January 12, 2006

January 12, 2006 | WebMemo on Trade, Economic Freedom

Free Trade with Switzerland: Time for Action

Switzerland is on the shortlist of countries the United States is currently considering to begin formal free trade negotiations with. From watches to cheese, Switzerland exports a variety of goods, and the Swiss market offers abundant new prospects for American farmers and businesses. Now is the time for the U.S. and Switzerland to seize the opportunity and begin formal trade negotiations.

 

The Case for an Agreement

Recent setbacks in World Trade Organization (WTO) negotiations reflect how difficult it can be to reduce trade barriers through multilateral negotiations. Outside of multilateral trade forums, there is another way for Americans to benefit from more open trade with other countries: bilateral free trade agreements (FTAs).

 

The potential gains from a U.S.-Switzerland FTA are significant. The Index of Economic Freedom,[1] published annually by The Heritage Foundation and The Wall Street Journal, shows that countries with freer trade policies enjoy higher per capita GDP growth than countries that maintain trade barriers.

 

In 2004, total merchandise trade between the U.S. and Switzerland amounted to almost $21 billion, making Switzerland the 18th largest market for U.S. goods exports. In the same year, trade in services between the two countries was worth more than $17 billion, and Switzerland was the eighth largest market for U.S. service exports.[2]

 

The investment relationship between the U.S. and Switzerland is even stronger. In 2004, Swiss investors were the seventh largest source of foreign direct investment (FDI) in the United States, with over $122 billion in the U.S. economy; U.S. FDI in Switzerland exceeded $100 billion.[3] Hundreds of Swiss firms operate within the United States, providing jobs to thousands of American workers. As well, hundreds of U.S. companies have chosen to locate their European headquarters in Switzerland.

 

In sum, the U.S.-Swiss economic relationship is strong and dynamic. Trade and investment flows between the countries are relatively free. Labor and environment standards are comparable between the two countries. The economies of both nations are mature and wealthy and based on market principles and the rule of law.

 

Despite all this, additional economic benefit would result from the U.S. and Switzerland entering into a free trade agreement. While the U.S. and Switzerland do enjoy an economic relationship bolstered by generally low average tariffs across most traded goods and services, tariff and non-tariff barriers to trade in agriculture, certain manufactured goods, and services abound on both sides. Reducing these protections against bilateral trade would benefit consumers and producers by expanding opportunity and promoting growth in both economies.

 

Agriculture: Switzerland has one of the most protected agriculture sectors in the world. A combination of tariffs, tariff rate quotas, subsidies, safeguards, and regulations reduce market access for many important U.S. farm exports, such as wheat, corn, and soybeans. While the U.S. agriculture sector is more open than Switzerland's, certain areas are highly protected. Swiss exports of chocolates, cheeses, and other food products face significant tariff, tariff rate quota, and regulatory barriers.

 

Manufactured Goods:In 2004, the World Bank reported that the weighted average tariff rate was 1.5 percent in Switzerland and 1.8 percent in the U.S.[4] The bulk of Switzerland's manufactures exports face low U.S. rates; however, high U.S. tariffs do apply to Swiss exports of timepieces, chemicals, pharmaceuticals, optical, and medical devices. Similarly, U.S. auto parts, chemicals, plastics, electrical and scientific equipment industries face high, trade-reducing duties in the Swiss market.

 

Services:Like bilateral trade in goods, U.S.-Swiss trade in services is relatively free. However, as a result of regulations in both economies, the potential for additional liberalization exists in finding ways to open the insurance, telecommunications, and financial securities sectors.

 

In both countries, foreign ownership restrictions, tax discrimination, work visas, government procurement, licensing, standards, labeling, and other regulations function as non-tariff barriers to trade. While many of these issues are best resolved through the WTO, progress could be made in a U.S.-Swiss FTA.

 

Movement on these issues, coupled with the elimination of tariffs, would bring real gains to consumers and firms in the U.S. and Switzerland. According to a recent study by the Institute for International Economics, the elimination of trade barriers would result in U.S. agriculture exports increasing by more than five times, or by $1.3 billion, and Swiss farm exports increasing by 50 percent. Overall, bilateral trade could expand by 20 to 100 percent, a gain of $3.4 to $17 billion per year.[5]

 

Initiating and successfully completing a bilateral trade agreement would also have diplomatic benefits. Transatlantic relations have been strained of late, which is good reason to work toward strengthening mutually beneficial economic and political relations. Switzerland, while not in the European Union, is in the geographic heart of Continental Europe. A free trade agreement with Switzerland could be a hub of goodwill in Europe.

 

Commence Negotiations Now

The United States and Switzerland enjoy the benefits of relatively free trade partnership. Today they stand poised to embark on negotiations to expand their trade relationship into one that further promotes growth and prosperity. The Bush Administration should approve the commencement of formal trade negotiations for a FTA with Switzerland and thereby promote both a stronger economy at home and stronger ties abroad.

 

Now is the time for action. In December 2005, the bipartisan congressional "Friends of Switzerland Caucus" wrote to United States Trade Representative Robert Portman urging the Administration to pursue trade negotiations with Switzerland. Other members of Congress have also sent letters. More Representatives and Senators should speak up to ensure that this opportunity to expand trade between the U.S. and Switzerland is not lost.

 

The American and Swiss peoples already have a strong and mutually beneficial relationship, economically and culturally. The U.S. and Swiss governments should negotiate a free trade pact that will cement this relationship and contribute to both countries' prosperity.

 

Daniella Markheim is Jay Van Andel Senior Analyst in Trade Policy in the Center for International Trade and Economics, and James E. Dean is Deputy Director of Government Relations, at The Heritage Foundation.



[1]Marc A Miles, Ph.D., Kim R. Holmes, Ph.D., and Mary Anastasia O'Grady, 2006 Index of Economic Freedom, The Heritage Foundation and The Wall Street Journal, 2006, at http://www.heritage.org/index.

[2] Bureau of Economic Analysis, "U.S. International Services: Cross-Border Trade 1986-2004, and Sales Through Affiliates, 1986-2003," January 10, 2006, at http://www.bea.gov/bea/di/1001serv/intlserv.htm.

[3] Bureau of Economic Analysis, "U.S. Direct Investment Abroad: Balance of Payments and Direct Investment Position Data," January 10, 2006, at http://www.bea.gov/bea/di/di1usdbal.htm.

[4]Marc A Miles, Ph.D., Kim R. Holmes, Ph.D., and Mary Anastasia O'Grady, 2006 Index of Economic Freedom, The Heritage Foundation and The Wall Street Journal, 2006, at http://www.heritage.org/index.

[5] Gary Clyde Hufbauer and Richard Baldwin, "The Shape of a Free Trade Agreement Between Switzerland and the United States," Institute for International Economics, September 2005, at http:// www.iie.com/publications/papers/hufbauer-swiss-us1.pdf.

About the Author

Daniella Markheim Jay Van Andel Senior Analyst in Trade Policy
Center for Trade and Economics (CTE)