Strengthening economic resilience in Switzerland through trade

By Erik Frohm

The COVID-19 pandemic and escalating conflicts, such as Russia’s war of aggression against Ukraine, have sent shockwaves through energy markets and global value chains. This has reinforced the imperative to foster economic resilience in many countries, while raising calls for self-reliance, more active industrial policies to benefit domestic industries and trade restrictions (Figure 1).

For Switzerland, a country deeply embedded in global markets, navigating these challenges is vital. Central to Switzerland’s success has been its steadfast commitment to openness, enabling the flow of goods and services, capital, people and ideas. Although trade may act as a conduit for adverse shocks, less integration into the global economy would not make Switzerland more resilient, as highlighted in the 2024 Economic Survey. Instead, stable and predictable trade and investment regimes reduce uncertainty and lower trade costs. This empowers companies to diversify and fortify their supply chains cost-effectively, as open trade makes markets “thicker”, by expanding the number of possible suppliers and buyers.

Figure 1. Global trade restrictions pose challenges for Switzerland’s open economy

Notes: For panel A, the chart denotes the global cumulative trade coverage of restrictions on goods estimated by the WTO Secretariat, based on information available in the TMDB on import measures recorded since 2009 and considered to have a trade-restrictive effect. The estimates include import measures for which HS (Harmonised Commodity Description and Coding System) codes were available. The figures do not include trade remedy measures.
Source: WTO November 2022 Report; Economic Outlook database; OECD International Direct Investment Statistics database.

According to the WTO’s Trade Cost Database, effective trade costs, representing all factors constraining international trade versus domestic activity, are lower in Switzerland than the OECD average in manufacturing and services, yet higher than in the four neighbouring countries (Austria, Germany, France and Italy), see Figure 2. Trade costs can be lowered in many ways. Tariff cuts, deeper or new free trade agreements (FTAs), improved at-the-border regulations and procedures, as well as investments in digital infrastructure all help. In this regard, Switzerland unilaterally abolished tariffs on industrial goods from January 2024. Similarly, the signing of an FTA with India in March 2024 together with the EFTA member states (Iceland, Lichtenstein and Norway) represents an important milestone. Yet barriers to trade remain high in agriculture and the services sector. Less direct support and more import competition would raise agriculture productivity and lower prices. Minimising barriers to services trade will increase the gains from digital transformation and boost competitiveness.

Figure 2. There is scope to reduce effective trade costs, in particular in services and agriculture

Notes: The effective trade costs are estimates of the costs involved with international trade relative to domestic activity. The figure shows trade cost estimates from the WTO, averaged across ISIC Rev. 4 sub-sectors in 2018. The trade costs are expressed as ad-valorem equivalents, in logarithms. Four neighbours refer to Austria, Germany, France and Italy. OECD is a simple average of OECD countries.
Source: WTO.

Most of Swiss exports and imports flow within FTAs. The usage rate is 73% for imports, which is higher than for the EU average yet lower than best performing countries. There are several reasons why companies may choose not to use the FTAs, depending on the products they trade and their preferential rules of origin. Complying with the rules may be difficult due to complex information requirements or involve large administrative costs. Reducing the administrative burden and providing centrallised, clearly structured and understandable information could increase the use of FTAs.

With the EU standing as Switzerland’s largest trading partner, the bilateral relationship is of paramount importance. The current partnership is governed by roughly 120 separate treaties, but faces uncertainties as efforts to reach a comprehensive “framework agreement” stalled since 2021. The Federal Council’s adoption of a new negotiating mandate with the EU in March 2024 is a welcome step, and opens the door to continued deep economic integration. An erosion of the Switzerland-EU partnership would raise uncertainty, be harmful for Switzerland’s external trade and competitiveness and undermine its economic resilience.

Addressing behind- and at-the-border regulations, as well as enhancing digital connectivity, are crucial steps to facilitating trade and limiting bottlenecks. While Switzerland outperforms the OECD average in several aspects of trade facilitation, there is further room for improvement, particularly in areas such as fees and charges, process automation, and external border agency cooperation (see Figure 3). Streamlining information availability and pre-arrival processing procedures for imports can significantly reduce the time and cost burden for businesses, particularly SMEs looking to expand internationally and diversify their supply chains.

As Switzerland charts its course through a changing global economic landscape, maintaining openness in trade and reducing regulatory burdens will be key to strengthening economic resilience. This approach can allow companies to improve the resilience of their supply chains, without unduly increased state influence or costly public support.

Figure 3. Improving trade facilitation measures would help reduce bottlenecks

OECD Trade Facilitation Indicators, from 0 to 2 (best performance), 2022

Source: OECD (2022), Trade Facilitation Indicators.