Impact of Six EU Free Trade Agreements on the Dutch Economy

The estimated impact of six envisaged bilateral EU Free Trade Agreements (FTAs) on the Dutch economy is small but generally positive. In five out of six cases, the FTAs would raise real GDP, lower import prices, and create additional employment. If all six envisaged FTAs were to take effect simultaneously, Dutch real GDP would grow by around half a percentage point (€3.3 billion).

The European Commission is currently negotiating, or considering to negotiate, new bilateral Free Trade Agreements (FTAs) between the EU and six of its trade partners: Australia, Chile, Indonesia, Mexico, New Zealand, and the Philippines. This partially concerns entirely new trade agreements and partly a deepening and broadening of existing trade agreements. On behalf of the Dutch Ministry of Foreign Affairs, SEO Amsterdam Economics has conducted an in-depth study on the impact such FTAs might have on trade, GDP, and employment in the Netherlands. In addition, it estimates the impact on trade and GDP for low- and middle-income countries.

We estimate this economic impact in two stages. First, we use a so-called ‘gravity model’ to assess the impact on bilateral trade, trade between third countries, and real GDP, taking into account indirect trade effects that could occur due to changes in relative prices and relative incomes. Second, we use an ‘input-output’ labour market model for the Netherlands to project the impact on Dutch production, value added, and employment by sector, taking into account input-output linkages between sectors.

The largest impact on Dutch exports would occur in a case of the envisaged FTAs with Australia and Indonesia. We predict that exports to these countries would increase by around 175%, which would imply an increase in Dutch export revenues by €4 billion and €1.3 billion, respectively.

The largest increase in Dutch real GDP occurs again for the FTAs with Australia and Indonesia, amounting to 0.16% of GDP (around €1 billion) and 0.21% of GDP (around €1.3 billion), respectively. This is smaller than the impact on exports because imports increase as well and some trade patterns change as a result of changes in relative trade costs and prices. The estimated impact on Dutch real GDP is smaller for the other four envisaged FTAs. For the FTA with the Philippines, the real GDP effect is slightly negative but negligibly small (?0.004%). If all six FTAs were to take effect simultaneously, Dutch real GDP would grow by around half a percentage point, or €3.3 billion.

On average, low-income countries see a slight decrease in real GDP after each of the envisaged FTAs, but these effects are relatively small, ranging from an average decrease of 0.01% for the FTA with Chile to an average decrease of 0.20% for the FTA with Australia. A small number of low-income countries will however see an increase in their GDP. One exception is the FTA with the Philippines which, on average, results in small gains for low-income countries.

This is because the increase in real incomes leads to higher domestic demand, hence more production, which implies a higher demand for labour and therefore an increase in wages. The total net impact on employment in the Netherlands is again largest for the envisaged FTAs with Australia and Indonesia. The effect is slightly larger when we take into account the comparative advantages of the Dutch economy relative to other EU countries. While the increase in employment is temporary, the increase in wages and the decrease in prices are permanent effects.