Switzerland: May 1996
Since 1993, Switzerland has acted on various policy fronts - specified in the context of a "revitalization programme" and its recent implementation of the Uruguay Round agreements - to enhance competition, shed internal barriers to factor mobility and trade, and reformulate policies in such protected areas as agriculture and services.
Economic reform in Switzerland spurred on by Uruguay Round results and stronger european competition
Since 1993, Switzerland has acted on various policy fronts - specified in the context of a "revitalization programme" and its recent implementation of the Uruguay Round agreements - to enhance competition, shed internal barriers to factor mobility and trade, and reformulate policies in such protected areas as agriculture and services. According to a WTO Secretariat report on Switzerland's trade policies and practices, the "revitalization programme" was motivated mainly by the perceived need, after Swiss voters' rejected the European Economic Area (EEA), to keep pace with European regulatory developments. Reforms are being implemented at a time of sluggish growth and relatively high and persistent unemployment, with strong currency appreciation exacerbating structural tensions in the Swiss economy. While finance and innovative manufacturing industries, including pharmaceuticals and advanced electronics, are performing well, many traditional industries and tourism are experiencing strong adjustment pressures.
According to the Secretariat's report, Switzerland's economic momentum has suffered from a legacy of weak anti-cartel legislation, tight national standards, certain investment restrictions, and a lack of internal market integration. Reflecting both "private" or "informal" access barriers and high levels of farm protection, retail prices for many goods and services compare unfavourably with neighbouring countries. In turn, a sheltered domestic sector, including many infrastructural services, has hindered the economy's overall performance and compromised the benefits of a generally liberal trade régime for manufactures. (Switzerland does not use quantitative restrictions, anti-dumping, countervailing or safeguard measures.)
Recent reform efforts have not spared agriculture, which has traditionally been subject to highly interventionist policies for production, income and environmental objectives. As a first step in 1992, the Government announced a gradual shift in farm support from price intervention towards direct payments. The report states that the new policy gained momentum in the wake of the Uruguay Round and is to be strengthened through the "Agricultural Policy 2002" initiative, released for political consultation in October 1995. The initiative seeks to abolish exclusive marketing channels, guaranteed producer prices and production quotas, and to condition public support on ecological criteria. With a view to promoting production, however, the authorities have earmarked sectors such as cereals, potatoes, sugar and oilseeds for high continued levels of assistance.
Among services sectors, the report considers air transport as particularly affected by Switzerland's non-participation in the EEA. Without EEA carrier status, Swissair cannot gain cabotage rights and remains restricted in its route strategies in the larger European market. Swissair's economic problems contrast with the performance of banking and insurance, where employment grew by over 10 per cent between 1989 and 1994. According to the report, Swiss-based banks rely on international markets for about a third of their assets and liabilities. Given the concentration of their foreign activities on investment banking and portfolio management, rather than on relatively unprofitable retail banking, non-participation in the EEA has not seriously affected their market position in the European Union. Under the General Agreement on Trade in Services (GATS), Switzerland has bound commercial presence, consumption abroad and cross-border supply for a full range of banking and investment services, but has not included cross-border supply of insurance.
Parts of the telecommunications services market have been opened since the late 1980s and liberalization of all services, including voice telephony, and of the basic network is scheduled for 1998. While PTT Telecom will be required to operate under commercial conditions, the report notes that it is currently aiming for strategic acquisitions to develop its market position. Cross-subsidization is prohibited between open and monopoly activities but, according to the report, may prove difficult to prevent in practice.
Although legislation in many trade-related areas has been aligned with international, in particular EU rules and principles, the report identifies regulatory problems preventing full market integration. A case in point are attempts by Swiss importers to invoke intellectual property provisions with a view to shielding exclusive arrangements from "unauthorized" supplies. It is now for Switzerland's Federal Court to clarify the scope of trademark legislation in these instances. While the Government is prepared, in principle, to conclude reciprocal agreements with trading partners to remove intellectual property-related barriers, autonomous legislative changes are apparently not envisaged. According to the Secretariat report, market segmentation may be compounded by sales boycotts of foreign-based dealers vis-à-vis Swiss residents.See footnote 1
The WTO Secretariat concludes that the Uruguay Round implementation programme, complemented by intensified competition within Europe, will help to advance economic liberalization and deregulation. Building on the Uruguay Round results, Switzerland supports an ambitious work programme for the WTO, including further negotiations in areas such as trade-related aspects of intellectual property rights, the trade effects of industrial, environmental and social policies and competition rules. While this programme may, to some extent, be inspired by Switzerland's non-participation in the EEA, it also reflects the genuine concern of a medium-sized trading nation, with advantages in services and modern manufacturing, to develop policies and conduct its trade in a transparent, non-confrontational multilateral setting.
