This article from Alexandre Fasel, the Ambassador of Switzerland to the United Kingdom, was originally published in the Spring 2019 edition of World Trade Matters.
Introduction
Switzerland’s economic growth and wealth are based on international trade. Trade in goods and services represents more than 90% of our country’s GDP (the world average is around 55%). Exposed to international competition, Swiss companies are forced to be competitive and innovative, which in turn has a positive impact on wages. The economy builds on broad international market access, a strong, transparent and inclusive rules-based multilateral trading system and an economic framework that allows companies to adapt to a changing environment. However, these key ingredients of success are challenged by increased protectionism and growing doubt as to the benefits of liberalized global trade.
Switzerland’s foreign economic strategy
Switzerland’s foreign economic strategy rests on three pillars:
(i) bilateral agreements with the European Union (EU);
(ii) the multilateral trading system - in particular the World Trade Organization (WTO); and
(iii) free trade agreements (FTA) with third countries.
Access to the European Single Market is of utmost importance for the Swiss economy. Trade in goods between Switzerland and the EU amounts to over one billion euro per working day. Switzerland is the EU’s third biggest trading partner, only surpassed by the US and China. Switzerland furthermore shares the fundamental values of the EU and contributes to stability and development in Europe and in the European neighbourhood. The very close Swiss-EU trading relationship is based on a network of around 120 bilateral agreements.
The second pillar of Switzerland’s foreign economic policy is the multilateral trading system. WTO rules are the basis of all Swiss trade relations and those of 163 other countries worldwide. They create a framework for predictable and secure market access and reduce discrimination between domestic and foreign producers. Without the WTO’s dispute settlement mechanism, the ‘law of the strongest’ would prevail and countries could quickly resort to protectionist measures in times of crisis.
The evolution of this set of rules, however, has become increasingly complex. Furthermore, the new US trade policy is putting the WTO system under strain. It is not without irony that the very country that has been most instrumental in creating this system is now the one that challenges its core features and principles. Switzerland for its part refuses to apply countermeasures, as this would only damage its economy and consumers due to higher import prices. Furthermore, we believe that such measures can easily contribute to an escalation into a damaging trade war.
Bilateral, regional or supra-regional FTAs - the third pillar of our foreign economic policy - are increasingly seen as a way to complement the multilateral trade liberalization efforts, which are currently facing difficulties. For Switzerland, FTAs provide its business operators with improved market access at conditions equivalent to those enjoyed by their most important competitors in the EU, US and Japan. Swiss consumers and producers also benefit thanks to higher economic growth and a greater variety of higher-quality goods and services at lower prices.
Over the past 25 years, Switzerland developed a broad network of FTAs, currently comprising 30 FTAs in force with 40 partners outside the EU or the European Free Trade Association (EFTA). In terms of value, these FTAs accounted for 23% of Switzerland's total exports in 2017. Including trade with the EU and EFTA, nearly 80% of Swiss exports and 90% of imports take place under FTAs.
Joint efforts in confronting trade skepticism and protectionism
World trade growth has created hundreds of millions of jobs worldwide. Nevertheless, fears about the effects of globalization and free trade have become widespread in recent years. The main driver of this development is technological progress and its effects on the labour market: whilst creating opportunities for the highly skilled, lower skilled workers can find themselves under pressure. When the negative impacts are concentrated in certain regions and sectors, it creates a breeding ground for populism, nationalism and protectionist tendencies.
To mitigate such risks, Switzerland focuses on a labour-market oriented education system, giving everyone the chance to benefit from the fruits of open trade, whilst providing an efficient social safety net. The Swiss government furthermore engages with civil society to inform on the benefits of trade and on the efforts it undertakes to alleviate the negative effects of trade liberalization. Businesses also have an important role in communicating the importance of international trade to their employees.
Conclusion
Switzerland is a successful global economic player thanks to its openness to the world. But open trade also needs to be complemented by domestic policy measures which help to smooth the adaptation costs of structural change. In the international arena, it is important to continue to stand up for the liberal trade order, to defend and preserve the WTO system as a bulwark against protectionism. The benefits of open trade and what we owe to it need to be actively communicated to the wider public. If we can achieve all this, Switzerland - as well as other open economies - will continue to compete successfully and offer all its residents a high level of prosperity.
Alexandre Fasel, Ambassador of Switzerland to the United Kingdom