Step 1: Understanding the Concept:
This question tests pronoun-antecedent agreement with collective nouns and proper nouns that appear plural, such as the names of countries.
Step 2: Detailed Explanation:
The antecedent is "the Netherlands," which is the name of a single country. When referring to a country as a single political entity, it should be treated as a singular noun. The original sentence uses the plural pronoun "they," which is incorrect.
We must use the singular pronoun "it" to refer to "the Netherlands." This eliminates options (A) and (B).
Between (C), (D), and (E), option (C) is the most direct and concise. Option (D) changes the voice to passive ("it was terminated"), which is weaker and less preferred. Option (E) is unnecessarily wordy. Therefore, "it terminated the agreement" is the best choice.
Step 3: Final Answer:
"The Netherlands" is a singular proper noun referring to one country, so it requires the singular pronoun "it."