Despite a dearth of natural resources, the Swiss economy is among the world’s most advanced and prosperous. Per capita income is virtually the highest in the world, as are wages. Trade has been the key to prosperity in Switzerland. The country is dependent upon export markets to generate income while dependent upon imports for raw materials and to expand the range of goods and services available in the country. Switzerland has liberal investment and trade policies, notwithstanding agriculture, and a conservative fiscal policy. The Swiss legal system is highly developed, commercial law is well defined, and solid laws and policies protect investments. The Swiss franc is one of the world’s soundest currencies, and the country is known for its high standard of banking and financial services. Switzerland is a member of a number of international economic organizations, including the World Trade Organization (WTO), the International Monetary Fund, the World Bank, and the Organization for Economic Cooperation and Development (OECD).

The Swiss economy expanded by 3% during the first half of 2007, the fastest rate in six years, thus confirming sustained growth over the last four years. GDP growth was primarily due to the positive evolution of private consumption and expansion of investment in fixed assets and software. For once, all export industries benefited from increased demand from foreign markets. With a surplus of $9.6 billion (SFr 11.7 billion), the Swiss trade balance reached unprecedented levels. On the inflation side, import pricesincreased more rapidly than exports.

Switzerland was ranked as the most competitive economy in the World Economic Forum’s 2006 Global Competitiveness Report for the first time, reflecting the country’s sound institutional environment, excellent infrastructure, efficient markets, competent macroeconomic management, world-class educational attainment, and high levels of technological innovation, which boost Switzerland’s competitiveness in the global economy. The country has a well-developed infrastructure for scientific research, companies spend generously on research and development, and intellectual property protection is strong. Business activity benefits from a well-developed institutional framework, characterized by the rule of law, an efficient judicial system, and high levels of transparency and accountability within public institutions. Higher education and training are rapidly growing in importance as engines of productivity growth.

Being a nation that depends upon exports for economic growth, and due to the fact that it is so closely linked to the economies of Western Europe and the United States, Switzerland was not able to escape recent slowdowns experienced in these countries. During most of the 1990s, the Swiss economy was Western Europe’s weakest, with annual GDP growth averaging 0% between 1991 and 1997. Beginning in late 1997, the economy steadily gained momentum until peaking in 2000 with 3% growth in real terms. The economy returned to lackluster growth during 2001-2003, but has been growing at or above potential since 2004–2.5% per annum. The Swiss Economic Ministry reports that strong global demand, particularly in the U.S. and Asia, and better Euro zone growth has helped Switzerland’s economic recovery. Long-run economic growth, however, is predicated on structural reforms. In order to maximize its economic potential, Switzerland will need to push through difficult agrarian and competition policy reforms. These are essential if the government is to reduce its budget deficits and meet its 3% growth target.

In 2005, the dollar/Swiss franc exchange rate continued to be shaped by geopolitical tensions. The dollar depreciated further against the Swiss franc from SFr 1.49 in October 2002 to SFr 1.31 in 2003, to 1.28 in 2005 to 1.23 in July 2006, and 1.16 in October 2007. The strengthening of the Euro, however, helped Switzerland to minimize the pressure from a weakening dollar. The Swiss National Bank raised interest rates on June 15, 2006 to 1.5%, the third increase since January 2006. The Swiss National Bank also said it expected economic growth to be a robust 2.5% in 2006 and 2007.

The number of bankruptcies in Switzerland had been on the rise for the past four years, reaching alarming levels in 2005 (10,800), and increased again by 7.7% in the first half of 2007. Compared to other European countries, Switzerland’s bankruptcy rates ranks fourth (1.35%) among the hardest hit countries, after Luxemburg (2.39%), Austria (1.9%) and France (1.49%).

The recent economic upswing had some positive impact on the labor market. Unemployment decreased from 4.1% in December 2003 to 2.7% in September 2007. Swiss in the 15-25 age bracket continue to fight unemployment numbers with a rate of 5.4%, and hotel and restaurant industry workers with 10.4%. One-fourth of the country’s full-time workers are unionised. In general, labour/management relations are good, mostly characterized by a willingness on both sides to settle disputes by negotiations rather than by labor action. About 600 collective bargaining agreements exist today in Switzerland and are regularly renewed without major problems. However, the mood is changing. The massive lay-offs that resulted from both the global economic slowdown and major management scandals have strained the traditional Swiss “labour peace.” Swiss trade unions encouraged strikes against several companies, including the national airline SWISS, Coca-Cola, and Orange (the French telecom operator), but total days lost to strikes remain among the lowest in the OECD. Uncertainties concerning the proper management of pension funds, and the prospect of a potential hike in the retirement age from 65 to 67 have stirred heated political debate.

2006 federal statistics show that the working category aged 25-40 is the most severely affected by long-term unemployment in Switzerland. The unemployment rate for foreign workers is on average 6.1%, higher than the 2.5% Swiss workers average, partly as a result of education and training differences. The long-term unemployment rate is estimated at 26% in French- and Italian-speaking regions (border cantons), while only 16% in German-speaking cantons. Other statistics show that precarious labour conditions still prevail in the temporary sector. About 17% of all workers have a salary below SFr 4,000. Wages have increased by a mere 4% between 1995 and 2006, below higher OECD rates. In addition, the reduction of employment benefits from 520 to 400 days has led many workers to fall into the cantonal social services statistics, which are not taken into account by the Economic Ministry (SECO) when computing the unemployment rate.

