ten years.[12] The BRICS countries jointly account for 17% of Dutch imports and 5% of Dutch exports[13] and are thus eclipsing the United States as important trading partners. Particularly noteworthy is the increased role of China, especially given the great importance of this country as a trading partner for Germany (after the US, China is the largest market for Germany outside the EU)[14] and the role which Germany in turn plays as the main economic partner for the Netherlands and as the EU’s economic powerhouse.[15] The Netherlands is therefore becoming increasingly interconnected with a global economic system in which an ever-growing number of (non-traditional) players and parties are adopting the role of partner and competitor.

One way to gain an understanding of the extent to which the Netherlands has become economically dependent and, in particular, susceptible to exogenous economic shocks, is by looking at what happens in case of a (sharp) drop in world trade. A model-based analysis is useful here. The Netherlands has ample macro-economic models at its disposal to estimate the effects on a national scale.[16] The Netherlands Bureau for Economic Policy Analysis (Centraal Planbureau, CPB) always publishes these models in conjunction with so-called ‘variant tables’, which show how the economy reacts to shocks in exogenous variables. A great advantage of these models is that they show the main economic relationships for a national economy, and do so for a multiplicity of shocks. The following data for the Netherlands can be derived from the variance analysis (CPB 2011) if there were to be a 1% drop in world trade:

When we extrapolate these figures, a 10% decrease in exports comes down to a 2-3% decrease in the national product. However, according to the variance analysis, there are signs of recovery at some point, since the difference is smaller after 8 years.

These figures do not tell the whole story, however. The process of globalisation has accelerated since the middle of the 1990s and products are now increasingly manufactured in international production chains, also referred to as value chains. These chains are the result of the segmentation of production processes due to specialisation and relocation of (parts of) the production process to low-cost production locations. Consequently, products are often manufactured in more than one country and world trade increasingly consists of trade in semi-finished and intermediate products.[17]

Because of the growing internationalisation, less than 30% of Dutch industrial enterprises can still be regarded as ‘national’.[18] Although for service providers this proportion is slightly higher, it is still less than 35%.[19] Hence, over 70% of the industrial enterprises and 65% of the service providers are in some way connected with the international production and value chains. Table 1 shows the share of several branches of industry in the Netherlands in terms of value added generated by export and transit.‍[20] Going by this indicator, the most vulnerable sectors are the chemical industry and the food production, tourism and transport sectors.

Source: OECD-WTO Trade in Value Added (TiVA) - May 2015

Therefore, even if companies appear to be national, they are often part of international production and value chains. Figure 1 gives a comparative overview of the degree of intensity to which countries take part in international value chains as well as of the length of these chains. This figure shows that the degree to which Dutch companies take part in international value chains of average length is relatively intense. This creates opportunities as well as risks: if one link in the value chain were to break, this could have consequences for the entire chain.

Source: OECD-WTO, Trade in Value Added (TiVA) - May 2015

Because value chains have become increasingly significant, it is important that we not only examine the standard trade figures, but also the added value created in each link of an international value chain. It is, for instance, quite possible that the parts of a Chinese product originate from Malaysia and/or the United States. If we were to ascribe the entire product to China, we would exaggerate the Dutch dependence on China. Figure 2 shows the Netherlands’ main trading partners, based on added value. These figures show that the large Western/European industrial countries (i.e. Germany, the United Kingdom and the United States) are still the Netherlands’ most lucrative trading partners. Nevertheless, when compared with the standard trade figures, these figures give a more balanced view of the importance of these partners. Secondly, the figures clearly show that the emerging economies are more important than often thought. For instance, taking the traditional trade figures, the share of the BRICS countries is 4%, while on the basis of the added value figures it is approx. 10%. Furthermore, the importance of China as a trading partner is quite evident. Taking the standard trade figures, China ranks 9th, but taking the added value figures, it ranks as the Netherlands’ 4th most important trading partner. Russia too ranks among the top ten most important trading partners, while Brazil and Indonesia are moving up the ranking.

Source: ING Economic Bureau, Nederland Handelsland: Herziening ranglijst belangrijkste exportlanden voor Nederland (‘The Netherlands as a trading nation: Review of the ranking of main export countries for the Netherlands’), 6 November 2014, p. 3.

What does the above mean for the economic susceptibility of the Netherlands? The picture is twofold. On the one hand, the extension and branching out of international value chains increase economic security (thus the international value chains cushioned the drop in world trade in 2008-2009). On the other hand, new risks emerge. In the first place, the value creation process in the Netherlands is becoming increasingly dependent on supplies from and sales in other countries. Risk factors come into play at the lower (on the demand side) and at the higher end of the value chain (on the supply side). These risks are global and by definition more difficult to control. Quality problems of foreign suppliers are ‘incorporated’ into the Dutch product. These problems should be interpreted broadly; for example, they could include the working conditions under which intermediate products are manufactured. Besides, the chains are more susceptible to political risks because of their greater length, a fact which is particularly relevant in this study on the effect of geopolitical developments. These extraterritorial risks in the value chains represent increasing economic susceptibility for Dutch products.

Secondly, in an interdependent world, contamination (physical and psychological) will take place more unexpectedly and at an ever rapid pace. We need global institutions to control these risks, but these institutions are difficult to establish or often do not function properly. Thirdly, it will become even more difficult to maintain the Netherlands’ advantage in terms of knowledge and skills. Direct investments are increasingly geared towards acquiring knowledge about production processes and marketing. The use of new technologies has led to an increase in international (industrial) espionage, partly because ever-bigger players and vested interests are involved. It is furthermore not clear how the government should shape representing the ‘Dutch’ interests. For example, is Shell a Dutch or British company? The question arises here whether the Dutch government should take the lead in protecting these interests through economic and traditional diplomacy. Given the continuing trend of internationalisation of Dutch companies, these questions will become even more salient in the future.

Foreign Direct Investment (FDI)

In addition to trade, the Dutch economy is based on foreign direct investment (FDI). The Netherlands ranks as the 9th largest investor in the world and occupies the 16th place in the world ranking as one of the countries to receive the most FDI.[21] Foreign investments in the Netherlands are more or less evenly distributed over goods (56%) and services (44%), but are largely concentrated in the mining/chemical industry (27%), the financial services sector and the insurance industry (16%) and the agriculture and food sectors (14%).[22]

Although direct investments are very important for the Dutch economy, they also entail vulnerabilities and risks. From figure 3, showing the status of FDI in the Netherlands, it can be concluded that most FDI still originates from Europe and North America (United States). Although direct investments from Asia are still quite limited, this picture is likely to change in the future. For instance, a recently published report by MERICS (Mercator Institute for China Studies) and the Rhodium Group forecasts that direct investments from China in particular will grow enormously.[23]

Source: OECD International direct investment database. (consulted on 14 August 2015)

Figure 4 shows the FDI from the Netherlands. Europe and North America still appear to be the main recipient regions of Dutch FDI, but the other continents are becoming increasingly important in this regard.