Notes to Editors:
The WTO Secretariat's report, together with a report prepared by Switzerland, will be discussed by the WTO Trade Policy Review Body (TPRB) on 28 and 29 May 1996. The WTO's TPRB conducts a collective evaluation of the full range of trade policies and practices of each WTO member at regular periodic intervals and monitors significant trends and developments which may have an impact on the global trading system.
Two reports, together with a report of the TPRB's discussion and of the Chairman's summing up, will be published in due course as the complete Trade Policy Review of Switzerland and will be available from the WTO Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.
The reports cover development of all aspects of Switzerland's trade policies, including domestic laws and regulations, the institutional framework, trade policies by measure and by sector. Since the WTO came into force, the "new areas" of services trade and trade-related aspects of intellectual property rights are also covered. Attached are the summary observations from the Secretariat and government reports. Full reports will be available for journalists from the WTO Secretariat on request.
Since December 1989, the following reports have been completed: Argentina (1992), Australia (1989 & 1994), Austria (1992), Bangladesh (1992), Bolivia (1993), Brazil (1992), Cameroon (1995), Canada (1990, 1992 & 1994), Chile (1991), Colombia (1990), Costa Rica (1995), Côte d'Ivoire (1995), Czech Republic (1996), Dominican Republic (1996), Egypt (1992), the European Communities (1991, 1993 & 1995), Finland (1992), Ghana (1992), Hong Kong (1990 & 1994), Hungary (1991), Iceland (1994), India (1993), Indonesia (1991 and 1994), Israel (1994), Japan (1990, 1992 and 1995), Kenya (1993), Korea, Rep. of (1992), Macau (1994), Malaysia (1993), Mauritius (1995), Mexico (1993), Morocco (1989 & 1996), New Zealand (1990), Nigeria (1991), Norway (1991), Pakistan (1995), Peru (1994), the Philippines (1993), Poland (1993), Romania (1992), Senegal (1994), Singapore (1992), Slovak Republic (1995), South Africa (1993), Sri Lanka (1995), Sweden (1990 & 1994), Switzerland (1991), Thailand (1991 & 1995), Tunisia (1994), Turkey (1994), the United States (1989, 1992 & 1994), Uganda (1995), Uruguay (1992), Venezuela (1996) and Zimbabwe (1994).
The Secretariats report: summary
TRADE POLICY REVIEW BODY:
Report by the Secretariat Summary Observations
The Economic Environment
Since the initial Trade Policy Review of Switzerland in 1991, the economy has undergone a severe recession, putting an abrupt end to eight years of continuous economic growth. While expansion resumed in 1993 and 1994, the economy was stagnant in 1995, and zero growth is expected in 1996. Unemployment has risen to over 4 per cent, unprecedented in recent decades, and shows few signs of declining.
Strong currency appreciation, at some 11 per cent in real terms between 1993 and 1995, has slowed the recovery process and exacerbated structural tensions in the Swiss economy. While finance and innovative manufacturing industries such as some chemicals and advanced electronics have performed well, traditional manufacturing sectors and tourism have shrunk. The expanding share of services in production and employment reflects a trend, across and within branches, to focus on headquarters and related functions and relocate many manufacturing activities abroad.
Merchandise exports remain concentrated in a few sectors, particularly machinery, instruments, watches, chemicals and medicinal products. Exports of commercial services amounted to some US$20 billion in 1994, one quarter originating in the financial sector. With recession, Switzerland's trade balance swung into surplus, although merchandise exports grew slowly, at 4 per cent in real terms between 1993 and 1995.
International Economic Integration
The Swiss economy is highly internationally integrated, capitalizing on an open trade régime for industrial products. Tariffs on manufactures are generally low, and there are no quantitative restrictions, anti-dumping, countervailing or safeguard actions.
