International Business : Recession in Western Europe Hits Netherlands Economy Hard

ISSUE: The Dutch economy, highly dependent on trade, has been hit hard this year by the recession in Western Europe and disruptions in the European currency system.

Recently, the Netherlands government has embarked on a campaign to lure more foreign investment, preferably from outside Europe, to shore up its economy. Recent delegations have toured the United States and Asia.

BACKGROUND: The Netherlands has long served as a gateway to European markets for overseas goods, and today trade accounts for more than 50% of the nation’s gross domestic product.

Though small in size, the nation is strategically located at the mouth of Europe’s main waterway, the Rhine River, and is within 300 miles of major markets in England, France, Belgium and Germany.

The nation also has a well-developed infrastructure for trade that includes Europe’s largest container port, in Rotterdam, and the Continent’s fourth-busiest airport, in Amsterdam.

The government has attracted a large number of overseas investors by offering corporate tax incentives to multinational companies and minimal customs controls.

Liberal trade policies helped turn trade deficits in the 1970s to large surpluses by the 1980s, as did a boost in overall world trade.

But when recession hit Western Europe in 1991, the Dutch economy also soured. Compared to other European countries, the Netherlands has experienced a relatively mild recession.

But unemployment, which hit 6.8% last year, has been rising steadily, and exports--three-quarters of the Dutch economy--fell in value last year for the first time since 1987.

OUTLOOK: Most economists are forecasting a mild recovery for Europe by 1994, which should help the Dutch economy regain its moorings. But much depends on Germany, which buys roughly 30% of all Dutch exports. As Germany has grappled with the costs of reunification and its own economic downturn in the last two years, the Netherlands has struggled along with it.

“As Germany’s economy goes, so goes the Dutch economy,” said Arend Lijphart, an expert on the Netherlands at UC San Diego.

But a failure to successfully conclude the Uruguay Round of the General Agreement on Tariffs and Trade talks and a failure to ratify the North American Free Trade Agreement in the United States could raise trade barriers and thereby hurt Dutch prospects, said Jonathan Aronson, an international relations professor at USC.

Uncertainty in the European currency market may also hamper the ability of the Dutch to boost exports in 1994, much as it did this year.

After the disruption of the European Rate Mechanism, only the Dutch guilder and the deutschemark stuck to their original values. As other EC nations devalued their currencies, Dutch exports became relatively expensive.

While the Dutch central bank says it expects the negative effects of this year’s currency swings to wear off by 1994, further devaluations by EC members could again drive up the cost of Dutch exports.

Given a brighter economic picture, Dutch exports are expected to increase by 5% next year, according to the Netherlands Foreign Investment Agency.

STRATEGY: Given the trouble in Western Europe, the Netherlands has been aggressively pursuing export markets in the Pacific Rim and the United States. Exports to Asia grew 7% in 1992, according to the Dutch Central Bureau for Statistics, while shipments of goods and services to the United States grew 3%.

Even so, much of the Dutch government’s efforts have remained focused on the European market in the hopes of capitalizing on an eventual upswing in the EC’s economies.

Dutch trade representatives are actively courting overseas investors to locate their European distribution centers in the Netherlands.

In addition, the Dutch government has shifted spending from social programs to renovating and expanding the country’s transportation infrastructure, including expanding the Schiphol Airport in Amsterdam to more than double its capacity.

Plans were also finalized this year to build a freight railroad linking Rotterdam’s port to Germany’s Ruhr industrial area.