Amsterdam Entrepôt
Encyclopedia
Dutch Republic
The Dutch Republic — officially known as the Republic of the Seven United Netherlands , the Republic of the United Netherlands, or the Republic of the Seven United Provinces — was a republic in Europe existing from 1581 to 1795, preceding the Batavian Republic and ultimately...
achieve primacy in world trade during the 17th century.
The entrepôt system
In the Middle AgesMiddle Ages
The Middle Ages is a periodization of European history from the 5th century to the 15th century. The Middle Ages follows the fall of the Western Roman Empire in 476 and precedes the Early Modern Era. It is the middle period of a three-period division of Western history: Classic, Medieval and Modern...
local rulers sometimes gave the right to establish staple ports to certain cities. Amsterdam
Amsterdam
Amsterdam is the largest city and the capital of the Netherlands. The current position of Amsterdam as capital city of the Kingdom of the Netherlands is governed by the constitution of August 24, 1815 and its successors. Amsterdam has a population of 783,364 within city limits, an urban population...
never received such formal rights (unlike e.g. Dordrecht
Dordrecht
Dordrecht , colloquially Dordt, historically in English named Dort, is a city and municipality in the western Netherlands, located in the province of South Holland. It is the fourth largest city of the province, having a population of 118,601 in 2009...
and Veere
Veere
Veere is a municipality and a city in the southwestern Netherlands, on Walcheren island in the province of Zeeland.-Population centres :Aagtekerke , Biggekerke , Domburg , Gapinge , Grijpskerke , Koudekerke , Meliskerke , Oostkapelle , Serooskerke , Veere , Vrouwenpolder , Westkapelle...
), but in practice the city established a staple-market economy in the 15th and 16th centuries. This economy was not limited to a single commodity, though at first Baltic grain dominated it. It came into being because the economic and technological conditions of the time required a trade-network based on what is known in economic terms as an Entrepôt
Entrepôt
An entrepôt is a trading post where merchandise can be imported and exported without paying import duties, often at a profit. This profit is possible because of trade conditions, for example, the reluctance of ships to travel the entire length of a long trading route, and selling to the entrepôt...
, or in other words a central point (for a given geographic area) where goods are brought together and physically traded, before they are re-exported to their final destinations. This need followed from the fact that in those days transportation of goods was slow, expensive, irregular, and prone to disruption, and that supply and demand for goods fluctuated wildly and unpredictably. The risks entailed by these circumstances put a premium on the creation of such a fixed base, where commodities could be stockpiled prior to marketing and final distribution. Furthermore, concentrating storage, transport, and insurance facilities in one place helped reduce transaction cost
Transaction cost
In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange . For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal...
s and keep long-term prices more stable than they otherwise would have been. The entrepôt functioned thus as a central reservoir of commodities, a regulating mechanism smoothing out fluctuations in supply and demand over time and minimizing the effects of interruptions and bottlenecks.
However, the entrepôt performed an additional function, a "derivative" of its primary market-function: the physical proximity of merchants promoted the exchange of information about market forces, prices, and developments in the factors underlying supply and demand. This not only lowered the cost of information-gathering but even led to decreasing marginal information costs
Marginal cost
In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good...
. Other things being equal, this externality
Externality
In economics, an externality is a cost or benefit, not transmitted through prices, incurred by a party who did not agree to the action causing the cost or benefit...
would lower the total marginal cost of goods trading through the entrepôt. It is a well-known economic fact that in circumstances of decreasing marginal costs, economies of scale occur, which can give an advantage to early entrants
Resource-Based View
The resource-based view is a business management tool used to determine the strategic resources available to a company. The fundamental principle of the RBV is that the basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firm's...
that permits them to outgrow their competitors, sometimes even leading to a natural monopoly
Natural monopoly
A monopoly describes a situation where all sales in a market are undertaken by a single firm. A natural monopoly by contrast is a condition on the cost-technology of an industry whereby it is most efficient for production to be concentrated in a single form...
. This may explain why in the field of entrepôts certain markets (Antwerp, Amsterdam) gained a dominant position for some time, while others (London
London
London is the capital city of :England and the :United Kingdom, the largest metropolitan area in the United Kingdom, and the largest urban zone in the European Union by most measures. Located on the River Thames, London has been a major settlement for two millennia, its history going back to its...
, Hamburg
Hamburg
-History:The first historic name for the city was, according to Claudius Ptolemy's reports, Treva.But the city takes its modern name, Hamburg, from the first permanent building on the site, a castle whose construction was ordered by the Emperor Charlemagne in AD 808...
