Switzerland: How are trade tensions affecting Switzerland?

How are trade tensions affecting Switzerland?

Wednesday, 15.05.2019

Philippe G. Müller *

Philippe G. Müller

The indirect effects of an escalation of trade conflicts are likely to be more damaging than the direct effects.

Once again, Donald Trump managed to shake half of the planet with a tweet. In announcing an increase of 10 to 25% of taxes on Chinese imports, the US president wanted to put more pressure on China - just one week before the expected conclusion of tough negotiations for a trade agreement between the two countries. At the time of writing, it was unclear whether the talks would fail or if the parties would come to an agreement.

Whatever the outcome, international trade tensions will not fade anytime soon. In addition to the trade dispute with China, the US government is about to make other fateful decisions: by Saturday, Donald Trump must decide whether to tax auto imports, based on a report from Ministry of Commerce - which would mainly affect European and Asian manufacturers and their suppliers.

The impact on the Swiss economy

To what extent would an escalation of these trade conflicts affect the Swiss economy? It should be noted that the total exports of other countries include about 57 billion Swiss francs in benefits and semi-finished products of suppliers based in Switzerland, ie about 8,5% of the country's gross domestic product (GDP).

As for the Sino-US dispute, it can be seen from the outset that exports from China and the United States have only a relatively small share of value added produced in Switzerland (respectively 4 and 2 billion). But the situation is quite different for exports from the European Union (EU) to the rest of the world: Switzerland's share of value added is significantly higher, of the order of 36 billion francs.

The direct effects on the Swiss economy of a decline in trade between the United States and China due to higher tariffs should be rather small. One reason for this is that Switzerland exports a lot of final consumer goods and services to these two countries. To push the line: pharmaceuticals in the United States and watches in China. Obviously, these products do not appear in the exports of these countries.

More serious with the EU

On the other hand, the situation in Europe is quite different. Switzerland exports a much larger share of intermediate goods and services as well as capital goods. Products that therefore constitute a significant part of the exports of European countries (think of the Swiss suppliers of the German automotive industry). As a result, rising tariff barriers and barriers to European trade are likely to affect the Swiss economy much more than Sino-US tensions.

Apart from the direct impacts of an escalation of trade conflicts, indirect effects are likely to be at least as important. The growing threat of a trade war has already destabilized many companies around the world last year, resulting in a significant decrease in their investments. If the situation continues to deteriorate, it is feared that this trend will increase further, significantly cooling the global economy.

These indirect effects could make the Swiss economy even more vulnerable. We can already predict a slowdown in real GDP growth from 2,5% last year to only 0,9% this year. Only a de-escalation of trade disputes abroad would allow the Swiss economy to regain its momentum.

* Responsible economist for French-speaking Switzerland, UBS

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