Deregulate and simplify the tariff system

Switzerland’s tariff system is unwieldy. The 2019 WEF Global Competitiveness Report ranks Switzerland bottom of the 141 countries surveyed on the indicator relating to the complexity of its tariff regime. The main factor here is likely to be its import regulations for agricultural goods, which are extremely complex and protectionist. And it is consumers and taxpayers who pick up the bulk of the cost of these regulations – around CHF 20 billion a year, according to Avenir Suisse. Gradually dismantling these trade barriers could therefore bring major economic benefits – and not just for consumers and taxpayers. Liberalisation of the Swiss cheese market back in 2007, for example, proved that domestic producers also stand to benefit from free trade: the increase in exports more than offset the loss of market share resulting from fewer restrictions on cheese imports. Cheese producers became more competitive, bringing down prices and increasing the range of products.

However, reducing tariffs does not automatically dismantle barriers to trade. Tariffs for imported industrial goods are fairly low, but manufacturing also faces what are known as ‘shadow tariffs’: companies have to collect relevant data, assess the duty due and document the origins of goods. And where industrial goods are exempt from customs duty under free trade agreements, the importer must document the basis for this exemption. Parliament has, however, rejected a proposal put forward by the Swiss Federal Council in late 2019 to scrap import duties altogether. Now might be a good time to return to this discussion.

Although scrapping duty on industrial goods has been put on hold for the time being, Switzerland’s Federal Customs Administration has recently simplified customs clearance procedures with its digitalisation project, DaziT. It estimates that DaziT could save Swiss companies engaged in cross-border trade in goods around CHF 125 million in regulatory costs each year. DaziT does not, however, involve simplification of import duties, so the benefits remain limited.

Maintain bilateral agreements with the EU

The European Union is Switzerland’s largest trading partner, accounting for more than half of its exports and almost three-quarters of its imports, so the country’s relationship with the EU is of crucial importance. Since 1999, Switzerland has had a range of bilateral agreements governing its political and economic ties with the EU. However, the relationship is coming under increasing pressure, as the EU is unwilling to update existing internal market agreements until a framework agreement has been signed. The Swiss People’s Party (SVP/UDC) has also proposed a referendum on ending freedom of movement that fundamentally calls such bilateral agreements into question. Swiss voters will decide on the issue in September.

In some sectors of the economy, the government’s reluctance to act has already caused considerable uncertainty, prompting job cuts and reducing profits. Following the vote, Switzerland should therefore present proposals for a new framework agreement without delay. The top priority should be to maintain the existing bilateral agreements, which form the basis and prerequisite for further negotiations, such as an agreement on transmission of electricity between Switzerland and the EU.

Review and broaden strategic free trade agreements

As well as agreements with the EU and EFTA, Switzerland has 28 free trade agreements with 38 partner countries that ensure preferential mutual market access. These agreements differ in content and fall broadly into one of two categories: simple, first-generation agreements and more wide-ranging second-generation agreements. First-generation agreements focus primarily on trade in goods and regulate such issues as tariffs, technical barriers to trade and protection of intellectual property. Second-generation agreements also cover goods, investment, public procurement and sustainable trade.

Switzerland should review its existing first-generation agreements and broaden them to cover trade in services, which has grown in importance in recent years. The increase in the number of employees working from home during the COVID-19 crisis will accelerate the trend towards a global distribution of labour in the service sector, and many existing agreements lack the scope to address this shift.

The country also needs to conclude new, strategically advantageous agreements with partners, including major economic powers, such as India and Australia. Negotiations are currently under way with India. If Switzerland is to remain competitive, its failure to have such agreements in place will put it at a disadvantage. And if its protectionist stance towards its own agricultural sector proves to be an ongoing obstacle to major new agreements, it should consider gradually dismantling these barriers to trade (see also Recommendation 1).