Switzerland’s machinery, metals, electronics, and chemicals sectors are world-renowned for precision and quality. Together they account for well over half of Swiss export revenues. In agriculture, Switzerland is about 60% self-sufficient. Only 7.5% of the remaining imports originated from the U.S. Swiss farmers are one of the most highly protected and subsidized producer group in the world. OECD estimates show that Switzerland is subsidizing more than 70% of its agriculture, compared to 35% in the EU. The parliament agreed in 2007 to reduce the level of subsidies from SFr 14.1 billion (U.S. $11.6 billion) to SFr 13.6 billion (U.S. $10.5 billion) from 2008-2011, approved VAT exemptions for local biofuel production, and accepted international parallel imports for fertilizers and tractors–Swiss farmers will be allowed to import tractors produced in China or India and sold in the EU, and could save up to $41 million (SFr 50 million) annually. German fertilizer imports could save another $20 million (SFr 25 million). A more general bill legalizing a more limited number of parallel imports will be presented by the Justice Ministry to parliament by the end of 2007. The parliament also rejected the government’s proposal to reduce the subsidized price for cheese production, and decided to keep the price at 15 centimes per litre.

Tourism, banking, engineering, and insurance are significant sectors of the economy and heavily influence the country’s economic policies. Swiss trading companies have unique marketing expertise in many parts of the world, including Eastern Europe, the Far East, Africa, and the Middle East. Not only does Switzerland have a highly developed tourisminfrastructure (making it a good market for tourism-related equipment and services), the Swiss also are intrepid travelers. Per capita, more Swiss visit the United States every year than from any other country. Tourism is the most important U.S. export to Switzerland (earning almost $1.5 billion). In 2004, more than 285,000 Swiss came to the United States as tourists.

The Swiss economy earns roughly half of its corporate earnings from the export industry, and 62% of Swiss exports are destined for the EU market. The EU is Switzerland’s largest trading partner, and economic and trade barriers between them are minimal. In the wake of the Swiss voters’ rejection of the European Economic Area Agreement in 1992, the Swiss Government set its sights on negotiating bilateral sectoral agreements with the EU. After more than 4 years of negotiations, an agreement covering seven sectors (research, public procurement, technical barriers to trade, agriculture, civil aviation, land transport, and the free movement of persons) was achieved at the end of 1998. Parliament officially endorsed the so-called “Bilaterals I” in 1999, and the Swiss people approved them in a referendum in May 2000. The agreements, which had to be ratified by the European Parliament as well as legislatures in all 15 EU member states, entered into force on June 1, 2002. Switzerland has so far attempted to mitigate possible adverse effects of non-membership by conforming many of its regulations, standards, and practices to EU directives and norms. Full access to the Swiss market for the original 15 EU member states entered into force in June 2004, ending as a result the “national preference”. The Swiss agreed to extend these preferences to the 10 new EU members on September 25, 2005 but restrictions will remain until 2011. A facultative referendum against the Bilaterals I (and in particular against the free movement of persons) is possible until mid-2009. A political campaign aimed at collecting the required 50,000 signatures to call for the referendum is likely to start in 2008.

The Swiss Government embarked in July 2001 on a second round of bilateral negotiations with the EU known as “Bilaterals II”. Talks focused on customs fraud, environment, statistics, trade in processed agricultural goods, media, the taxation of savings, and police/judicial cooperation (dubbed the Schengen-Dublin accords). Amid a fierce political debate over the essence of Swiss-EU relations and populist warnings against EU workers and criminals entering Switzerland, the Schengen-Dublin package was approved on June 5, 2005 by 54.6% of Swiss voters. Fears of cheap labor coming from new EU member states have prompted the government to provide for tripartite surveillance committees to ensure that decent wages are enforced.

Nevertheless, cantonal work inspections are still very much understaffed, thus preventing a real coverage of the services sectors affected by the Swiss-EU agreements. The illegal employment of foreign workers at very low rates is also a problem in the tourism and construction sector. But domestic wages in other services sectors are also under pressure in Swiss border cantons. Penalties for labor law infringement are not being enforced completely. In practice, EU workers or services providers can avoid cantonal registration and controls if they stay less than 90 days in the country. This 90-day legal vacuum provides the opportunity for many fake independent contractors to bypass and undermine the legal accompanying measures on worker protection.

As part of the bilateral agreement on the taxation of savings signed in June 2003, Swiss banks will levy a withholding tax on EU citizens’ savings income. The tax, which started on July 1, 2005, will increase gradually to 35% by 2011, with 75% of the funds being transferred to the EU. The EU has still to ratify the extension of Schengen to Switzerland, and implement the bilateral agreements on R&D and Media cooperation.

