Free trade will help China, Switzerland unlock more opportunities

Since the advent of the financial crisis, there has been a growing concern that access to international markets is becoming difficult. Rising unemployment rates and high public debt levels have prompted many countries to consider protectionist measures for their businesses.

At the same time, there are also no indications that the Doha Round negotiations of the World Trade Organization will be successfully completed in the near future. The opening of markets does not seem to be the highest priority in these difficult economic times.

This is bad news for export-oriented countries such as Switzerland and China, as their economic future is largely reliant on market access for their products.

But instead of waiting for a solution at a global level, the two countries have decided to open their markets to each other. In January 2011, the governments of China and Switzerland officially started negotiations for a free trade agreement.

With the abolishment of tariff and non-tariff barriers such as quotas, the two countries also plan to facilitate access to their markets, encourage trade and deepen economic ties. This would be a positive reaction in times where free trade has so many opponents.

An FTA between China and Switzerland does not come out of the blue. The economic ties between the two are already deep. Due to the strong growth of China's economy, trade between Switzerland and China has increased sharply in both directions.

Between 2005 and 2011, exports from Switzerland to China grew at an average of 17.7 percent. As a result of the constant growth, China has become the most important trading partner for the Swiss economy in Asia. Exports from China to Switzerland have grown considerably at 11.1 percent a year on average.

Machines, watches, precision instruments and pharmaceuticals make up most of the Swiss exports, while Chinese exports to Switzerland include machines, textiles and chemicals.

Over the last decade, Swiss enterprises have invested heavily in China. By the end of 2010, Swiss direct investments in the Chinese mainland stood at about 8 billion Swiss francs ($8.18 billion; 6.66 billion euros). Foreign direct investments in Hong Kong accounted for another 4.9 billion Swiss francs. By latest estimates there are about 300 Swiss enterprises, with 700 branches and more than 135,000 employees in China.

Foreign direct investment by Chinese firms in Switzerland has been relatively modest, but looks poised for significant increases. The more than 50 Chinese firms have gained from Switzerland's geographical advantage of being in the center of Europe.

Even though the economic ties between the two countries are strong, there is still a lot of trade potential that is not utilized. Obviously, an FTA would facilitate the trade of goods and lead to more shipments of final products and intermediate inputs. Swiss and Chinese firms will also make use of the new opportunities and reallocate their supply chain.

The FTA should also be used to facilitate trade in services and to strengthen intellectual property rights. In the services sector - banking, insurance and tourism - there are several possibilities for stronger ties between the two countries.

An FTA would also encourage more Chinese firms to establish economic relations in Switzerland. The potential for this is large. As more Chinese companies become truly global multinational players, Switzerland will be an ideal location for regional headquarters, research and development, production and services, as it is also a gateway to the European Union.

To sum up, an FTA between China and Switzerland is a logical step for two countries that are heavily dependent on good market access for their products and services. This is all the more important, as the WTO's Doha Round negotiations have failed to reach any concrete agreements.

The author is an economist at the Zurich-based Swiss Business Federation. He can be reached via MinschRudolf@economiesuisse.ch.