Update data protection

Switzerland’s data protection rules are less stringent than those applying within the European Union, and so the EU wants to establish whether the Swiss legislation actually guarantees the same level of protection as its own legislation. Specifically, this relates to such areas as handling personality profiling for personalised recruitment of EU citizens. If the European Commission were to conclude that Swiss legislation does not ensure the same level of protection as EU legislation, this would seriously disadvantage the Swiss economy, and especially SMEs. Companies would have to demonstrate compliance with data protection standards every time they conclude a business deal. The additional bureaucratic load would drive up costs unnecessarily and generally make Swiss companies less competitive. It is therefore essential to overhaul the Swiss legislation, which dates back to 1993 and is long overdue for revision, and bring it in line with the digital age.

Assess the maturity of trade compliance processes

An increasingly stringent regulatory environment means companies spend more and more time and resources on the administration involved in international customs and trade standards. Complex export control regulations restrict cross-border trade in some goods and technologies and penalise companies breaching them. It is not unusual for the customs authorities to impose fines of millions or tens of millions of Swiss Francs or impose short-term export bans on companies.

Companies must therefore analyse the maturity of their compliance processes and ensure they meet trade regulations. Modern software solutions, for example, ensure prompt checks on all trading partners, so companies can avoid embarking on business relationships with proscribed individuals or companies. They also enable businesses to optimise the quality and accuracy of relevant commercial information, such as tariff codes, export monitoring reference numbers and the origin of goods, saving time and money and averting the risk of fines or export bans – and reputational damage to the company. Companies can then address problems rapidly and proactively, whilst the software provides good-quality data for in-depth analysis and identification of areas for savings. This will give companies greater transparency over customs duties and, potentially, better enable them to compare suppliers in various countries and show greater flexibility in extraordinary circumstances – including the COVID-19 pandemic. Companies need to exploit these opportunities for digitalisation.

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Reassess supply chains

COVID-19 has been a painful reminder to many companies of just how vulnerable their current supply chains are. The automotive, electronics and pharmaceuticals sectors have always been, and remain, particularly reliant on individual suppliers and regions. More than 200 of the Fortune Global 500 companies have a presence in Wuhan, the industrial city in China that imposed the world’s first lockdown. For too long, many companies have focused solely on optimising costs and just-in-time production. They now need to rethink their global value chains and increase their resilience to major shocks, enabling them to make strategic use of free trade agreements. A broader supplier base and other measures to diversify risk are essential if companies are to protect themselves against disruption. Relocating closer to local sales markets or internal markets (‘glocalisation’) could be a further option to consider. Also, Swiss companies seeking to redesign their supply chain could look in particular to countries in Eastern Europe, the Middle East and the Mediterranean.

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Make better use of automation and digital supply chain networks

There is considerable room for greater automation of the main processes required for international trade. Global trade management platforms can optimise both the collection and use of commercial data, boosting end-to-end efficiency and driving down costs. Such tools provide far-reaching insights into the increasingly complex world of cross-border trade and mean managers have a broader basis for decision-making.

The same applies to value chains. The COVID-19 pandemic has highlighted how important it is for businesses to retain as detailed an overview as possible of their supply chains. Companies with a digital supply network (DSN) are at an advantage: DSNs transform the traditional linear view of a supply chain into a network with a digital core in which the individual areas are disaggregated to link all the value creation stages with each other. This makes supply chains much more visible and enhances cooperation and sharing of information. In a volatile environment, a DSN also means companies can respond more efficiently to unexpected events, including regulatory change, insolvency, disruptions to supply, sudden fluctuations in demand or armed conflict. This will be even more important in the future.

Related publication

COVID-19: Managing supply chain risk and disruption

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Optimise international business location strategy

Business location strategy underpins the success of multinational companies. A global presence has an impact on operating costs, availability of skilled staff and proximity to customers, with implications for management and general risk. Companies must ensure, however, that their strategy also reflects tariff and trade-specific factors. Many companies have paid insufficient attention to these areas in the past, but the increasingly complex and digitalised trade environment is constantly creating new opportunities for optimising strategy, and these need to form part of decision-making. Import and export regulations for specific goods may differ from country to country, so an appropriate approach in this area can substantially cut costs. Multinational companies should analyse and optimise their business location strategy and their business model holistically and could benefit from an international network of trade agreements.

Business location strategy also needs to take specific account of technological advances. Emerging technologies, such as augmented reality and 3D printing, offer further scope for international cooperation, and could affect existing development and production locations.

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