This year, the Swiss eliminated tariffs on manufactured goods entirely. Because the Swiss have had low tariffs on manufactured goods this is not that surprising; but it is important to understand why the Swiss have now chosen free trade in manufactured goods.
The elimination of tariffs will directly reduce the cost of goods to Swiss importers and lower prices for consumers. Free trade in manufactured goods also has indirect benefits for the Swiss economy. Swiss industries have greater incentive to procure competitive inputs and to diversify their supply chains. This will increase their productivity and competitiveness in international markets.
The Swiss decision to eliminate tariffs on manufactured goods was based on careful analysis of the impact this would have on their economy. They estimated the direct benefits of reducing costs for companies, and the indirect benefits of improved productivity in the economy at about $1 billion.
Lower tariffs will result in less tax revenues for the Swiss government. But the Swiss estimate that increased output will increase tax receipts, offsetting about 30 percent of this loss in revenue. The Swiss study concluded that the positive benefits of free trade in manufactured goods far exceed the loss in revenue for the federal government.
The exception to this free trade policy is Swiss agriculture. In a country with vertical farms and grazing land, farmers rely on tariff protection and government support. This is not surprising in the highly regulated European market for agricultural goods.
How does one explain this decision by the Swiss to adopt free trade in manufactured goods at a time when most developed countries, including the U.S., are raising tariffs. When you ask Swiss economists this question, they talk about the Swiss as a nation of shopkeepers and farmers. As a small country highly dependent on trade, the Swiss must remain competitive in global as well as domestic markets. They cannot afford to pursue industrial policies that create zombie enterprises dependent on government protection and handouts.
The criticism of the Swiss policy of free trade in industrial goods is that this decreases their bargaining power in trade negotiations with other countries. But Swiss policies of free trade have in fact been the basis for successful trade negotiations with other countries. For example, the Swiss recently negotiated a ‘Free Trade Agreement’ with the Peoples Republic of China. The ‘Agreement’ promotes mutually beneficial trade relations through the establishment of a well-functioning and mutually advantageous bilateral preferential trade regime. The ‘Agreement’ also reaffirms their commitment to a multilateral trading system through the World Trade Organization (WTO).
The U.S. has now adopted protectionist trade policies, just as we did with the Smoot Hawley tariffs imposed during the Great Depression. The higher tariffs and other protectionist measures target Russia, China, Iran, and their allies. These countries are responding with their own countermeasures. U.S. policy makers argue that higher tariffs and other protectionist measures are needed to counter the industrial policies pursued by China. But this geoeconomic fragmentation is significantly reducing global trade. The International Monetary Fund estimates that geoeconomic fragmentation has reduced global Gross Domestic Product by 12 percent.
U.S. trade policies conflict with the most favored nation tariff policies mandated by WTO rules. In recent years, multilateral negotiations to reduce tariffs and other protectionist measures in the WTO have bogged down. The decision by the Swiss government to unilaterally adopt free trade policies in manufactured goods sends an important message to other countries. The Swiss are challenging other countries to reaffirm their commitment to free trade and investment in a global trading system and to the WTO.
Dr. Barry W. Poulson is on the Board of Directors of the Federal Fiscal Sustainability Foundation.