The American engine

The relationship between Switzerland and the USA has become so dynamic that it is beginning to eclipse the bilateral agreements in place with the EU. Now there's a chance of a free trade agreement.

"Bilateral relations are central and critical. They must be preserved and defended at all costs": you hear this message day in, day out from business associations, trade unions, federal agencies, politicians and NGOs who act as spokespersons for what we call civil society. The media's in on it, too. "Is there a risk of a new bilateral ice age on the horizon?" was a recent title used by the NZZ newspaper with regard to the procedural situation unfolding in relation to the EU framework agreement. But what does "bilateral" actually mean? In principle, is the world made up of two parts? Who is on the other side, the side that is facing Switzerland? Is this other side made up of the 28 countries of the EU, as the underlying assumption normally implies? Or rather, the soon-to-be 27 countries of the EU? 


A long-lasting boom 


The economic umbrella organisation Economiesuisse recently put it this way: "Around 55 percent of our exports are sent to the EU market, and Swiss companies, large and small, are integrated into the European domestic market. The situation should remain like this." Bilateral apparently means "us and the EU". However, this is merely a small slice of reality, which should remain like this. If you look at Switzerland's overseas economic relations, the EU accounts for a large part of trade and cross-border investment. Nevertheless, you could also say that it is the more jaded part. 


Over the past ten years, the European single market has lost importance for Switzerland, in relation to other trading areas. In 2007, exports from Switzerland to the EU amounted to CHF 128 billion, or 62 percent of total exports. By 2017, this had fallen to 53 percent and was slightly higher than this figure in the first nine months of 2018. Imports are similar, with shipments to Switzerland being higher than exports and somewhat more resilient. 


We export more to America than to France and Italy combined.


This means that Switzerland is more of a sales region for the EU, from a net perspective. 
If you take a step back, completely different, more powerful drivers come into view. You only have to look at the graphic on the left (page 38) to see this. The uptick in trade with China is no surprise: the long-lasting boom has carried numerous Swiss companies in its wake, causing a real stir. On the other hand, the element that deserves more attention is the near-unbelievable development of economic transactions between Switzerland and the USA. "This legendary development of trade and investment is probably one of the secrets that has been best kept from the Swiss public," says Martin Naville, CEO of the Swiss-American Chamber of Commerce. 


"America is still regarded as the bad guy who is pummelling Switzerland with blows in the dispute over banking secrecy and taxation, but now it’s time for people to concentrate on something else altogether." Naville took up his post as head of the Chamber of Commerce about fourteen years ago.
While trade between Switzerland and the EU hardly grew during this period and, as mentioned above, actually fell in proportion to other trade transactions, imports and exports between Switzerland and the USA almost doubled. In the first nine months of 2018, Swiss exports to the USA accounted for almost 17 percent of the total volume, compared with only 10 percent ten years ago. 


In this case, a strong export driver had indeed taken the reins of the economy, but the buzzword "America first" would be going a little too far: "America second" would be better. The data on imports and exports provided by the Federal Statistical Office, as displayed in the chart on the right (page 38), shows that the USA is the second largest sales region for domestic exporters. Overseas deliveries from this country in the first nine months of 2018 amounted to almost CHF 28 billion. At almost CHF 10 billion, imports were significantly lower. This means that Switzerland is also contributing somewhat to the USA's current account deficit, which Trump gets so riled up about. Germany is in first place. It is Switzerland's most important trade partner in terms of both exports and imports, which has been true since time immemorial. 


In the first nine months of 2017, our country imported goods from Germany to the tune of almost CHF 41 billion, while exports to the north amounted to a good CHF 34 billion. This includes all the back-and-forth deliveries of intermediate and semi-finished products that Swiss and German companies pass on to each other as if they were in the same country. What about our closest neighbours France and Italy? After all, we could play product ping-pong with them, too. Naville says: "When I started at the Chamber of Commerce, Switzerland exported as much to the USA as to Italy or France. The three countries were handling similar volumes. Today, we export more to America than to France and Italy combined. Or, in other words, twice as much as our total deliveries to BRICS countries." 

In both directions 


But wait: things go even further, beyond trade. The saying "America first" is not actually out of place. The Swiss have invested more in the USA than in any other country. Roche, Novartis, Nestlé and UBS are just the tip of the iceberg. And the Americans are the number one foreign investor in Switzerland, with Google, Microsoft and IBM attracting attention. The economic exchange between countries does not just take place in the form of imports and exports: it can also take place through the purchase of a company or shares in another country. 


Figuratively, two partners interlace their fingers when one partner buys companies or assets in the other partner's country. In 2016, Switzerland was the sixth largest foreign investor in the USA, and according to provisional figures, the 330 billion or so from 2017 is likely to put the country in xx place. Naville describes it as follows: "The striking thing about the relationship between Switzerland and the US is, firstly, that the flows of trade and investment are not asymmetrical – instead, they run in both directions. Secondly, that there is an enormous amount being transferred on both the trade axis and the investment axis. Swiss companies invest as much in the USA as German companies do." 


It is easy to forget that the USA is basically a huge domestic market with rather weak links to the outside world. Exports account for only XX percent of the gross domestic product, and imports YY percent. The import surplus has long been typical of the American economy, which repeatedly pushes money abroad so that it can exist and function in this way, for example, in the form of direct investments. Even though Switzerland is a comparatively small country, its investments in the USA are driving things forward. According to the Swiss embassy in the USA, these investments will probably involve about half a million jobs. Among the larger investors, the Swiss pay the highest wages on average, and spend the most on research and development. 