) were left behind and only came into their own when the special circumstances favoring the other entrepôts came to an end. In the case of Amsterdam those circumstances changed when the technological possibilities of direct trade improved, obviating the intermediating
Intermediation
Intermediation involves the "matching" of lenders with savings to borrowers who need money by an agent or third party, such as a bank.If this matching is successful, the lender obtains a positive rate of return, the borrower receives a return for risk taking and entrepreneurship and the banker...
function of the entrepôt.
Historical evolution of the system
But why Amsterdam? The mechanism underlying the entrepôt trading-system does not explain the peculiar success of the Dutch Republic and Amsterdam in particular. Other merchant cities might have gained this prize and as a matter of fact, Antwerp for a time did. However, the Antwerp entrepôt was destroyed with the Fall of Antwerp (1584–1585) and the subsequent expulsion of its Calvinist inhabitants (half of the city population), followed by the centuries-long blockade of the Scheldt trade.To explain the peculiar Dutch success we have to take account of a number of factors that in isolation still do not explain the Dutch primacy in world trade, but whose interplay may go far in doing that. The Dutch had gained an important role in the Baltic trade (grain especially) in the 15th and 16th century because of the nature of commodities exchanged (herring for grain) and the dominance of the Dutch in the herring fisheries
Herring Buss
A herring buss was a type of sea-going fishing vessel, used by Dutch herring fishermen in the 15th through early 19th centuries.The buss ship type has a long history...
. However this role only became dominant in this low-value, high-volume bulk
Bulk cargo
Bulk cargo is commodity cargo that is transported unpackaged in large quantities. This cargo is usually dropped or poured, with a spout or shovel bucket, as a liquid or as a mass of relatively small solids , into a bulk carrier ship's hold, railroad car, or tanker truck/trailer/semi-trailer body...
trade due to a structural fall in shipping costs Dutch shippers experienced because of revolutionary innovations in shipbuilding (wind-driven sawmill
Sawmill
A sawmill is a facility where logs are cut into boards.-Sawmill process:A sawmill's basic operation is much like those of hundreds of years ago; a log enters on one end and dimensional lumber exits on the other end....
), which brought down construction costs of shipping, and in ship-design (Fluyt
Fluyt
A fluyt, fluit, or flute is a Dutch type of sailing vessel originally designed as a dedicated cargo vessel. Originating from the Netherlands in the 16th century, the vessel was designed to facilitate transoceanic delivery with the maximum of space and crew efficiency...
ship that required smaller crews) at the turn of the 17th century. This so improved their competitive position that they soon dominated the European bulk trades, not only the Baltic trade, but also the salt trade of the Iberian Peninsula
Iberian Peninsula
The Iberian Peninsula , sometimes called Iberia, is located in the extreme southwest of Europe and includes the modern-day sovereign states of Spain, Portugal and Andorra, as well as the British Overseas Territory of Gibraltar...
.
High profitability of the bulk trade resulted in the possibility of large savings and the reservoir of savings looking for profitable investment eventually resulted in a lowering of interest rates as a primary effect, and of the development of sophisticated financial markets as a secondary effect. Such financial markets also profited from the decreasing-marginal-information-cost phenomenon and this helped soon make Amsterdam an important financial center also.
The physical proximity of a strong financial sector helps partially explain why after 1590 Amsterdam also became a center for the low-volume, high-value "rich trades" (i.e. commodities like spices
Spice trade
Civilizations of Asia were involved in spice trade from the ancient times, and the Greco-Roman world soon followed by trading along the Incense route and the Roman-India routes...
, silk
Silk Road
The Silk Road or Silk Route refers to a historical network of interlinking trade routes across the Afro-Eurasian landmass that connected East, South, and Western Asia with the Mediterranean and European world, as well as parts of North and East Africa...
, and high-quality textiles). In such trade the Dutch low shipping rates did not necessarily provide a competitive advantage. What did attract the specialists in this type of trade (apart from the favorable financing possibilities) was the influx of skilled worker
Skilled worker
A skilled worker is any worker who has some special skill, knowledge, or ability in their work. A skilled worker may have attended a college, university or technical school. Or, a skilled worker may have learned their skills on the job...
s and entrepreneurs from the Southern Netherlands in the 1580s that helped transfer the sophisticated Flemish textile industry to the Republic. This gave her an industrial base for her export trade. The "rich trades" were also stimulated by government intervention, as they were by nature (because of the price-inelasticity of their demand
Price elasticity of demand
Price elasticity of demand is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price...