On November 26, 2006, the Swiss electorate approved a government bill to contribute 1 billion Swiss francs (about $800 million) to the 10 new EU member states. In a nation-wide referendum, 53.4% of voters accepted the “Eastern Europe Cooperation Act,” which entitles the government to spend 1 billion Swiss francs on projects in primarily Central European states over the next 10 years. Switzerland had pledged this contribution to share the burden of the EU’s eastern expansion in order to facilitate the conclusion of the second set of bilateral negotiations with the EU. The right-populist Swiss People’s Party (SVP), which prompted the referendum, was disappointed, but pleased that it mobilized a 47% opposition. The Eastern Europe Cooperation Act gives a new legal basis for Swiss aid to countries in Eastern Europe. The act has a 10-year term and replaces the former federal Law on Aid to Eastern Europe, which came into force in 1995. Since the fall of the Berlin Wall, Switzerland has spent SFr 3.5 billion on about 1,000 aid projects in Central and Eastern Europe to help countries in the region transform into market economies. Sixty percent of the SFr 1 billion is to come from the budget of the departments of foreign and economic affairs, mainly from cuts in aid programs to other parts of the world. The remaining 40% will be taken from the regular budget of the federal administration. The funds are to be used on projects chosen by Switzerland and focused on education, trade promotion, environment, and internal security. The money is paid directly to the projects and does not go the EU cohesion fund in Brussels. Switzerland has no formal agreement with the European Union concerning these contributions. Instead, there is a Memorandum of Understanding (MOU) that sets out the general conditions of the Swiss commitment to the ten new EU member states. Under the MOU, almost half of the funding will go to Poland. Hungary’s benefit will be SFr 131 million, while the Czech Republic will receive SFr 110 million.

The Swiss federal government remains deeply divided over EU membership as its long-term goal, and in a March 2001 referendum more than 70% of Swiss voters rejected rapid steps toward EU membership. The issue of EU membership is likely to be shelved for several years, if not a decade. In May 2005, the government said it could sign a framework agreement with the European Union, as an alternative to joining the organization, to encourage dialogue and create a platform for closer cooperation.

Switzerland nevertheless expressed interest in reaching a third layer of bilateral agreements that would involve energy, the Galileo satellite navigation system, health, and agriculture. But recent harsh criticism by the European Commission against preferential cantonal tax treatment for foreign holdings cooled the political climate surrounding the EU. Unilateral trade retaliation–as threatened by the EU if the Swiss cantons do not change their cantonal tax regimes–has not occurred, but the political damage is done,including greater anti-EU feelings among the population. The pressure to negotiate with the EU could turn sour as the EU has already asked Switzerland to pay another SFr 300-350 million ($240-280 million, on top of the SFr 1 billion cohesion fund) to provide further financial aid to Romania and Bulgaria, which joined the EU on January 1, 2007. Unlike the November 2006 referendum, the newly enacted Eastern Europe Cooperation Act does not provide for an automatic referendum on further payments. The parliament will decide on the additional aid request.

The government also decided in November 2006 to once more consider adoption of the EU “Cassis-de-Dijon” principle for trade after a first setback in 2004. If adopted, EU products could be imported in Switzerland without having to go through the burdensome Swiss certification and Swiss language requirement process. Currently, Swiss retail prices are on average 20-40% higher than in the EU. If parallel imports are allowed under adoption of the Cassis-de-Dijon principle, prices could drop by 10%. Possible exceptions have been reduced from 129 products to 40, but hurdles remain on the labeling of alcohol contained in Alcopops, the Swiss ban of phosphates in washing machine powders, the real origin of “EU meat”, and on the stringent Swiss generic food production requirements. The “Cassis de Dijon principle” will not apply to the many farming andindustrial products already covered by mutual recognition agreements (MRAs) under the EU-Swiss Bilaterals I and II; nor will it apply to other products such as pesticides, motor engines, and weapons that require an authorization. The impact, as a result, may not be as large as expected. Another issue is that Swiss and EU MRAs concluded with third countries may also benefit from adoption of the Cassis-de-Dijon principle (these goods would also have to receive WTO most favored nation status).

The government has reaffirmed its wish to strengthen ties with other non-EU trading partners in Asia and America. Exploratory talks on a Free Trade Agreement between the U.S. and Switzerland failed to result in negotiations, due to Swiss problems with free trade in agriculture, but the two sides did agree to a new framework for economic, trade, and investment discussions. This new agreement is the Swiss-U.S. Trade andInvestment Cooperation Forum (the “Forum”) and is currently assessing areas where the two governments could facilitate greater trade and investment flows.

Switzerland ranks 17th among the main trading partners of the U.S. worldwide. The United States is the second-largest importer (11.5%) of Swiss goods after Germany (20%). The U.S. exports more to Switzerland each year than to all the countries of the former Soviet Union and Eastern Europe combined, and Switzerland imports more U.S. products and services than does Spain. In addition, the United States is the largest foreign investor in Switzerland, and conversely, the primary destination of Swiss foreign investment. It is estimated that 200,000 American jobs depend on Swiss foreign investments. Total U.S.-Swiss bilateral trade increased from $15.33 billion during 2003 to $16 billion in 2004.

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