Friday, July 11, 2014
Sino-Swiss FTA comes into force
GENEVA - On July 1, the free-trade agreement (FTA) signed the previous year between China and Switzerland entered in force. The agreement, which is more than 1,100 pages long and took seven years to negotiate, is only the third that China has signed with a Western country and is by far the most significant. Indeed, for China, it is the first with a continental European country and the first with one of the world's 20 leading economies.
While over the past two decades Beijing has become more confident in engaging in multilateral diplomacy, developing bilateral relation is still the field in which China's diplomacy is the most confident. This is particularly true as regards economic relations and even more so when dealing with the issue of liberalizing trade policies outside China's direct sphere of interests.
Thus initially, China largely confined its free-trade negotiations with the likes of Hong Kong, Macau, Singapore and the 10-member Association of Southeast Asian Nations and only subsequently sought to enlarge the number of its free-trade partners.
Switzerland is the second European state and the third member of the 34-member Organization for Economic Cooperation and Development to sign an FTA with China. In 2007, China signed an FTA with New Zealand, which came into force in 2008. The effect on the New Zealand economy was dramatic, with goods exported to China tripling between 2007 and 2013 and total trade between the two countries increasing from US$3.7 billion to $9.7 billion. Altogether, trade with China is credited with sheltering the New Zealand economy from the effects of the 2008 global financial crisis.
In 2007, China started free-trade talks with Iceland but subsequent developments proved rocky. The post-2008 economic meltdown combined with Iceland's tentative approach to join the European Union resulted in the talks with China going into abeyance. These were revived in 2012 when public support for Iceland's joining the EU cooled, resulting in a trade agreement that was signed in 2013.
Whatever the benefits of the FTA that China signed with New Zealand and Iceland, the one signed with Switzerland is in another league altogether. Not only is Switzerland the largest economy with which China has signed an FTA but it is also one of the world's 20 most competitive economies In addition, it is one of the world's leaders in the field of technical innovation and in relation to its population the world's leader in new patents.
In addition to the economic environment, political considerations no doubt played a role in encouraging a rapprochement between China and Switzerland. Thus attempts by China after 2004 to establish a dialogue with the EU on trade issues were systematically rebuffed by Brussels. The EU's arms embargo imposed on China in 1989 did not help, and a report by the European Commission claiming that China had not reached "Market Economy Status" was viewed in Beijing as politically motivated.
Granted, these considerations alone were not the motive force behind the FTA with Switzerland, but they did play a role and so did the fact, in Beijing's eyes, that Switzerland was not part of any military alliance and had an essentially neutral foreign policy. Thus the fact that neither China nor Switzerland as regards their bilateral relations had any outstanding political agenda enabled both parties to focus on economic imperatives and on the benefits that both would gain by an FTA.
At present, China is Switzerland's largest trading partner in Asia - and third worldwide - with a bilateral trade that in 2013 had reached $26.3 billion. For Swiss producers, the FTA should give its exports to China a major boost.
On a step-by-step basis, spread over a number of years, 84.2% of Swiss exports to China will be exempted from tariffs. More explicitly this will be product specific, namely a 99% reduction as regards textiles, 77% regarding chemicals, pharmaceuticals and machinery, and 64% as regards up-market mechanical watches, while quartz watches will only see an 18% reduction.
Milk producers in Switzerland should stand to gain massively from the FTA especially in view of the suspicion as regards quality with which locally produced milk is viewed by Chinese consumers. Conversely, in parallel, some 99.7% of Chinese exports to Switzerland would be exempted from custom duties.
While it is no doubt Switzerland's high-tech sector that is China's major interest, both countries will see a mutual opening of their financial markets and reciprocal investments. This should facilitate Switzerland's ambition to become a financial hub for future international transactions in the Chinese currency, the yuan, and talks to develop a currency-swap agreement are underway.
Last but not least, the FTA provides for rigorous protection of patents and intellectual property rights. Patents registered In Switzerland will automatically be recognized in China, and while Swiss industrial sources do not claim that patent-right infringement in China will not end overnight there is now a framework for addressing disputes in a more effective manner.
Overall, both the negotiation and subsequent implementation of the FTA are to be viewed as a major step in China's learning curve on the road to free trade. And were China ever to negotiate an FTA with with the EU, the experience gained in dealing with Switzerland should prove profitable.
Alexander Casella worked for 20 years with the United Nations High Commissioner for Refugees.
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