These two countries are always at the pinnacle of the innovation rankings, and this is where they come together. The USA's pharmaceutical companies are heavyweights in research and in terms of market positioning. Over the past twenty years, the USA has been the most profitable market for pharma companies. In contrast to the rest of the world, drug prices can largely be freely determined, and volumes are huge. It should also come as no surprise that the Swiss are also among the top foreign taxpayers in the USA. 


Relationships are the be-all and end-all


But wasn't there a problem with the banks? After all, the American state plagued Swiss banks with threats and fines and pulled about CHF 14 billion out of the industry, meaning that the commitment of the big banks to do business in the USA equated to a loss in the long term. Naville argues that the Swiss banks have not been treated harsher by the American government than domestic banks have, which were issued with far more fines. And if there were no money to be made in the USA, Swiss banks would not have been involved there for twenty years, with so many employees, he thinks. In his view, any company that wants to clothe itself as a global bank in Zurich must also have a presence in New York. 


"Whenever possible, I prefer taking the direct route into the US market," says Stephan Rietiker, "with the necessary investment precautions, naturally". Rietiker comes from Switzerland, but is also an American citizen and is licensed as a physician in Switzerland and the USA. He has held management positions in pharmaceutical enterprises and medical technology companies such as Roche, Boehringer Mannheim, Schering-Plough, Sulzer Medica and Lifewatch. A year ago, he published a book in which he explains the peculiarities of the American legal system and economic structures. 


How well are Swiss companies doing in the USA? Rietiker says: "If people work in the region in question and are familiar with the law there, above all with relation to legal and compliance matters, then you can earn a lot of money, in my opinion". He goes on to explain that, on the other hand, if you send a Swiss person to the USA who has never lived there before to set up a business, failure is practically inevitable. Of course, local subsidiaries need a certain amount of leadership from above, but an understanding of the flair of the region, relations with industry associations, politicians and lobbyists are necessary to make progress. 


What are the risks in terms of the relationship between Switzerland and the USA? Naville does not see any direct danger associated with the trade disputes, but indirect burdens that come via the EU or China could nevertheless put pressure on business. From Rietiker's point of view, Switzerland must now solve the problem of withholding tax, i.e. withholding tax on dividends. US companies are no longer reimbursed this tax by their government, meaning that they bear the burden twice. He has not yet found that US companies are moving out of Switzerland as a result, but politicians must not keep putting this problem on the back burner. Ensuring that US companies remain in Switzerland is more important than a few percentage points of tax.


It is also a good time to negotiate new arrangements with the USA. "You can definitely make deals with the current US administration: the odds are now better than ever," he adds. His impression, however, was that there wasn't the necessary drive for this course of action coming from Bern. Now's the time to "bite the bullet", not to wait and see what the EU does or how Brexit plays out, he thinks. Civil servants aren't the key to successful negotiations: instead, there is a need of business minds who "know how things tick over there", executives who are really at home in the USA but who are also familiar with the Swiss system. Of course, the US Ambassador in Bern, who is very friendly towards our country, should also be included in this, in his view. 


If, however, the Federal Administration were to say that their first priority was relations with Europe, this would appear to be rather unrealistic. "Priority must be given to establishing and developing trade relations with Asian countries and the USA, of course, while at the same time stabilising our relationship with the EU." Switzerland must now position itself so that it can reach a free trade agreement with the USA as quickly as possible, he says. According to all the information available to him, the USA is once again taking a sympathetic perspective to Switzerland. "You can work with Americans," he says, "different things make them tick when compared to the Swiss, but it is perfectly possible to collaborate with them".


Federal Council 
Mission Parmelin 

The new Minister of the Economy, Guy Parmelin, takes over the "Switzerland-US" brief.

Swiss media are reporting setbacks in the efforts to reach a free trade agreement between Switzerland and the USA. They allege that it put a real damper on the farewell visit of Federal Councillor Johann Schneider-Ammann (FDP) to Washington last week when the US Trade Representative Robert Lighthizer cancelled a planned meeting, with only his deputy showing up instead. Shortly afterwards, the second blow came when Guy Parmelin (SVP) took over the Department of Economic Affairs, and the Handelszeitung newspaper wrote in horror of this "winegrower from the subsidy-supported canton of Vaud", who is apparently in favour of the old economy and agricultural subsidies. 


On closer examination, the prospects for a free trade agreement are as good as, or even better than, they were two weeks ago. The meeting with Lighthizer didn't work out because President Trump, just back from the G20 meeting, had summoned his Trade Representative to the White House for an all-day session to discuss the China issue. The fact that Lighthizer's number two immediately stood in for a meeting illustrates the USA's interest in Switzerland.


In addition, Schneider-Ammann has raised expectations to an unrealistically high level. He wanted the USA to make a swift commitment to negotiations. It was clear to the observers involved that the talks had not got to that stage yet. Switzerland must do even more to convince the Americans of the advantages of an agreement with them. On the one hand, an agreement could increase the pressure on the EU to cede in the trade dispute with the USA, while on the other, Swiss companies would be able to invest even more in America and create jobs. 


The task of tightening up these arguments likely now lies with Minister of the Economy Parmelin. Contrary to what is said publicly, he is not against a free trade agreement with the USA. As a farmer, he also knows what farmers want, and can bring them on board at an early stage. It is said that the Americans are no longer insisting on the complete liberalisation of agricultural trade. Reducing dependence on trade with the EU would be in line with Parmelin's policy, which is a sizeable incentive to take the brief firmly in hand at this stage. Florian Schwab
 

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