Source: OECD International direct investment database. (consulted on 14 August 2015)

The scale of FDI both in and by the Netherlands reflects its high level of interconnectedness with the global financial and economic system. It is expected that the proportion of direct investments from emerging economies, in particular China, will only increase in the future. This creates certain risks, since these investors gain access to the knowledge and technology of Dutch companies and can exert influence on their strategic operations. The Netherlands is in especially susceptible if these investments are made in vital sectors by relatively unknown or state-led actors. It is feared that these parties do business foremost for geopolitical or ideological reasons and less for commercial ones.[24]

The International Financial System

The Dutch financial sector is of the utmost importance to the Dutch economy. This is evidenced by the share of the gross value added in the GDP. Although the size of the sector has decreased since the crisis, the financial sector still accounted for over 8% in 2013.[25] That is relatively high; Figure 5 shows that only in three EU Member States the share of the financial sector in their GDP is higher than in the Netherlands.

Source: Eurostat, National accounts and GDP

The Dutch economy is highly interconnected with the international financial system, both within Europe and from a global perspective. In recent decades the financial system has significantly changed in nature; it is more strongly interconnected with the economy and society. Moreover, the financial markets are now much more internationally oriented. This makes the Netherlands susceptible to instability and crises on foreign financial markets, as the recent past has clearly shown.

Moreover, as a member of the euro zone, the Netherlands is very much affected by the economies of the other euro countries. By definition, financial problems elsewhere in the euro zone also affect the Dutch economy, as the current Greek crisis has made painfully clear.

From a global perspective too there are developments in the financial and monetary system which make the Netherlands vulnerable. These are closely related to the current shift in power. In addition to markets and investment flows (see above), the stock markets, banks and currencies (e.g. the Chinese yuan) of the emerging countries will consequently play a more important role in the global financial system, making it yet more complex. Moreover, because of the level of global interdependence, instability and financial crises in the emerging countries will easily spread to other parts of the world, including countries where the financial systems are fragile. This may also affect the Netherlands. Furthermore, fluctuations on the global financial market are more difficult to control since there is a lack of adequate governance arrangements at this level.

As a final point, where the Western world used to dominate this system with key roles for the US dollar and the Western financial institutions, this position has now come under pressure. The influence of the West (and the Netherlands) on the global financial and monetary system will decline as a result of the emergence of non-Western currencies (such as the Chinese yuan), the establishment of alternative financial institutions or the need to give emerging powers a say in existing institutions, such as the IMF and the World Bank.

Raw Materials and Energy

For a long time now, in particular non-Western countries and regions (e.g. Russia, the Middle East and parts of Africa) have been the main suppliers of raw materials and energy. Here the Netherlands plays a key role as an important hub in the gas and oil flows. For its oil consumption the Netherlands depends for 95% on imports;[26] its main suppliers of crude oil are Russia (24.5%), Norway (20.9%), the United Kingdom (12.1%), Nigeria (10.6%) and Saudi Arabia (8.6%).[27] As a result of the increased tensions with Russia, the share of Russian oil imports has fallen by over 8% since 2008, largely replaced by imports from Norway (+13%). The Netherlands not only runs a higher risk of economic vulnerability because of its high dependence on imports, but also since Dutch oil consumption is concentrated in specific sectors (the transport sector and the petrochemical industry), where there are few possibilities to switch to other energy sources in the short term. Gas is a different story; thanks to its gas reserves, the Netherlands is a net exporter of natural gas. However, the Netherlands still imports gas, mainly from Norway (42%), Russia (14%) and the United Kingdom (7%).[28]

At present, the Netherlands’ gas production and infrastructure ensure a high level of supply security. However, with regard to the energy issue, in the medium term the trend that the Netherlands is increasingly losing its position as a net gas exporter due to depleting gas reserves and ground instability resulting from the extraction of gas is particularly relevant.

Source: TNO, Final report critical materials in the Dutch economy - a vulnerability assessment

Apart from energy sources, we should look at raw materials. In a recently published report on the importance of materials in the Dutch economy, TNO gives an up-to-date overview of Dutch imports of a group of 22 strategic raw materials.[29] The report concludes that, although phosphate and platinum-group metals are extremely important for the Dutch economy, a secure supply of rare earth metals, antimony, wolfram and indium is at particular risk.[30] Figure 6 shows the relative importance of the trading partners for the supply of these 22 strategic raw materials. The main suppliers are: China (16%), Germany (11%), the United States (7%), Belgium (6%), Costa Rica (6%), the United Kingdom (5%) Russia (5%) and Malaysia (4%). Figure 7 presents a sector overview for the same group of 22 strategic raw materials. The economic importance for the Dutch economy of the sector concerned has been plotted on the x-axis, the supply risk on the y-axis. Geographical concentration, recycling and substitution possibilities are examined according to these criteria. It can be concluded from figure 7 that the main product groups are subject to limited risks. The transport equipment sector is subject to the highest risks. Furniture, metal products, computers, electronic and optical equipment, electric equipment, and basic metals are subject to moderate risks. For agriculture, the food sector and the mining industry, which are important for the Netherlands, the risks are low.

Source: TNO, Final report critical materials in the Dutch economy - a vulnerability assessment

The Internet

Another and relatively new risk has arisen from the huge importance of the Internet for the corporate sector and consumers (see Figure 8: nine out of ten Dutch nationals consult/use the Internet every day for e-shopping, online banking, internet telephone services and for gathering and providing information). For the corporate sector high quality, high speed and reliable Internet traffic is vitally important. For example, a recent international comparative study conducted by the Netherlands Bureau for Economic Policy Analysis (CPB) examined the susceptibility of the Dutch economy to so-called ‘DDoS attacks’ by hackers.[31] Such attacks block important websites unavailable and reduce the speed of data communications. According to consultancy agency Kaspersky, the Netherlands ranks among the top ten countries most affected.[32] Targeted are the financial sector, private companies, the government as well as NGOs. In 2011 and 2012 it was relatively quite as far as DDoS attacks are concerned, but the Netherlands was badly hit again in 2013. In April and May 2013, the Dutch government and Dutch banks were the targets of attacks.[33] Kaspersky has estimated that the loss per DDoS attack varies from an average of >EUR 47,000 (for small and medium-sized enterprises) to an average of >EUR 400,000 (for large enterprises).[34] What is noteworthy is that the Netherlands is often the country of origin for these attacks (ranking third, after China and the United States), implying a risk for the image of Dutch e-providers. The CPB puts the number of DDoS attacks down to the number of users in the country where the attacks are launched (this does not necessarily have to be the country where the hackers are based) and in the country affected by the attack, as well as to the scale of international trade. This latter aspect, which pertains to the openness of the economy, is particularly relevant since it implies that global shifts of power can result in a mounting number of cyber attacks on this infrastructure, which is becoming increasingly important both socially and economically.

