US president Donald Trump has antagonised friend and foe alike with his determination to correct what he sees as America’s unbalanced trading relationships. The decision to slap swingeing tariffs on a variety of products has prompted predictable ire elsewhere, with retaliation to impose similar levies on US goods.
Caught in the middle of a budding global trade war, what is the best approach for a small, open and export dependent economy like Switzerland? The desire to strike back is understandable. But restraint might be the better option.
Two recent publications by Avenir Suisse experts suggest “keeping cool” – at least for the time being – is the optimal strategy. Longer term, rethinking the emotionally fraught topic of joining a bigger trading bloc like the European Union could return to the agenda.
Speaking to business newspaper Handelszeitung, Avenir Suisse chief economist Patrik Schellenbauer noted the relative insignificance of steel and aluminium ‒ Mr Trump’s chosen trade targets ‒ for Swiss exporters. Foreign sales of steel amount to just CHF 74 m and of aluminium CHF 30 m, with the overwhelming bulk going to EU members. “The short term economic effects are barely noticeable”, he observed.
But Schellenbauer acknowledged matters could be more serious in the medium term if the EU retaliated fully. Although primarily directed against China, any EU steps to protect its internal market from exports from third countries could have an unwelcome backlash for non EU Switzerland. “Switzerland must try to be treated as an exception”, he recommended.
The biggest danger lies in the possible escalation of a trading spat into a full scale war. With multinationals like Nestle(acute), Novartis, Roche and ABB all based in Switzerland, but having negligible domestic sales, open and free markets are essential to the Swiss economy and wellbeing. “An international legal framework observed by as many as possible is a big advantage for a small and relatively powerless country”, Schellenbauer concluded.
Writing separately, Avenir Suisse senior fellow Marco Salvi provided broadly similar counsel. He noted the long and lasting benefits to many countries of lower tariffs and multilateral trade agreements, first under GATT, then WTO.
But he argued convincingly in favour of inaction in the face of Trump’s taunts. “Over the past three decades, a lot of countries have reduced their tariffs without reciprocity. The reason was neither charity nor any particularly neoliberal instincts. Rather, it was self interest”, he noted.
“The economically most sensible answer to Trump’s tariffs is to stay cool and reduce domestic tariffs which, in spite of many rounds of liberalisation in recent decades, are still there.”
Inaction, of course, let alone cutting levies, could be unpopular domestically, as it might smack of political weakness amid sabre rattling and machismo elsewhere. But Salvi argued lowering tariffs unilaterally would help to win friends in US industries, like pharmaceuticals and high tech, that have opposed president Trump’s actions. It would also further encourage the emergence of global supply chains dependent on free markets. Already, many US products, such as iPhones, are designed in the US but manufactured elsewhere. Just look at Harley-Davidson’s recent decision to shift some manufacturing to India and Thailand.
Both Avenir Swiss experts suggest retaliation, if unavoidable politically, should for the time being be restricted to harmless targets: hence the EU’s decision to focus on conspicuous, but inconsequential, US products like Harleys and bourbon. Perhaps baseball caps could be next.
Longer term, the increasing role of large regional blocs, rather than individual WTO members, in trade talks could leave Switzerland feeling lonely. “Increasingly, world exchanges and trading rules will be decided between the big blocs, while the WTO loses significance”, argues Schellenbauer. “So it could be a big advantage for Switzerland to align itself more closely to the EU to ensure market access. If it comes to protectionist steps, the latest example would bear that out. Were we part of the EU internal market, we wouldn’t be affected.”
Schellenbauer does not call outright for Switzerland to join the EU. More circumspectly, he restricts himself to noting that: “Should this be just a foretaste of a protectionist wave, there would be a big risk for a small, open economy like Switzerland of being caught in the crossfire.”
But the underlying message is clear. Only recently, Avenir Suisse suggested in its White Paper on options for Switzerland’s future that EU membership could be appropriate in certain circumstances.
Although not a member, Switzerland, alongside the EU’s Belgium and Ireland, is the European country most intertwined with the internal market. “Economically we‘ve already, practically speaking, long been part of the EU internal market”, Schellenbauer notes. “But politically, Switzerland would prefer to stay outside the EU, with the result that we have no say in decision making. The logical consequence is that we have to accept significant constraints on sovereignty.”
“If protectionism escalates, or big trading blocs set the rules among themselves, Switzerland would be badly hit. Our exporters would face discrimination, leading eventually to higher unemployment. In that event, EU membership would have to be a potential fallback.”
Strong words for a country where joining the EU remains virtually taboo. But, then again, isn’t it the duty of any self respecting think tank to think outside the box?