Swiss Foreign Economic Policy: Key Challenges with a Focus on US Trade Protectionist Measures/Politica economica exterior suiza: desafios claves con un enfoque en las medidas comerciales proteccionistas de Estados Unidos.

• Author: Nell, Philippe G.

INTRODUCTION

During the past thirty years, Swiss foreign economic policy has been very successful to open up foreign markets. Actions at the multilateral level with other partners have led to the creation of the World Trade Organization (WTO) and its corollary agreements. Highly integrated with the European Union (EU) economy without being an EU Member State, Switzerland was able to negotiate a partial participation in the EU internal market. Additionally, free trade agreements have provided a level-playing field for Swiss exporters on third-country markets relative to their EU competitors and the opportunity to liberalize trade at a quicker pace than at the multilateral level. Bilateral agreements covering investment protection, the avoidance of double taxation and other economic areas have completed the picture. With the United States (US), a Joint Economic Commission, a Trade and Investment Cooperation Forum and an EFTA (1)-US trade dialogue have established a comprehensive framework to strengthen economic relations.

Switzerland should feel comfortable with its access to foreign markets based on reciprocal agreements. Since a decade, however, headwinds have raised significant challenges at the multilateral level with the WTO, at the bilateral level with the EU and more recently with free trade partners. If this was not enough, US protectionism and precautionary measures taken by the EU affect more and more Switzerland and the international climate. This article highlights key challenges of the Swiss foreign economic policy with a focus on US trade protectionist measures.

1. THE THREE PILLARS OF THE SWISS FOREIGN ECONOMIC POLICY UNDER STRESS

   As a small open economy, Switzerland highly depends on foreign markets. In 2017, exports and imports accounted respectively for as much as 43.4 percent and 38.9 percent of the gross domestic product (GDP). Swiss foreign economic policy relies on three major pillars, namely first the multilateral trading system, second a very close relationship with the EU and third a broad network of free trade and other economic agreements. In each pillar, Switzerland faces major difficulties to move forward.

   The World Trade Organization

   Member of the General Agreement on Tariffs and Trade (GATT) since 1966 and founding member of the WTO, Switzerland has benefited significantly from the progressive trade liberalization since the end of World War II. The GATT has opened a new era in trade by lowering tariffs from an average of almost 40 percent in 1947 to less than 4 percent today for industrialized countries. The WTO has strengthened the multilateral trading regime by enlarging its scope to services and intellectual property protection, integrating textiles and agriculture in the system, setting up rules in several areas such as sanitary and phytosanitary measures and technical barriers to trade as well as defensive trade instruments such as anti-dumping, safeguard and countervailing measures. Government procurement is also part of the WTO at a plurilateral level and an effective dispute settlement regime with an appeal mechanism has been established.

   Over the years, Switzerland has clearly favored liberalization and rules setting at the multilateral level because it has brought significant results applied by all WTO members. Furthermore, as the 19th world exporter of goods, Switzerland lacks leverage against bigger economic powers. This came out clearly during the past year as President D. Trump put a significant emphasis on bilateralism with a transactional approach. The US have been exercising pressure on partners to obtain concessions such as voluntary limitations of exports or a better access to their markets. Swiss interests are best defended at the multilateral level and will continue to be so in the future.

   However, the WTO faces presently very significant challenges. Ministers have recognized that a conclusion of the Doha Development round launched in 2001 is not feasible. Negotiations focus on specific areas where limited ambitions can be met. As a major result, an agreement on trade facilitation was concluded in 2015 and has come into force. It implies measures to ease administrative procedures at the border and requires adjustments mainly from developing countries, which may benefit from technical cooperation programs.

   The 2017 WTO Ministerial Conference in Buenos Aires gave only minor impulsions in some areas, such as fisheries subsidies; electronic commerce (ec); small economies; micro, small and medium-sized enterprises; and investment. For the first time in the history of the WTO, witnessing significant differences between Members, no ministerial declaration was approved at the end of the conference.