Source: Statistics Netherlands

Dutch prosperity has traditionally been built on international trade and multinational activities – in this respect, the Netherlands has passed the point of no return. The resulting dependency on external factors is apparent on several fronts: primarily for exports, as far as access to foreign markets is concerned, but it also applies to the import of raw materials and energy, to attracting foreign investments and to the role of the Netherlands as a logistic hub. As this section shows, the level and manner of international economic dependency differs per economic sector, but generally the Netherlands is susceptible, to a greater or lesser extent (sometimes to a very great extent), to international developments and events on all fronts being discussed. As a result of the ongoing shift of power, the emergence of new players and the extension and branching out of international value chains, it may be expected that the risk of vulnerability will further increase in the years ahead. Moreover, the influence of the Netherlands in the international system will further decline, as a result of which the scope to build up resistance against these vulnerabilities (in collaboration with partners) will come under even greater pressure.

Potential Effects of Geopolitical Factors

Against the background of the general susceptibility of the Dutch economy to external influences as outlined in Section 1, this section deals with the question of how it is affected by the global shifts in power and the tensions between the superpowers. These geopolitical processes should be considered within the context of the wider range of international developments that are important for Dutch national security in the years ahead and which in the most recent editions of the Clingendael Monitor (2014 and 2015) have been outlined as follows:

This summary underlines the fact that the current global system is characterised by tensions between the forces of geopolitical rivalry on the one hand and the forces of mutual dependence between parties on the other. Which forces will eventually prevail will to an important extent determine the economic vulnerability of the Netherlands: the force of interdependence and thus cooperation, or the force of geopolitical rivalry and thus conflict. Related to this is the following question: can the superpowers (including the EU) still maintain a certain order, based on shared values and principles, at a time when drastic changes in the global balance of power and the development of a more multipolar global system are taking place? These are essential questions for the Netherlands, aware as it is of its permanent dependency on the outside world.

In reply, the 2015 Clingendael Monitor points out that the most likely scenario for the next 5 to 10 years will be a combination of a more multipolar world order and elements of a multilateral system.[35] Cooperation will depend more strongly on the relations between the superpowers – the United States and China in particular – and will increasingly take place on an ad hoc basis, i.e. outside the formal frameworks of the existing international organisations. In short, the world order will be characterised by a mix of rivalry and cooperation, to the extent that this cooperation serves the interests of the big players. Against this background, the question of the economic vulnerability of the Netherlands and the possibilities to reduce this vulnerability in collaboration with partners is more pressing.

This section focuses on the geopolitical elements from the above summary. The concept of geopolitics (as applied in this report) refers to the spatial dimension of the power politics of superpowers.[36] A geopolitical perspective on international relations therefore focuses on the relationship between political influence and geography, particularly within the context of inter-superpower rivalry. These could be regional as well as the world powers. In the current global system, geopolitics in particular manifests itself more emphatically on two fronts.

Firstly, the current shift from economic and political influence at a global level in favour of a large group of non-Western countries, of which China is the most influential, but among which India, Brazil and several regional powers are also important players, at the expense of the West and Western-oriented Japan. Russia is in a category all of its own. From a long-term perspective, Russian influence, comparable with that of the West/Japan, is on the decline. However, compared with the years immediately after the demise of the Soviet Union, Russia is once again in a strong position and seeking to establish diplomatic relations with other large, non-Western countries. A consequence of this broad global trend is that, as previously indicated, the Netherlands, as part of the Western world, has less international influence, whilst the Western and standards in the global system are coming under increasing pressure.

Secondly, this concerns the increase in inter-superpower tensions. While the influence of the West (the US, the EU, Japan) is on the decline, relations between a) the US and Japan on the one hand and China on the other, and b) between the US and the EU on the one hand and Russia on the other, have become less stable. Moreover, the geopolitical rivalry between India and China is on the increase and there are latent tensions between China and Russia.[37] The EU and China also have conflicting interests and views, which may have a potentially disruptive effect on their relationship. In addition to the flaring up of direct inter-superpower tensions, this increasingly fierce rivalry between various superpowers has an impact on the regional stability in other parts of the world, either in the form of proxy conflicts or as a result of the inability of the international community to take action.

In the follow up to this Section, this geopolitical dimension and its potentially harmful effect on the economic vulnerability of the Netherlands will in the follow-up to this Section be analysed in greater detail from the following three angles:

Economic Influence as Political Leverage

The first form of vulnerability that will be examined in greater detail in this report results from the use of economic influence as political leverage by foreign players. In international relations, economic influence for political purposes is exerted by imposing, or threatening to impose, (various forms of) sanctions. These sanctions can be directed against States, but also against specific companies or individuals (referred to as targeted or smart sanctions). Trade and investment can be affected by formal sanctions, such as a boycott, an embargo, an investment freeze or other financial sanctions. In addition to formal sanctions, States may opt for indirectly threatening to impose sanctions in order to exert pressure. Such ambiguous ‘sanctions’ can result in behavioural change, even if no formal sanctions were imposed. For example, Russia has made frequent use of (the threat of) sanctions in the (recent) past. However, to impose, or to openly and indirectly threaten to impose, economic sanctions is also an important means of exerting international influence for the three main economic players: the European Union, the United States and China.

At an international level, over the past ten years there has been a significant increase in the use, directly or indirectly, of economic sanctions by States and non-state actors. This trend already started in the 1990s, when the collapse of the Soviet Empire put an end to the conflict between the two superpowers; the use of UN sanctions was therefore less effected by the differences of opinion in the UN Security Council. Sanctions have been imposed more often since that time, and the affected trade flows are more extensive than in the past. Because of this trend, the Netherlands is expected to be more frequently involved in economic sanctions, also a target.

