4. October 2019. Today, Switzerland is one of the most successful countries in the world. You won’t find many other countries where there is such widespread prosperity across the population as there is in Switzerland. This is also due to the country’s international trade with partner countries around the world.
Students of economics already learn how the exchange of goods and services across national borders is beneficial to both sides in their first term. The logic is essentially easy to understand. If every country lived in isolation from the rest of the world, prices for products would vary from country to country. For example, oranges in Italy or Spain would be cheap, and in Switzerland they would be a rare, expensive commodity. If you allow people to trade across borders, distributors can buy the products cheaply in one country and sell them at a higher price in another. This is lucrative not just for the distributors, but also means producers and consumers are better off in both countries.
However, it doesn’t mean that everyone in a country is better off as a result of free trade. Swiss producers of food, for example, would find it difficult to compete against foreign suppliers, which is why they often seek the protective hand of the state in the form of protectionist customs and import quotas. When politicians listen to their concerns, trade is restricted and potential gains in prosperity will not be realised.
Protectionism is increasing worldwide
In 2019, we have seen such motivated protectionism increasing worldwide. As the Global Trade Alert in St. Gallen regularly shows, the trade war between China and the USA is just the tip of the iceberg. However, as the 20th largest economy in the world, Switzerland has limited influence on the global trade policy. By and large, it has to deal with global trends it hasn’t decided on itself.
For a small, open economy, the rampant protectionism presents a particular challenge. Last year, Switzerland exported around 28,000 francs per capita. Swiss companies thus earn a lot of money abroad and Swiss consumers benefit extensively from goods produced abroad. If this trade is made more difficult by new trade barriers, jobs will be put at risk and consumers must brace themselves for reduced product choice at higher prices.
Free trade agreements are a central tool
However, the difficult international environment also provides opportunities. When new trade barriers are created, it is important that Switzerland not be affected by them. Free trade agreements are a key tool for this. While an agreement with the EU, China, Japan and also Korea is already in force, discussions and negotiations over another agreement with the USA - our second most important trading partner and with the South American Mercosur states (Brazil, Argentina, Uruguay, Paraguay), for example, are currently ongoing.
Around 85 percent of our foreign trade takes place with the twenty most important trading partners. The USA is the only country among them that Switzerland has not yet reached any agreement with. This is also where the greatest incentive exists, from an economic but also geopolitical point of view, to improve trade relations through an agreement. Due to high import duties, an agreement with Mercosur countries would also be of great interest to Switzerland. Negotiations with Russia and India are to be welcomed, as there is great potential for savings in customs duties in these countries as well.
What are the benefits for Swiss citizens?
But what benefits can Swiss citizens specifically realise beyond the pure symbolism of a free trade agreement? We need to analyse this in greater detail. In the past, I have examined the trade agreement with China in detail, in collaboration with colleagues at St. Gallen University. Based on this, I am currently investigating all the Swiss free trade agreements in a similar way together with Piotr Lukaszuk on behalf of the SECO.
In addition to various agreements regarding product standards, regulation and access to public tenders, it is the principal goal of free trade agreements to reduce reciprocal import duties. As a result, Swiss citizens obtain foreign products at lower prices. At the same time, market access for Swiss firms improves if, in contrast to foreign competitors, they don’t have to pay customs duties. Even if not every company and every industry benefits to the same extent, countries participating in the agreement stand to gain overall. This also applies to Switzerland because some companies deliberately produce in Switzerland rather than in their neighbouring EU countries if sufficient customs duties can be saved through trade agreements.
Maintain local conditions in Switzerland
For Switzerland, the protectionism raging around the world is both challenge and opportunity. The path that the country has taken for many years - to conclude free trade agreements with selected trading partners - is the right one. Over the coming years, Swiss policy is to maintain favourable conditions for its sites. If this can be achieved through further trade agreements and, more broadly, through a farsighted economic policy, Switzerland can also be successful - and in a more difficult global environment. The recent past has shown how successful the trade policy strategy has been, and provides a good basis for the future.
Stefan Legge has a doctorate in economics and is a lecturer at the Swiss Institute for International Economics and Applied Economic Research at St. Gallen University.