Preferential suppliers, in particular the European Union and central and eastern European countries, have recently gained ground in the import market. Trade under the 1972 free-trade agreement with the EU currently represents some four fifths of merchandise imports and two thirds of exports. Within EFTA, Switzerland has since 1991 concluded twelve preferential agreements with central and eastern European and Mediterranean countries to ensure access conditions similar to those available to the European Union.
Despite liberal access conditions, Switzerland remains a high-price country. Many retail prices compare unfavourably with neighbouring markets, reflecting strong farm protection and weak internal competition for a range of goods and services. Market entry has long suffered from "private" or "informal" barriers which can be attributed to a legacy of weak anti-cartel legislation, specific and protective technical regulations, certain investment restrictions, and exclusivity rights under intellectual property legislation.
Trade Policy Trends
Since the early 1990s, Switzerland's trade policy environment has changed rapidly. The process of European integration has intensified, and the Uruguay Round has offered major opportunities for further multilateral liberalization. The rejection of the European Economic Area (EEA) by referendum in 1992 increased the importance of the Uruguay Round, prompted a reconsideration of the country's European links, and inspired an autonomous programme of economic reform (the "revitalization programme").
Participation in the EEA would have resulted in Switzerland's immediate adoption of EU legislation on services, technical regulations, government procurement and competition. This would have helped to harmonize standards and eliminate cartel-related access barriers and, in addition, ensured free circulation of EEA-originating goods, services and persons between Switzerland and other members. Questions of bilateral market integration, extending to areas such as technical regulations, ground and air transport and movement of persons, have since been addressed in negotiations with the EU. They are considered to form a single package and had not been concluded at the time of this report.
The revitalization programme, adopted in 1993, aims to remove distortions in the incentive system, eliminate regulatory barriers to trade, improve internal factor mobility and inject more competition in previously protected markets. The main elements are:
- a thorough overhaul of competition policy which, under a new Competition Law from mid-1996, is to gain significantly in strength and coverage;
- removal of standards-related barriers and harmonization of domestic with international requirements under the 1995 Law on Technical Barriers to Trade;
- further integration of domestic product and factor markets under the new Law on the Internal Market, which entitles Swiss residents and Swiss-based companies to offer goods, services and their labour in any canton or commune;
- improved access to public procurement markets following the adoption of the Federal Law on Government Procurement and the ratification of an Intercantonal Concordat, based on the provisions of the WTO Agreement on Government Procurement; and
- the introduction of value-added tax, which has removed an implicit premium on vertical business integration and a bias against exports.
Further measures building on the revitalization programme and aimed at eliminating, curtailing or streamlining monopolies are planned in areas such as agricultural marketing, telecommunications and postal services, electricity and railways.
While these reforms should, in time, remove many traditional obstacles to factor mobility and trade, other restrictions remain, including limitations on foreign access to Swiss land and labour markets. Such limitations, originally designed to protect employment or the country's identity, continue to undermine the resilience of factor markets and inhibit the economy's flexibility to adjust.
In the absence of a ruling by the Federal Court, it is not clear whether Switzerland's trademark legislation, revised in 1992, can be used to exclude parallel imports. While the Federal Council has indicated the possibility of concluding reciprocal agreements with trading partners to remove intellectual property-related trade barriers, autonomous changes to achieve the same end are apparently not envisaged. Market segmentation may be compounded by private trade restrictions designed to underpin high import prices. Some evidence of this has recently emerged from a prohibition by an EU-based car manufacturer on its dealers in Italy to sell to Swiss residents, following the removal of regulatory import barriers by Switzerland. Swiss competition law provides little scope for remedial action in such cases, and no effective international mechanism for redress exists.
Sectoral Policy Developments
Agriculture and food processing
Switzerland has long operated a variety of highly interventionist agricultural policy schemes with production, income and environmental objectives. However, since the early 1990s pressures for reform have grown as negotiating requirements in the Uruguay Round coincided with internal economic and ecological constraints.
As a first step, in 1992, the Government announced a gradual shift in farm support from price intervention towards direct payments. The new policy gained momentum through the Uruguay Round implementing legislation and is to be strengthened through the "Agricultural Policy 2002" initiative, released for political consultation in October 1995. This seeks to abolish exclusive marketing channels, guaranteed producer prices and production quotas, and to condition State support on ecological criteria. However, the authorities see a continuing need to promote production in sectors such as cereals, potatoes, sugar and oilseeds with high levels of assistance. Recent estimates suggest that full income compensation for WTO-related reforms (including tariffication) could lead to an increase in federal outlays of between 17 and 24 per cent over their 1993 level.