The main risks for the Netherlands as a target for sanctions arise from possible sanctions imposed by Russia and China; by Russia due to the tense relations with the EU, and by China due to its economic scale in conjunction with its foreign politics. In the case of Russia, this involves the extension and possible tightening of sanctions resulting from the relationship between Russia and the EU, which deteriorated in 2014. In response to the Russian annexation of the Crimea and interference in the civil war in the Ukraine, the EU (like the US) imposed economic sanctions on Russia in 2014. Moscow then decided on countersanctions, which also affected Dutch exports to Russia. Russia recently threatened to impose a boycott on all flowers from the Netherlands. This probably had to do with the Dutch efforts to set up an international tribunal to try those responsible for the MH17 disaster. The extension and further expansion of the Russian sanctions cannot be ruled out, especially since the EU sanctions are likely to be continued if Russia does not change its position. Moreover, in the event of renewed Russian aggression, further tightening of sanctions cannot be ruled out. Either way, it seems that the relationship between Russia and the West will remain tense in the years ahead, partly because it is extremely unlikely that Russia will hand back the Crimea to the Ukraine.

It should be borne in mind that the effect of economic sanctions in the relations between Europe and Russia is relatively limited. As a result of globalisation and the emergence of new markets, both the EU Member States and Russia can “more easily” open up new markets and look for suppliers not directly involved in the conflict. Moreover, former Soviet States (including the Baltic States) have become less dependent on Moscow, inter alia because of their EU membership. As a result of both factors, the effect of a ‘cold trade war’ on world trade is limited. Although the potential effect of a ‘cold trade war’ is not insignificant, it will therefore be reduced, illustrating that it is not as significant as sometimes assumed.

At the same time, as an open and democratic society, the Netherlands is relatively more vulnerable to foreign economic pressure. By contrast, sanctions directed against autocratically governed countries (e.g. Russia and China), even if these are implemented in the framework of the EU, have a relatively smaller chance of success, in the sense that it is difficult to force behavioural change.[38] When assessing sanctions and the threat of them, it has to be borne in mind that, on the one hand, the Russian economy can be hit harder by the West but, on the other hand, that the economic damage resulting from sanctions also has a greater political effect in the Western democracies than in an autocracy such as Russia. Action and reaction therefore balance each other out; in some respect, the chance of success of Russian sanctions are of the same order as US and European sanctions.

In the case of China, relations with the Netherlands and the European Union are not currently strained because of a security crisis or by geopolitical rivalry similar to the conflict with Russia. As a result, and despite conflicts of interest and ideological differences, the economic and diplomatic relations are intense and of a generally positive nature. However, it is relevant to point out here that the Chinese government is not afraid to exert economic pressure on other countries if it believes that its internal security is at stake. Targets would then be the countries which actively or passively provide support to groups which the Chinese government regards as dangerous to the state (inter alia dissident political activists and regional activists in Xinjiang and Tibet) or which provide military or diplomatic support to Taiwan (which China regards as a renegade province).

Examples of steps which China has taken against other countries include the sanctions against the Netherlands (1981-1984) in response to the delivery of two submarines to Taiwan[39] and the sanctions against Norway in response to the decision of the Norwegian Nobel committee to award the Nobel Peace Prize to Liu Xiaobo in 2010.[40] The Chinese sanctions against Norway are still in force. Despite the generally good economic and diplomatic relations, the authoritarian nature of the Chinese political system can sometimes conflict with Dutch support for human rights and access of the Netherlands to activities by human rights activists and critical media. The dominant role of Beijing in the Chinese economy, in combination with China’s expanding sphere of economic influence, means that the risk of sanctions or threats on the part of China against the Netherlands cannot be ruled out in the future.[41]

Besides restricting access of Dutch companies to the Chinese market, China might take steps that could harm the role of the Netherlands as a logistic hub or the extent of Chinese investments in the Netherlands. It seems that China’s ambitious long-term programme for infrastructural projects in Europe, Asia and Africa, launched in 2013 under the banner One Belt, One Road (also referred to as the ‘Silk Route initiative’), can strengthen China’s ability to exert considerable influence on this last point. Furthermore, Chinese direct investments in the Netherlands are likely to increase sharply in the years ahead. According to a report by MERICS (Mercator Institute for China Studies) and the Rhodium Group, the coming years will show a significant increase in Chinese direct investment in the EU. The Netherlands is currently the 6th largest recipient country of Chinese direct investment in the EU.[42] This means that the Netherlands’ susceptibility to Chinese investments will increase.

In addition to formal sanctions imposed by States and supranational institutions, there are informal sanctions initiated by non-profit-making organisations, companies or unorganised groups of activists. Numerous international non-profit-making organisations (such as consumer, environmental, religious and political organisations) have outspoken views on the manufacturing conditions, which they translate into actions directed against companies, international trade and investment. These organisations sometimes specifically call on consumers to boycott specific products and activities (e.g. products from the Occupied Territories); they sometimes only spread information on the products concerned, leaving “the decision” up to consumers (as in the case of Greenpeace-Brent Spar). It is difficult to take countermeasures against such informal sanctions since they are usually not backed by a formal organisation. Consumer boycotts can also go hand in hand with diplomatic pressure or be initiated by governments, and therefore take the place of formal boycotts (e.g. the Chinese boycott of French products in 2008).[43]

While formal sanctions are more likely to be directed against a country or an economic sector, informal sanctions may be directed against other sectors or against individual companies. That is why the potential threat to Dutch security is greatest in the case of State-initiated sanctions. It should be noted here that formal sanctions can also be directed against specific companies (smart sanctions) and that informal sanctions may also cause damage at the national level, depending on the scale, duration and the sectors affected. Consumer boycotts, whether they are coordinated or not, can be directed against a range of products which are considered to be Dutch.[44]

Box 1 presents a few examples of sanctions directed against the Netherlands in connection with the relations between the Netherlands and the Islamic world. These examples show that sanctions against the Netherlands related to geopolitical developments are not new. As early as 1973, the Arab oil-producing countries displayed their power by imposing an oil embargo on the United States and several other countries, including the Netherlands. This oil boycott illustrated the declining power of Western oil companies and Western oil-consuming economies in favour of Saudi Arabia and other Arab oil-producing countries. Moreover, the immediate reason for the boycott was a war in the Middle East. Box 1 also shows that sanctions against the Netherlands are not always directly related to geopolitical factors, as in the cases of Fitna and the PVV’s (Party for Freedom) sticker campaign.

In addition to the possibility of the Netherlands becoming a direct target of economic sanctions, there is the risk that the Netherlands will be indirectly affected by sanctions between other countries. In the past, Dutch companies have been affected by American and European sanctions against countries such as Cuba, Iraq, Iran and Russia. Any prospective sanctions by the US against Chinese targets (and vice versa) could have far-reaching consequences for Dutch business interests. Although, given their highly significant economic interdependence, the risk of economic sanctions between the US and China is limited, the risk of an unintended escalation of the mounting Sino-American tensions will increase as their geopolitical rivalry intensifies, especially in East Asia, but also in cyberspace. Hence any mutual sanctions that might be imposed between the US and China would probably be very harmful to Dutch economic interests.

