The European Union and the United States are by far Switzerland’s most important trading partners. Switzerland is negotiating a Framework Agreement to simplify bilateral relations with the EU. And twelve years after talks with the U.S. on a free trade agreement failed, Switzerland and the U.S. are trying again. Thomas Borer, a former Swiss ambassador to Germany who founded his own consultancy in 2002, tells Swiss Trade why both sets of negotiations are critical to the future of Swiss exports.
Switzerland has over 120 bilateral treaties with the European Union, its biggest trading partner. Until now, these treaties have had to be negotiated individually after each change in EU law – a time-consuming, painstaking business. Since 2014, Switzerland has been negotiating a Framework Agreement with the EU to simplify this process with a system under which Switzerland would adapt automatically to EU rules.
The Framework Agreement would also provide a platform to solve bilateral disputes. The Swiss government has warned that breaking off negotiations on the Framework Agreement could mean that treaties with the EU are no longer updated, leading to legal vacuums and trade barriers.
“The Framework Agreement is necessary for Switzerland to be able to develop its relationship with the EU further, and the EU is demanding it,” Borer says. “If this framework doesn’t come together, then further developments in bilateral relations are blocked. The existing bilateral agreements don’t go far enough.”
Single Market Access
The EU argues that if a non-member wants to have access to its internal market, then that country must accept the rules of this market as well as an authority to rule on disputes. Pressure is increasing on Switzerland to conclude the Framework Agreement successfully by the end of the year. European Commission President Jean-Claude Juncker recently pointed out that he is in office only until November 2019 and that things “could be really bad” for Switzerland after his departure. Both the EU and Switzerland face elections next year that could shift the parameters for the talks.
“I would wish the Framework Agreement could be concluded now, because it is very important for the future of Switzerland,” says Borer. “I regret very much that the government doesn’t have the courage to communicate that to the Swiss people. A majority is in favour of it, but there are unfortunately fears from opponents on the right and the left.”
The Swiss government says the Framework Agreement will affect five treaties that secure Switzerland’s access to the EU market – the agreements on the free movement of people, on road and rail transport, on air transport, on technical trade barriers and on agriculture.
There is still a long list of unresolved issues. One major sticking-point in the negotiations has been how disputes will be resolved. Both sides have agreed on a court of arbitration with three people – a judge from Switzerland, a judge from the EU, and a third judge from a third, impartial country. In the case of a conflict on EU law, the arbitration court would rely on an evaluation by the European Court of Justice. The Swiss People’s Party has criticised this, seeing it as compromising Swiss sovereignty.
Labour unions are concerned that the government will use the Framework Agreement to try to ease rules guaranteeing EU workers Swiss wage and employment conditions in Switzerland (and thus protecting Swiss workers from foreign competition).
The Brexit negotiations are also weighing on the talks, Borer says. “The EU has shown itself to be very tough towards the U.K., and it can’t give big concessions to Switzerland because it knows that it would then have to make concessions to the U.K.,” he says. “So Switzerland is prisoner to the Brexit negotiations.”
On the other hand, Brexit is an opportunity for Switzerland, Borer says. After the U.K.’s departure from the EU, “we should act quickly to negotiate a free trade agreement with the U.K., because the U.K. will have more flexibility.”
Free Trade with the U.S.
Economics Minister Johann Schneider-Ammann announced in September that Switzerland is engaged in “intensive talks with the Americans” on a free trade agreement with the U.S., Switzerland’s biggest market after the European Union.
Switzerland has 30 bilateral trade agreements with 40 partners, including Norway, Iceland, Japan and, since 2014, with China. Schneider-Ammann, a former entrepreneur whose term in office has been characterised by “hyperactive trade diplomacy,” according to the Tages-Anzeiger newspaper, says free access to the U.S. without customs duties would be “very attractive” for the Swiss economy. After negotiations on the Transatlantic Trade and Investment Partnership between the EU and the U.S. came to an indefinite halt in 2016, Switzerland now has a chance to leap ahead and gain a competitive advantage for its companies.
“Given the context that free trade negotiations via the WTO have come to a standstill, it is imperative for Switzerland to negotiate more free trade agreements bilaterally, and the U.S. is one of our biggest trading partners,” Borer says.
In a July paper for the U.S. Heritage Foundation, a Conservative think-tank, Anthony Kim, Ambassador Terry Miller and Edwin J. Feulner also argued in favour of a free trade agreement with Switzerland, describing “a long history of dynamic economic partnership that has enhanced prosperity in both countries.” They predict that a bilateral free trade agreement between the two countries “would be a catalyst for advancing freedom to trade and invest as well as for promoting overall economic freedom in both countries.”
The Heritage Foundation urged the Trump administration to consider granting Switzerland tariff exemptions on steel and aluminium products. The U.S. ambassador to Switzerland, Edward McMullen, has also encouraged Switzerland to try again.
Talks failed in 2006 because of opposition from Swiss farmers.
“Agriculture accounts for less than one percent of the Swiss economy,” Borer says. “We can’t allow ourselves to miss out on free trade agreements because of agriculture.”
Both Schneider-Ammann and Doris Leuthard, another firm advocate of free trade agreements, have announced they plan to step down from the Swiss government at the end of this year. But Borer believes their departures won’t hinder progress towards a free trade agreement.
“All seven members of the government are behind the idea of making progress in bilateral trade agreements,” Borer says. “I think momentum won’t slow, even after two new members of the government are selected. First a proposal must be put forward at the administrative level and that will certainly take several months.”
On the U.S. side, there is interest from President Donald Trump, despite increasing protectionism in the U.S., Borer says.
“Trump’s argument is that he is in favour of free trade but that the current agreements are disadvantageous for the U.S.,” Borer says. “We have seen this with NAFTA – he bangs on the table, cancels the treaties, but then he does want to seal a deal that he can present as his victory. A free trade agreement with Switzerland would also give him leverage to put pressure on the EU, because the German, French, Italian companies competing with Swiss industry would be disadvantaged.”