Why Switzerland seeks deeper ties with China

Swiss watchmakers have benefited most from the Swiss-China free trade agreement. Keystone-SDA

There has been free trade between Switzerland and China for ten years. Now Switzerland wants to update the agreement. What advantages has it brought the two countries so far? Here is an analysis.

The rift between those in favour of free trade with China and those against is mainly about economics and moral values.

China’s growing hunger for power in the world has obviously not escaped the notice of Swiss politicians. In the parliament in Bern, Chinese global ambitions are now discussed and observed more critically than they were in 2013, when the free trade agreement between the two countries was signed.

Scepticism and concern are rife across all parties. In September, the House of Representatives decided that major Swiss companies could no longer simply be taken over by foreign investors. The billExternal link was unofficially called “Lex China”.

For the leftwing Social Democratic Party and Green Party in particular, Switzerland’s ties with China are already too close. Most recently, Green parliamentarian Nicolas Walder demanded that Switzerland terminate the free trade agreement because of Chinese human rights violations. Parliament rejected this motionExternal link in February.

Switzerland initiates second stage

Industry and commerce, meanwhile, are making active use of the resulting freedom of trade. All figures are heading upwards – but there is still room for improvement. This explains why Switzerland is now launching the second stage. It started negotiations to update the agreement this week.

While the European Union, the US and other western nations are increasingly taking an anti-China stance, Switzerland is snuggling up more closely to it than many other nations.

China has only 20 trade agreements worldwide, including with partner countries with which it has historic or geographic links and some smaller economies such as Iceland and the Maldives. The ASEAN states, Australia and Korea have more economic weight.

Why are China and Switzerland so close?

From a Chinese perspective, Switzerland was a test run. “China used this agreement to study how free trade agreements work in Europe,” says Patrick Ziltener, an Asia specialist who evaluated the trade agreementExternal link for the Sino-Swiss Competence Centre at the University of St Gallen.

According to Ziltener, the agreement with Switzerland was also a question of reputation for the world’s second largest economy. China was thus able to show the world that it allows and even promotes free trade. A partnership with internationally respected Switzerland would prove that China was a reliable partner.

Switzerland opens door for China

Switzerland also opened an important door for its trading partner on the international stage. It recognised China as a market economy within the World Trade Organization (WTO), as Ariane Knüsel and Ralph Weber explain in their book Switzerland and China. This was the entry ticket for free trade with China for all partners.

Switzerland treated this recognition as a formality and settled it with a fax from the Federal Council. The EU, meanwhile, still does not consider China to be a market economy as defined by the WTO, the authors write. As a WTO-recognised market economy, China can no longer be sued for dumping – that is, keeping prices artificially low – on the world market, which also explains China’s interest in the agreement.

There is moreover a historical connection. Switzerland was one of the first countries to recognise the People’s Republic of China in 1950. And lastly comes the issue of knowledge transfer: companies that make use of free trade agreements often have to disclose their production processes. This helps China to enhance its economic know-how.

Who benefits from free trade?

The effect of free trade agreements is often described as an increase in trade volumes. But this is only half the story. Free trade does not lead primarily to more volume but to more profit. This is because tariffs are lifted. In 2022, the Swiss economy saved CHF187 million in unpaid customs duties thanks to the agreement, Ziltener calculated.

In fact, seeing things in terms of Swiss export volumes to China blurs the view of the agreement. In terms of pure volume, gold dominates by far. Swiss gold exports to China have more than doubled in the past ten years and account for half the total value of goods.

The reason for this is China’s huge appetite for gold. The Chinese central bank was the world’s largest single buyer of gold in 2023. According to analysts, it is seeking to make China independent of the dollar. Here it is curious to note that, while Swiss foreign policy preaches multilateralism, Swiss gold exports are helping China to decouple itself from the global monetary system. Switzerland is home to four of the five largest gold refineries in the world.

However, gold exports have nothing to do with the free trade agreement. “China does not levy import duties on gold, regardless of origin,” explains Fabian Maienfisch, spokesperson for the Swiss State Secretariat for Economic Affairs (SECO).

So let’s take a look at trade volumes excluding gold.

Swiss exports to China (excluding gold) have increased by 74% to CHF15.4 billion over the past ten years. The pharmaceutical, watch and machine industries are particularly China-oriented. The pharmaceutical industry has seen the largest increase.

China and US dominate Swiss exports

But is this the result of the free trade agreement? Only partially, since Swiss exports to the US have grown even more than exports to China, as the following graph shows.