Another possibility is the exchange of economic sanctions between China and Japan; these could also harm the Netherlands, although not on the same scale as Sino-American sanctions would. The recent ‘cold trade war’ between Russia and the US could also intensify, irrespective of whether the EU and Russia have applied sanctions. This would probably affect the Netherlands economically.

Going by recent events, the Netherlands must, over the next 5 to 10 years, take account of the greater risk of sanctions against it (particularly at EU level) or against other countries which might also affect its economic interests. In this regard the relevance of geopolitical factors mainly lies in the risk of consequential damage resulting from tensions and sanctions between superpowers. However, because of the international process of power shifting and the ensuing possibility of tensions, the risk of sanctions and countersanctions being imposed will increase; this risk also applies to the emerging economies.

Strategic Economic Policies of other States

The second form of economic vulnerability of the Netherlands concerns the potentially harmful effects of the strategic economic policies of other States. This concerns policies aimed at securing national economic interests through anticompetitive activities, such as state aid, buying up raw materials and economic espionage.[56] The likelihood that countries will opt for a strategic economic policy increases as global relationships are more controlled by geopolitical forces and there is less cooperation in multilateral frameworks aimed at free trade and a level playing field. The 2015 Monitor (‘A world without order?’) shows that at the present time we cannot rule out a (further) progression towards a more geopolitical global system.

This largely concerns the positions and policies of the major players in the global economy, since a strategic economic policy at an individual level is not feasible for most States. They are too small to influence the global market. Small and medium-sized economies will therefore benefit from the enforceable rules within multilateral frameworks: a rule-based system. This does not apply to the largest countries, which can help set the conditions on the global market and are therefore able to implement a national strategic economic policy.

In the next 5 to 10 years, this concerns in particular the United States, China and the European Union. Although the BRICS countries increasingly operate as a group, they mostly do so on an ad hoc basis. Moreover, China is by far the largest economy in this group. The three economic superpowers (the US, China and the EU) will opt for regulations and conflict settlement through multilateral organisations if this serves their interests but, if not, they will try to safeguard their interests in other ways.

One way is to create alternatives for the global multilateral system. Partly as a result of the diffusion of power and the inability of the current multilateral institutions to adapt to this situation, emerging economies increasingly opt for alternative forms of cooperation. The BRICS development bank (New Development Bank) is a recent example.[57] However, it would be naive to think that the multilateral system is undermined solely by the emerging economies. Also the United States sometimes pursues a policy which is not in the interest of a properly functioning global system. This may be illustrated by Washington not ratifying the new voting proportions in the International Monetary Fund or generally opting to deal with global environmental problems on a bilateral basis.

A second way is to provide targeted support to companies and to protect the domestic market. For instance, China pursues a policy whereby state aid for certain Chin to the Chinese market ese companies is combined with limited access for foreign companies to the Chinese market.[58] Given the large scale of the Chinese economy, the resulting competitive advantages for Chinese companies constitute a major challenge for Dutch and other non-Chinese companies, a challenge which is greater than in many other countries.

In this context, attempts by countries to secure access to or supply of raw materials receive a lot of attention. This attention is directed at the Chinese policy, which consists of three stages: commercial cooperation, political influence and security of supply. As an extension of its own model of development, China supports a number of special economic zones in neighbouring countries (Russia, Pakistan, Vietnam) and in countries in Africa, Asia and Latin America. The previously mentioned One Belt, One Road initiative also serves as an example of strategic economic policy by China. As part of this initiative, China has invested in a large number of infrastructural projects in Central Asia, South-East Asia, the Middle East, East Africa and Europe. The One Belt, One Road initiative provides a framework for China’s long-term strategic interests, including securing access to China’s export markets, access to raw materials and the ability to open up new markets.[59]

This is largely prompted by the rapidly increased dependence of the Chinese economy on the import of oil and raw materials. For instance, there has been a spectacular increase in imports of oil and minerals into China. In 2013, China imported 64% of all internationally traded iron ore,[60] In comparison, the United States imported less than 2%. Moreover, in April 2015 China surpassed the United States as the biggest importer of crude oil (see Figure 9).[61] Furthermore, China for many years has been the biggest importer of minerals such as aluminium, copper and zinc, although it should be pointed out that, at a more aggregated level (i.e. including processed raw materials), this level is still relatively low. Here, US demand for imports is still dominant. However, in a number of regions, China at this level is already a player on a par with Europe.

Such a strategic policy is not limited to China. A good example is the shale gas revolution in the United States. Thanks to new and innovative techniques (fracking), the US has gained access to large amounts of shale gas. As a result, energy prices have dropped considerably and the US is now one of the largest oil and gas producers in the world. An important driving force behind this revolution is America’s wish to become independent of energy imports in the longer term. The effect of shale gas can already be seen in the level of America’s dependence on oil: the import of oil has decreased from 60% in 2005 to 27% in 2014.[62] These shifts, if they were to continue, will have geopolitical consequences for the future since the US will have less strategic interest in, for example, the Middle East. However, the EU’s efforts to reduce its energy dependency on Russia, inter alia by making greater use of renewable energy, are also made for strategic reasons.

These examples show that, in particular with regard to energy and raw materials, a combination of dependence and scarcity in relation to geopolitics can be a catalyst for a strategic economic policy. In this field of influence, it is very important that the Netherlands secures the supply of strategic goods by diplomatic and economic means. In addition, this field of influence will to a considerable extent be conditioned by the question of whether energy and raw materials become increasingly scarce in the medium term.

Source: Financial Times, May 2015

This not a matter of raw materials only. In a globalising world, knowledge in particular has become increasingly important. Knowledge creates an important competitive advantage, albeit of a temporary nature. The temporary nature of the advantage of knowledge will increasingly constitute a vulnerability. Because of the great importance of knowledge, increasing efforts are being made to acquire knowledge, both legally and illegally (espionage). Many students from emerging economies go to unvisersities in the West. Western knowledge producers are persuaded to set up expertise centres and the foreign direct investments of emerging economies in the industrialised countries are no longer driven by market access but by the desire to learn more about management, marketing, production processes and innovation. There is also an increase in illegal copycat behaviour and economic espionage.

