Donald Trump and China’s Xi Jinping may soon resolve the bitter differences over bilateral trade, triggered by the combative US president’s protectionist agenda.
Settling the spat between the world’s two biggest economies would be a major fillip to global trade: international stock markets have already responded favorably to suggestions that a deal is within reach.
But even if Washington and Beijing settle their differences, there are other big impediments to international trade – lifeblood for a small, open and highly export orientated economy like Switzerland.
The risks of extraterritoriality
Those involve the accelerating steps to extend domestic rules and regulations beyond one country’s own borders. Switzerland is no exception. Recent proposals put to the popular vote have included expanding rigorous domestic food and agricultural standards to imports from elsewhere. Pressure has also been rising for stricter moral and humanitarian standards in trade relations – evident in growing concerns about human rights, child labor or environmental matters.
No one can deny adequate standards for essential imports, or concern about the labor practices behind imported product, are legitimate and laudable aims. Much progress has been made over recent years in combatting abuses such as child labor or unacceptable working conditions, especially in developing countries.
But as a new Avenir Suisse Policy Brief shows, recent Swiss endeavors to extend domestic rules abroad can carry heavy economic costs – both for Switzerland and its trading partners in the developing world. There have been many recent examples, with more in the pipeline, of Swiss lobbies advocating extraterritoriality. These have ranged from animal husbandry to food standards and the use of pesticides. But seldom has an attempt been made to quantify the impact of ‘exporting’ such Swiss rules to foreign trading partners.
Illustrating the costs
Avenir Suisse’s new paper tries to do the maths. In the case of the new Corporate Responsibility Initiative, for example, (better known by its German initials UVI), authors Fabian Schnell and Patrick Dümmler estimate (conservatively) that the proposal if implemented would carry a one off cost of CHF 5.1 bn, as well as with annual burdens of about CHF 2.1 bn.
It is not just a matter of extra money. The authors suggest that many seemingly well intentioned proposals can actually be counterproductive. Rather than exploiting the developing world, they point to empirical studies showing that the presence of foreign companies can be highly beneficial both through foreign direct investment and new jobs and the transfer of known how and best practice. Furthermore, the appeal of significant foreign direct investments can stimulate developing nations to improve their human rights or environmental protection records.
Applying extraterritoriality, by contrast, could lead to the creation of what the authors call ‘Offshore Islands’ – corporate investments where lip service is paid to compliance rules, without local circumstances being adequately taken into account. Rather than proving ‘positive spillover’, such a box ticking mentality could reduce the potential benefits of a foreign corporate presence.
Mechanisms already exist
The study shows that multinationals actually have strong motives to behave as good corporate citizens – without the need for observing constraining home country laws in their operations abroad. Reputational risks alone, they argue, are powerful factors committing big foreign corporate investors to behave correctly.
Such standards can go well beyond the legal minimum requirements in a multinational’s other countries of operation . Examples of sectoral standards prompting above average demands in terms of corporate social responsibility apply demonstrably in often criticized sectors like finance and insurance, textiles and raw materials, or foods and tobacco, Schnell and Dümmler argue.
Arguably most damaging of all would be to impose home country standards on global supply chains, which can be exceedingly complex and ill-suited to ‘top down’ solutions. Moreover, global supply chains can help by spreading international best practice and fostering benchmarking. Even where corporates may be tempted to cut corners, there is no lack of watchdogs, from growing internal compliance departments to big international NGOs and local and international media.
Raising standards, eliminating malpractice and spreading prosperity are laudable. But international trade can benefit from different countries having their own rules and legal systems, reflecting local needs and peculiarities. Trying to unify and codify all these under one global set of legal standards would not necessarily help – least of all a country like Switzerland.