Swiss Shock – Can Switzerland Reverse The 39% Tariff?

The imposition of a 39% tariff on Swiss exports to the US has been greeted with shock, despair and much ire in Switzerland – the main newspaper NZZ greeting the move as ‘absurd’. Considerable offense was taken by the fact that the announcement came on the Swiss National holiday (August 1st). Equally, local business leaders and economists have been perplexed by the fact that the tariffs have been calculated on the back of a trade deficit that was skewed by the export of gold – the deficit is now a surplus.

Equally, many of the goods that Switzerland exports to the US, do not have competitors there (Swiss chocolate, watches and more importantly specialized industrial goods which are used by the likes of Boeing). Neither is the Swiss franc a weak currency.

There is also a feeling in Switzerland that its role on the international stage, and facilitator of American diplomacy (the Swiss embassy in Tehran has traditionally acted ‘for’ the US), has gone un-noticed.

Swiss politics is normally a very staid affair but this episode has led to infighting across the spectrum, and considerable blame has been focused on the President of the government Council, Karin Keller-Sutter. As a result, the Swiss negotiating team that will return to Washington this week will have representation from the conservative SVP, and more officials from the trade and finance divisions.

The Swiss case highlights the flaws in the methodology of the White House approach. While its economy is extremely resilient, the Swiss will not be able to suffer a 39% tariff lightly. Our sense is that the counterargument will centre around a re-framing of the trade relationship between the two countries, a re-evaluation of how Swiss industry in particular helps US firms, and an undertaking for Swiss industry to invest in the US.

The hope here is that Switzerland ends up with an EU style deal, of tariffs of 15%, and a somewhat empty promise to invest ‘billions’ into the US.

From a diplomatic point of view, given that the Swiss had traditionally been so helpful to US interests, this is an own-goal by the White House. At the time of writing, there is no indication at all as to whether this episode pushes Switzerland closer to the EU (in terms of trade – there is no question of Switzerland joining the EU).

For its part, the EU is still trying to get the White House to agree the wording of deal reached in Scotland – there is ongoing lobbying from the spirits industry in Europe, not to mention the auto manufacturers. The deal is not yet watertight and needs to be implemented by individual members. There is still uncertainty over the threats to place specific tariffs on semiconductors and pharmaceuticals firms based in Europe next week (Ireland in particular) and the USD 600bn that is supposed to be invested by European firms in the US. If sector specific tariffs are severe the backlash to the deal could grow and there is rising chance that it could fall apart.