Its status as a high-quality, knowledge-based economy makes the Netherlands an interesting target for economic espionage. In addition, the ongoing digitisation process makes the Dutch economy vulnerable to digital threats. Although traditional espionage tactics have lost none of their importance, digital espionage in particular has sharply increased over the past few years.[63] Because of low costs and high returns, cyber-attacks constitute an attractive alternative for traditional espionage methods. As appears from the 2014 annual report of the General Intelligence and Security Service (Algemene Inlichtingen- en Veiligheidsdienst, AIVD), States pose the biggest threat as far as digital espionage is concerned. The 2013 Cyber Security Assessment identified China, Russia, Iran and Syria as the main actors (see Box 2). While the Iranian and Syrian intelligence services focus on disrupting and destabilising political targets, China and, increasingly, Russia are also active in the field of economic espionage. It should be pointed out here that the US too is guilty of economic espionage; for instance, both the aircraft manufacturer Airbus and the European Commission turned out to be targets of espionage by the American intelligence service NSA.

Economic espionage constitutes a threat to the economic security of the Netherlands. Although foreign intelligence services mainly focus on military technology, there is also a significant increase in espionage activities directed at the Dutch corporate sector, in particular the so-called ‘top sectors’ (the maritime, agriculture, high-tech, horticultural and energy) and the chemical industry.[64] In the past, Dutch companies (e.g. Philips and ASML) have fallen victim to economic espionage. The Dutch economy suffers damage from the theft of intellectual property and the undermining of its negotiating position during tendering procedures, contract negotiations, mergers and take-overs. It is difficult to assess the extent of the damage. For the Netherlands, the damage resulting from economic espionage (by state and non-state actors) is estimated at EUR 8.8b. per year.[65]

Because of the power shifting process, which will result in increasing tensions, and of the manifestation of emerging countries, characterised by a high level of government interference, the risk of economic espionage is likely to remain high, and may even increase.

Instability in regions which are important for the Dutch economy

The 2015 Monitor identified three hot spots characterised by mounting tensions or violent conflicts: East Asia, the MENA region and Eastern Europe. Instability in these three regions can affect the economy of the Netherlands in different ways.

However, the context described above which is of relevance to the Netherlands revealed that, as an economic entity, Europe (the EU / euro zone) is still the most important for the Netherlands. Since the start of the financial-economic and debt crisis, a series of measures have been taken to strengthen the euro zone in particular and to prevent a recurrence of the crisis. Nevertheless, the economic recovery is fragile and several euro countries are still plagued by major economic problems, as far as debts and budget deficits, and the failure to carry out necessary economic reforms are concerned. All this suggests that fragility in the euro zone will have to be taken into account in the years ahead. Besides the persistent risk of a ‘Grexit’, this largely relates to the risk that, as in Greece, the austerity and reform programmes imposed by the euro zone will also result in growing opposition to the euro in other euro countries, in particular France, Italy and Spain. This will put an even greater strain on the level of cohesion within the EU, in particular on the north-south axis. This risk is all the more acute now that national elections are about to take place in, amongst others, Spain, and Eurocritical parties in the southern Member States have gained significantly in popularity. This uncertainty about the EU’s future is further increased by the referendum on British membership of the EU, which will be held in June 2017.

Uncertainty as to the future of the EU / euro zone will have a negative effect on the real economy and, as a result, harm the Netherlands. Moreover, as research has shown, if Britain were to leave the EU, the Netherlands would be particularly affected. It may be clear that the continuation of the problems in the EU / euro zone could also result in the further weakening of the EU’s global position.

Further removed from the heart of Europe, there are two regions on its flanks, which are relevant for their own unique reasons. Economic development in the MENA region has come to a standstill and political instability there is extremely great. The conflicts are concentrated in Iraq and Syria, with a civil war (Syria) on the one hand and, with the rise of Islamic State (IS), a disintegration of existing States (Syria and Iraq) on the other. However, the political instability in Libya, Yemen, Mali and Nigeria and the attacks in Tunisia all show that large parts of the Middle East, North Africa, Sub-Sahara and West Africa have become victims of conflict, radicalisation and fragility. As a result, security of supply of important raw materials is already at risk. We have also seen extensive migration flows and there is the risk that these conflicts will spill over in the form of terrorism and crime. Moreover, it cannot be ruled out that the instability will spread further, partly as a result of the increasing involvement of external parties. If this were to happen, particularly if the domestic stability in Saudi Arabia and Egypt were to be threatened or the violence in Syria and Iraq were to develop into a region-wide conflict, this could have far-reaching consequences for energy supply security (Saudi Arabia and the Gulf States) and safe passage (Strait of Hormuz, Suez Canal, piracy); these are consequences which will also affect the Netherlands and its major petrochemical industry.

To the eadt of the EU, the deteriorating relationship with Russia plays a role. The annexation by Russia of the Crimea and the Russian-supported actions of the separatists in the Ukraine put a heavy strain on relations between the EU/US and Russia. Their economic relations in particular were intensified considerably after the Cold War, and, besides that, the energy relationship with Russia is particularly important, not only for a number of EU Member States, but also for the Netherlands as a ‘hub’ for Russian gas and a transit location for Russian oil. It is feared that Russia will use Europe’s energy dependency as political leverage or as a means to play EU Member States off against each other. As previously indicated, the economic effects of the current conflict, in particular the mutual economic sanctions, have been limited to date. For instance, in its August 2014 estimate, the Netherlands Bureau for Economic Policy Analysis (CPB) estimated these effects at 0.5 per cent of economic growth.[83] However, if the conflict were to escalate further (which cannot be ruled out), the effects will be more serious (see Figure 10). In this respect, some observers fear a return to the type of relations during the Cold War, when political tensions limited the scale of global production by 3.5 per cent.[84]

Source: P.A.G. van Bergeijk, ‘The return of the Cold Trade War?’, Voxeu.org, 6 November 2014

In East Asia, the playing field is largely determined by geopolitics; in particular, the risk exists of conflict in the South China Sea and East China Sea. In both cases the relationship between China and the United States plays a role. In the East China Sea there is also the risk of a conflict between China and Japan. In addition, risks exist of conflicts in the relationship between China and Taiwan and between North and South Korea. The majority of the main disputes and conflicts in East Asia results from the aftermath of the Second World War. Because of the Cold War, these issues were not resolved at the time and therefore continue to undermine the stability in the region. Moreover, increasing rivalry between the US and China as global powers manifests itself primarily in this region. It is largely through their influence in East Asia that the Americans are trying to curb and channel China’s rise. In response to China’s growing international influence, the US continues to exert yet more counter pressure. It seems likely that this process will continue in the years ahead. Such tensions threaten international cooperation at a global level between major economic players such as the US, China and Japan. From an economic perspective, the shipping routes through the region and the important role which Asia plays in the various links of the international value chains constitute substantial vulnerabilities for countries such as the Netherlands.