The conversion of non-tariff import restrictions into tariffs has increased transparency, but is unlikely to translate into brisk expansion of trade. The average ad valorem equivalent of Switzerland's farm tariffs, capturing both in-quota and out-of-quota supplies, was estimated at over 80 per cent in 1995. Import entitlements under tariff quotas are awarded under various mechanisms, including the traders' past imports, an auction procedure, a first-come-first-served approach, and pro rata allocation. Under the "prise en charge" system, quota access is contingent on the purchase of domestic output.
The chemical sector has been the strongest performer in recent years, relying mainly on pharmaceuticals, with real growth of over one third between 1990 and 1994. Swiss firms have also shown strength in specialized areas such as precision engineering, clocks and watches, contrasting with strong adjustment pressures in heavy engineering, clothing and electrical equipment. These trends, although accentuated by currency appreciation, reflect moves in comparative advantage towards education- and skills-related production and away from traditional capital-intensive activities. As in the past, structural change in Switzerland is essentially market-driven, without significant policy intervention.
Current efforts to establish pan-European rules of origin, covering the EEA, Switzerland and central and eastern European countries, may facilitate greater outsourcing and ease pressures on clothing and other "sensitive" industries.
Air transport is among the industries mostly affected by Switzerland's non-participation in the EEA. Without EEA carrier status, Swissair cannot gain cabotage rights and remains restricted in its route strategies in the larger European market. In turn, higher travel costs and fewer connections than among EEA members have an adverse impact on the sector.
Profitability problems in aviation contrast with the performance of banking and insurance, where employment grew by over 10 per cent between 1989 and 1994. Swiss-based banks rely on international markets for about a third of their assets and liabilities. Given the concentration of their foreign activities on investment banking and portfolio management, rather than on relatively unprofitable retail banking, non-participation in the EEA has not seriously affected their market position in the EU. Under the General Agreement on Trade in Services, Switzerland has bound commercial presence, consumption abroad and cross-border supply for a full range of banking and investment services, but has not bound cross-border supply of insurance.
Parts of the Swiss telecommunications services market have been opened since the late 1980s; and liberalization of all services, including voice telephony and the basic network, is scheduled for 1998. Mainly for constitutional reasons, the Confederation is to retain a majority share in PTT Telecom which, however, is required to operate under commercial conditions. In anticipation of the new environment, PTT is currently seeking to develop or expand strategic positions through acquisitions. Cross-subsidization is prohibited between open and monopoly activities, but this may prove difficult to prevent.
Trade Policies and Foreign Trading Partners
Switzerland's support for the multilateral trading system is rooted in its tradition of independence. Thus, although the greatest part of its merchandise trade is with one preferential partner, the European Union, the country has played a significant, autonomous rôle in the WTO and the development of the Uruguay Round Agreements. Swiss trade policies have not given rise to GATT/WTO dispute settlement cases for many years, and Switzerland's WTO implementing legislation was not challenged domestically by referendum, despite its impact on agriculture and the lack of immediate employment alternatives in a faltering economy.
The Uruguay Round implementation programme, complemented by intensified competition within Europe, will help to advance economic liberalization and deregulation. Building on the Uruguay Round results, Switzerland supports an ambitious work programme for the WTO, including further negotiations in areas such as trade-related aspects of intellectual property rights; the trade effects of industrial, environmental and social policies; and competition rules. While this programme may, to some extent, be inspired by Switzerland's non-participation in the EEA, it also reflects the genuine concern of a medium-sized trading nation, with advantages in services and modern manufacturing, to develop policies and conduct its trade in a transparent, non-confrontational multilateral setting. Back to top
Footnote: 1For example, a German car manufacturer was reported recently to have prohibited its Italian dealers from selling to both Swiss and Austrian residents who sought to benefit from lower sales prices in Italy. While the European Commission has launched an investigation into the sales ban involving Austria, covered by EC competition law, no such initiative appears possible in the case of Switzerland. In contrast, while Swiss competition law extends in principle to all practices affecting domestic markets, regardless of the place of implementation, enforcement could pose problems. Effective international mechanisms for redress do not exist.