The two increasingly rival economies, the US and China, are thus the two driving forces behind Swiss exports. Observers see this as a risk. If the trade war between the West and China escalates further, the US and EU could well put pressure on Switzerland to disengage from China again.

Swiss export earnings confidential

As mentioned above, the success of a trade agreement is reflected not just in export volumes but also in the profit from unpaid customs duties. “The free trade agreement has enabled Swiss export companies to benefit from significant tariff savings,” says SECO spokesperson Maienfisch. This has boosted Switzerland’s competitiveness on the Chinese market compared to its main competitors, the EU and US.

But which sectors of the Swiss economy have benefited from tariff savings? Figures for this are not available from the federal government. They are missing from the Free Trade Agreements Monitor 2022External link (page 91 ff.), “because China does not provide publicly usable data,” SECO stated upon request.

Watch industry benefits the most

However, the evaluation by the University of St Gallen, carried out under Ziltener’s leadership, provides information about this. It found that the watch industry has benefited the most, saving $133 million in customs duties in 2022 alone. Yet there is still room for improvement, particularly for watchmaking – to the tune of $46 million per year, according to the calculations made. And Switzerland wants to exploit this potential. 

Little benefit for pharmaceutical industry

As for the pharmaceutical industry – Switzerland’s largest exporter – it has saved only $1.4 million in customs duties according to the calculations. The Swiss agreement with China is therefore of little importance for this sector. Firstly, customs duties are low for it anyway. And secondly, if the agreement were to be used, the companies would have to disclose their chemical formulas, which is not in their interest.

In updating the free trade agreement, Switzerland is pursuing three objectives:

1. Further dismantlement of tariffs 

According to SECO spokesperson Maienfisch, Switzerland’s current goal is “to expand tariff reductions for industrial products”. Today, for instance, one-fifth of machine exports are only partially or not at all exempt from customs duties. Switzerland also wants further tariff dismantling for pharmaceutical products.

Maienfisch also mentions the watch industry, where tariffs of up to 9.2% still apply. However, these are not purely import duties, as China also generally levies a consumption tax on luxury goodsExternal link. Whether it will drop this general tax specifically for Swiss watches is questionable.

The Swiss watch industry is in great need of relief right now, as watch sales in China have plummeted. Richemont and Swatch report massively lower turnover, while Rolex does not disclose such figures. A quick comparison shows the importance of low China tariffs: the tariff savings realised on Swiss watch exports in 2023 alone are roughly equivalent to Swatch’s first half-year profit in 2024.

2. Investment in China

Switzerland’s second goal is to enable Swiss companies also to invest in the Chinese economy. Parliament has called for this in a motionExternal link. However, the fact that the same parliament now also wants to ban Chinese investments in Swiss companiesExternal link clearly puts the Swiss negotiating delegation in a difficult position.

3. Environmental and human rights

The Swiss government finalised the existing agreement in 2013 without consulting the people. Things could be different this time. In the case of the Swiss free trade agreement with Indonesia, NGOs forced the government to defend the negotiated result at the ballot box with a “palm oil referendum” in 2021.

The Swiss delegation has learned from this experience. It wants to take the wind out of the sails of a possible referendum. This is why it also plans to include environmental and human rights aspects in the negotiations, as demanded by a parliamentary committeeExternal link.

Whether this will be enough for the opponents of the deal remains to be seen. China opposition groups in Switzerland have already announced that they will launch a referendumExternal link. The Greens have said they will support a referendum if the agreement does not establish a binding framework for environmental and human rights. This was confirmed to SWI swissinfo.ch by Green parliamentarian Walder.

The Social Democrats are also ready for a referendum. The party’s foreign affairs politician Fabian Molina is also calling for “human rights and environmental standards, in particular the exclusion of forced labour”. He warns: “If the Federal Council does not find answers to these serious problems, we will reject the agreement”.

What does China want?

Over the last five years, China has used the opportunities provided by the free trade agreement less than before. It generally makes less use of it than Switzerland, but nonetheless realised tariff savings of CHF213 million in 2022, a good CHF25 million more than Switzerland.

The Asia specialist Ziltener can imagine that China will want to include the export of labour in the new round of negotiations. This would mean Swiss work permits for Chinese specialists – which is likely to prove a difficult sell domestically.

When all is said and done, however, the agreement with Switzerland guarantees China the political acquiescence of a broadly networked state. It can rely on internationally respected Switzerland and on the fact that this Western country located in the heart of Europe will continue to abstain from an anti-China policy.   

Edited by Reto Gysi von Wartburg/sb