Resilience

The conclusion of the above is that the risk of economic vulnerability of the Netherlands is growing and is expected to grow further in the light of geopolitical developments discussed above. The extent to which this will actually harm the functioning of the Dutch economy depends in part on its economic resilience.[85] In response to the susceptibilities and risks already established, the resilience of the Dutch economy may be increased on several levels. Four elements are important in this respect: risk diversification, risk reduction, reduction of the direct effects of negative exogenous shocks and (credible) economic countermeasures. These instruments may be used to help boost the economy’s resilience, looking at the various dimensions of susceptibility: trade and international value chains, the international financial system, direct investment, raw materials and energy, and the use of the internet.

With regard to reducing the Netherlands’ vulnerability as a result of its export dependency and involvement in international value chains, diversification constitutes an important policy instrument for addressing its vulnerability to the strategic economic policies and means of economic leverage of other countries. Also with regard to access to essential raw materials and energy, this is a way to become more resilient, e.g. strong enough to deal with instability in supply countries which are important for the Netherlands. In principle, susceptibility to foreign pressure can be reduced by preventing or reducing the dependence on one or a very limited number of foreign parties, since having several suppliers and markets offers the possibility of substituting one for the other; it is thus an important policy instrument for the government and corporate sector. However, it is important here to examine the entire value chain, since on the basis of (exclusively) the direct suppliers it is not possible to gain sufficient insight into the origin(s) of various parts and, therefore, into the main dependencies.

If supplier diversification is not an option, keeping strategic stocks is; although this is ultimately not the answer, building up stocks can help to temporarily relieve the economic pressure. Furthermore, greater emphasis may be placed on waste prevention during the production and consumption process and on recycling, which decreases the intensity of use of scarce production resources in the production process and thereby reduces the level of dependency. Substitution, i.e. replacing (if possible) vulnerable materials with other means, is another way to reduce vulnerability.

With regard to the risk that direct investments will increase the economic vulnerability to political pressure or strategic economic policies, resilience can be increased by means of an assessment framework which has been tailored to similar initiatives in other EU countries. The Ministry of Economic Affairs has conducted a survey into the adequateness of the existing instruments for the telecom sector are adequate. As a follow-up to this survey, the Ministry is now preparing a legislative proposal which will provide additional instruments for assessing national security risks during take-overs (“acquiring predominant control”) in vital telecommunication infrastructure.[86] The advantage of this sector-specific approach, whereby assessments are carried out ex ante, is that it offers the government flexibility, enabling it to provide ‘tailor-made solutions’. However, it remains to be seen whether this approach will provide sufficient transparency to potential investors and whether the government will have to monitor foreign investments and their backgrounds from a central point and with a bird’s eye view. Furthermore, the possibility to strengthen coordination between EU Member States in this area also seems an important item for consideration, given the close interdependence of their economies.[87]

With respect to the potential vulnerability resulting from the Netherlands’ high level of interconnectedness with the international financial system, there are various ways to increase its resilience. The Dutch financial sector would be less vulnerable to exogenous shocks if Dutch banks were better capitalised. In this respect, according to the CPB Risk Report on the Financial Markets, Dutch banks are on the right track to satisfy the stricter capital requirements.[88] However, the vulnerability of the financial sector lies mainly in its relative size, which is very large. A smaller financial sector would make the Dutch economy less vulnerable.[89]

With regard to reducing the potential vulnerability resulting from the use of the Internet, several steps to enhance resilience may be taken, also referred to as cyber resilience. First of all, companies and private individuals should make themselves more aware of the risks of using the Internet. Technological steps can also be taken. This concerns, for example, investing in better defences against cyber attacks, such as multi-layered firewalls and advanced encryption and authentication tools. However, prevention is not enough; sufficient capacity is required to detect attacks, devise an adequate response and expose any attackers. This could, for example, also have a deterrent effect on States which systematically engage in or facilitate economic espionage as part of their strategic economic policy.[90]

In a more general sense, deterrence as a countermeasure to reduce or prevent vulnerability will only be effective on specific conditions,[91] and will in any event be more effective if there is a stronger mutual relationship between parties. In addition, it is a fact that, although the Netherlands can take steps independently to reduce its economic vulnerability, cooperation with partners in bilateral and multilateral frameworks (in particular EU partners) will often be required to actually increase its resilience.

Attempts have been made in the past to achieve resilience by maintaining special bilateral relations. However, intensive development cooperation with Indonesia and India, for example, has not proved to be a firm basis for good political relationships since a unilateral relation of dependence does not fit well with the growing self-awareness of these emerging economies. Resilience can, however, be achieved on the basis of mutual recognition and cooperation on the basis of equality.

Yet, with a view to reducing its economic vulnerability, the Netherlands will benefit most from the existence of a well-functioning and effective multilateral global financial and economic system. Embedding a stronger, interdependent global economic system within a rule-based order offers the best guarantee for a level playing field and for peaceful conflict settlement, as well as for some protection from the unilateral actions of third parties, provided there is a wide membership. In this regard the Netherlands (just like other medium-sized European countries) is faced with a major dilemma regarding its interests. Since the Netherlands benefits from a strong multilateral system, the current challenge is to give emerging countries a say, this with a view to retaining the system. Only then will the emerging countries be prepared to abide by the rules. However, sharing power with these countries implies a declining influence of the Netherlands and its partners. If Western countries, including the Netherlands, are not prepared to make compromises, the multilateral system may be subject to further fragmentation. Initiatives by the emerging economies, such as the establishment of the BRICS Bank or the Asian Development Bank, at first glance constitute competition with institutions such as the World Bank and confirm the existing risk of a shift from a multilaterally embedded global order to a more diffuse system. From this perspective, the question arises as to whether further economic integration with North America through the so-called Transatlantic Trade and Investment Partnership (TTIP) is necessary and desirable. (TTIP is essentially a non-multilateral project between two economic superpowers which, because it excludes China and other emerging economies, therefore raises the question whether it will strengthen the multilateral system as the Netherlands would like). It underlines the dilemma which the Netherlands is now facing: the multilateral system can only continue if the emerging economies become co-owners.