) prone to large price fluctuations (as a little over-supply would bring about a large fall in prices). The readiness of the Dutch government to regulate markets and to provide legal monopolies
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
to chartered companies like the Dutch East India Company
Dutch East India Company
The Dutch East India Company was a chartered company established in 1602, when the States-General of the Netherlands granted it a 21-year monopoly to carry out colonial activities in Asia...
(VOC) helped to lessen the risk of investment in such enterprises.
All these factors conspired to concentrate trade at entrepôts (in view of their trade advantages as described above) and in particular at the Amsterdam entrepôt (once Antwerp had been eliminated as a competitor) because of the time-window (1590-1620) in which they came to exert their influence. The rise of the Amsterdam entrepôt therefore to some extent was also a matter of being in the right place at the right time. But once the entrepôt had been established, its growth-promoting peculiarities helped Amsterdam (and the port cities in the maritime zone of the Netherlands, interlinked to Amsterdam by the area's inland waterways) achieve its position of economic pre-eminence.
Eventually, this pre-eminence would be undermined by technological and economic changes that would eliminate the advantages of the entrepôt and promote disintermediation
Disintermediation
In economics, disintermediation is the removal of intermediaries in a supply chain: "cutting out the middleman". Instead of going through traditional distribution channels, which had some type of intermediate , companies may now deal with every customer directly, for example via the Internet...
. However, these developments would only occur in the 18th century. During the 17th century the need for intermediation in commodities and financial markets still reigned supreme. The Amsterdam entrepôt provided great advantages to European consumers and producers (inherent in its operation) and to the merchants that used it. However, there also were losers in the process. Competitors, like the Hanseatic
Hanseatic League
The Hanseatic League was an economic alliance of trading cities and their merchant guilds that dominated trade along the coast of Northern Europe...
and English merchants lost appreciable market share
Market share
Market share is the percentage of a market accounted for by a specific entity. In a survey of nearly 200 senior marketing managers, 67 percent responded that they found the "dollar market share" metric very useful, while 61% found "unit market share" very useful.Marketers need to be able to...
and hence income, especially after the trade embargoes
Embargo
An embargo is the partial or complete prohibition of commerce and trade with a particular country, in order to isolate it. Embargoes are considered strong diplomatic measures imposed in an effort, by the imposing country, to elicit a given national-interest result from the country on which it is...
imposed by Spain on Dutch commerce during the Eighty Years' War had been lifted. The resurgence of Dutch trade on Spain and Portugal and other Mediterranean countries after 1647 overwhelmed the Republic's competitors.
To remedy this situation at first England, and later France, took to coercion in the form of economic and military warfare. The English Navigation Acts
Navigation Acts
The English Navigation Acts were a series of laws that restricted the use of foreign shipping for trade between England and its colonies, a process which had started in 1651. Their goal was to force colonial development into lines favorable to England, and stop direct colonial trade with the...
of 1651 and 1660-1663 restricted free trade in an attempt to divert trade to a putative London entrepôt. However, as the Acts only regulated English and colonial trade (and imperfectly so) and England only managed to dominate a few commodities markets for which it formed the main customer, these attempts were never successful. England would only achieve primacy in world trade after other factors had undermined the Dutch entrepôt. French protectionism was more successful, eventually, because the French and Dutch economies were complementary (not competitive, like the Dutch and English economies). Restricting trade between France and the Republic therefore resulted in the roll-back of the specialization that Comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...
had engendered in both economies (though at great cost to the French consumer also) and helped throttle the once-flourishing Dutch industries.
During the 18th century this combination of adverse economic and technological developments (promoting disintermediation) and foreign protectionism led to a relative decline of Dutch pre-eminence in world trade and of the Amsterdam entrepôt. It also led to a fundamental restructuring of the Dutch economy, with a large degree of deindustrialization
Deindustrialization
Deindustrialization is a process of social and economic change caused by the removal or reduction of industrial capacity or activity in a country or region, especially heavy industry or manufacturing industry. It is an opposite of industrialization.- Multiple interpretations :There are multiple...
and a shift to services industries, like merchant banking, together with foreign direct investment
Foreign direct investment
Foreign direct investment or foreign investment refers to the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor.. It is the sum of equity capital,other long-term capital, and short-term capital as shown in...
in emerging economies, like the Great Britain of the Industrial Revolution
Industrial Revolution
The Industrial Revolution was a period from the 18th to the 19th century where major changes in agriculture, manufacturing, mining, transportation, and technology had a profound effect on the social, economic and cultural conditions of the times...
. By that time there was no longer a role for entrepôts in world trade.