   Since then, no progress has been achieved to reform the Dispute Settlement Understanding and the vacancies at the WTO Appellate Body have not been filled. Provided that no new nomination takes place by the end of 2019, the appeal regime will become ineffective with only one judge remaining. Starting already under President G. W. Bush, the US has expressed concern on the overreach of the Appellate Body (2). The first blocking of the reappointment of a judge occurred under President B. Obama. The US position has been further emphasized under President D. Trump with strong criticism against the functioning of the dispute settlement regime and the implications of its interpretation of WTO law for domestic law. The US has however not tabled any concrete proposals to reform the system and suggestions from other members have not gained sufficient support.

   Despite this difficult situation, Switzerland remains committed to the WTO. Its rules represent the bedrock of international trade law. Multilateral provisions are regularly referred to and upgraded in free trade agreements. The present role of the WTO is foremost to offer a unique multilateral negotiation framework; to act as a guardian of the WTO agreements; to settle disputes; to monitor notifications and trade-restrictive policy measures, as well as to provide technical cooperation to developing and least developed countries.

   The relations with the European Union

   Since the 1960s, the EU has accounted for more than half of Swiss exports and about three quarters of Swiss imports. Swiss economic growth has therefore, and still, strongly depended on a barrier-free access to the EU. As the EU integration process moved decisively forward with the realization of the four freedoms (free movement of goods, services, persons and capital), Switzerland looked for a closer relationship to maintain the competitive level of its firms on the EU market.

   In 1989, the EU offered Switzerland and its EFTA partners (3) a full access to its internal market subject to take over all its economic legislation. A very comprehensive agreement--the European Economic Area Agreement (EEA)--was negotiated, signed and adopted by the Swiss Parliament, but subsequently turned down in a popular vote on December 6, 1992 (Nell, 2012). Major reasons for this refusal were the adoption of an institutional regime recognized as unsatisfactory by the Federal Council with inter alia a limited participation in the decision process regarding new EU rules, the submission to the EU Court of Justice for the interpretation of the law and the taking over of a significant amount of EU legislation; in addition, concerns about job losses through the free movement of persons were expressed. The fear of setting the stage for a future EU accession was also a very sensitive and debated issue as Switzerland had applied for membership on May 22, 1992. In the aftermath of the vote, based on key EU elements--free movement of persons, agriculture, road transport--and Swiss interests--air transport, technical barriers to trade, government procurement, research--a package limited to seven agreements was negotiated (1994-98), signed (1999), and adopted by the Swiss population (2000). These agreements came into force in 2002, after ratification by all EU Member State Parliaments.

   Ten years of integration had been lost as Switzerland registered one of the lowest GDP growth among OECD countries in the 1990s. Nine agreements were added in 2004 covering inter alia Swiss participation in the Schengen (4) and Dublin (5) regimes, taxation of savings, processed agricultural products and Erasmus (6). The EU had supported the lengthy and difficult negotiation process because its members were keen to register progress, in particular, on free movement of persons by abolishing a Swiss regime for seasonal workers, on road transport by adapting the minimum weight of lorries in Switzerland to the EU level, and on taxation of savings by closing loopholes on tax fraud by EU citizens keeping undeclared banking accounts in Switzerland.

   The Swiss economy supported vigorously these agreements. The advantages were deemed important. For instance, in a permanent lack of skilled labor, firms could finally draw on a very large pool of workers and were no longer limited by quantitative restrictions. Immigration from the EU grew much faster than forecasted and companies could expand their activities. Products could be tested technically according to EU or Swiss standards in Switzerland and then sold in all EU member states without any additional controls. Swiss firms got access to EU cities and utilities for government procurement.

   Swiss airlines obtained almost full access to the EU, increasing thereby their competitiveness as well as the attractiveness of Swiss airports as hubs. On agriculture, free trade for cheese was introduced: Switzerland agreed to face EU competition on its home market in order to get free access to the EU. With Schengen, controls for people at Swiss borders were abolished and moved into the country based on police cooperation, security was enhanced and the tourism sector benefited from the Schengen visa. For research, Swiss universities and research institutes took a very active...