Conclusions

From every perspective discussed in this report, the Dutch economy is highly and increasingly dependent on, and therefore susceptible to, international trends and events. This applies to trade, direct investment, financial relations, value chains, raw materials and, in the years ahead, the use of the Internet. Partly because of the extension and branching out of international value chains and the use of the Internet, this susceptibility will continue to increase. Moreover, not only is the Netherlands as far as the economy is concerned closely interconnected with countries that are ideologically compatible (EU Member States, the United States, Japan), this is also ever more the case in its relationships with countries outside this traditional circle of economic and diplomatic partners. Although in this context China stands out as the upcoming economic superpower vigorously pushing its way to the foreground, in general the economic clout of non-Western countries and regions is also steadily growing. While these countries were mainly relevant as suppliers of oil and other raw materials a few decades ago, they now as well play a major role as markets, as investors, as links in the value chain and as competitors in every possible branch of industry. The interconnectedness of the Dutch economy with the global economic system is not expected to decrease in the next 5 to 10 years; depending on the development of the global economy, this interconnectedness is more likely to increase. Moreover, it is likely that the dependence on non-traditional markets, i.e. outside the OECD region, will also increase as a result of the ongoing global shift of power.

Against this background, this report focuses on current geopolitical developments which are expected to still be relevant in the next 5 to 10 years as far as the economic vulnerability of the Netherlands is concerned. First of all, this concerns the process of the global shift of power, whereby the West and Japan will become less influential in comparison with the non-Western world. Of the dimensions of susceptibility discussed here, the potential impact of this process is significant as far as the harmful effects of the strategic economic policies of other States are concerned. The greater international influence of countries where the government intervenes in the economy more frequently and profoundly than is customary in Western economies has a long-term effect on international competitive conditions and on access to markets, capital, technology and raw materials. Depending on the particular economic sector, this may to a greater or lesser extent have an adverse effect on Dutch companies and the Dutch economy in general. An important question for a follow-up study is therefore: which economic sectors are particularly vulnerable to external factors. Incidentally, it should be pointed out here that the emergence of non-Western economies also creates opportunities for Dutch companies in the form of new markets for Dutch export products, investment opportunities, etc.

However, countries which systematically engage in or facilitate economic espionage as part of their strategic economic policy pose a potential threat as far as (cyber) espionage is concerned. Moreover, as a result of the global shift in power, the susceptibility of the Netherlands to the economic strategic policies of other States increases in two different respects. Firstly, as a result of the increasingly close economic contacts with countries with a centralised economy; secondly, as a result of the declining ability to promote standards which limit the market-distorting interventions of national governments in world trade.

The global shift in power is also relevant for the other two dimensions of economic susceptibility. With regard to the risk of the Netherlands becoming a (direct) target for economic sanctions, it can be concluded that the risk is limited as far as sanctions imposed by Western actors are concerned. However, as non-Western actors become more influential economically and diplomatically, the likelihood that the Netherlands will be subjected to threats of sanctions, or actual sanctions, for geopolitical, religious or ideological reasons (e.g. related to human rights) will increase. As far as the dependence of the Netherlands on unstable regions is concerned, the shift of the global economy’s centre of gravity to Asia implies that the Dutch economy will become more susceptible to a regional crisis in that part of the world. The declining global influence of the European Union also has consequences for its ability to tackle internal financial and economic problems.

The second geopolitical factor concerns the increase in tensions between the superpowers, in particular between Russia and the EU/US and between China and the US/Japan. The potential effect of this factor is greatest when it concerns the application of economic sanctions. Tensions between Russia and the EU/US are already manifesting themselves in the form of mutual sanctions. As a Member State of the EU, the Netherlands is directly involved in this, but it may also indirectly suffer the consequences of, for example, a prospective tightening of American sanctions against Russia. The indirect effect of economic sanctions between China and the United States or between China and Japan could also affect Dutch economic interests. Unlike in previous instances of American sanctions against countries such as Iran, which put significant pressure on the Dutch companies involved, many Dutch companies cannot pull out of China without suffering very significant damage (and pulling out of the US is certainly not an attractive or feasible option either).

Further tensions between the superpowers could also result in stronger strategic economic actions by big countries. When there is growing international distrust and multilateral cooperation is difficult, big countries in particular tend to secure the competitive position of their strategic companies and access to raw materials, markets, technology and capital through government intervention. Smaller countries such as the Netherlands have limited options to reduce their economic susceptibility through such means. It should be pointed out here that an increase in inter-superpower tensions will not automatically result in less economic cooperation. As shown by the summary report of the Clingendael Monitor, rivalry and cooperation can exist side by side. However, if the geopolitical rivalry continues to intensify, a point may be reached where this has a negative effect on economic cooperation at bilateral and multilateral levels.

Finally, tensions between the-superpowers also affect the third dimension of economic susceptibility, i.e. the dependence on unstable regions. In this regard, it should be pointed out that the regions surrounding the EU, in particular the MENA region, will for the time being be affected by ongoing and possibly mounting tensions and instability. In Eastern Europe and East Asia, the effect is direct, since the instability in these regions is an immediate result of the deteriorating inter-superpower relationships. In the Middle East and parts of Africa, the effect is more indirect; because of conflicting interests and mutual distrust, the superpowers seem unable to adopt a unified approach to these regional crises. At the same time, the Netherlands’ economic interests in these regions are considerably less than the interests linked to China or Russia. To date, the geopolitical tensions have only had a relatively limited effect on the (in)stability within the EU. This may change, however, if Europe, partly as a result of global loss of power, were – to a greater or lesser extent – to become the playing field of rivalries between actors such as the United States, China and Russia.

One may conclude that the potentially harmful effects of geopolitical developments and events on the Dutch economy are considerable. This applies to both the global shift of power (the West becoming less dominant) and the mounting tensions between various superpowers (Russia vs. the US/EU; China vs. the US/Japan). This concerns the risk that the Netherlands will be affected directly or indirectly by sanctions, will suffer damage from the strategic economic policies of other countries and will become more vulnerable as a result of developments in unstable regions outside the EU, especially in relation to Russia and East Asia. The question as to which economic sectors are particularly vulnerable merits further investigation.

At the same time, care should be taken not to draw too alarmist conclusions. Whether, and to what extent, the Netherlands will actually become economically vulnerable will primarily depend on how global relationships develop in the future, in particular relations between the superpowers themselves. If tensions in these relations increase, resulting in international cooperation becoming more difficult, the risk of vulnerability will also increase. However, as we pointed out in the introduction, this is counterbalanced by the fact that the current global system is characterised, both financially and economically, by a high degree of interconnectedness, which can have a moderating effect. This observation is supported by the fact that, in a world where geopolitical forces seem increasingly to manifest themselves, alongside rivalry we find continuing cooperation, both within multilateral frameworks and between the superpowers. Finally, this study also shows that the Netherlands can increase its economic resilience, either independently or in collaboration with partners, but preferably within a multilateral framework.