The World Trade Organization (WTO) is a vital multilateral trade agreement which was created by the General Agreement on Tariffs and Trade (GATT) in 1994. It is basically a voluntary group of nations that bargains, supervises, and implements global regulations for international trade. One of the reasons why nations choose to do business under trade agreements is because of the trade liberalization as well as the consequent gains that come as a result of RTAs (CEIBS 2012, p. 1-8).
Additionally, the trade agreements encourage the removal of trade barriers that allow consumers as well as producers to get goods and services from the cheapest and the most competitive sources of supply. For instance, the government of Switzerland believes that domestic prices in Switzerland are about 20%-30% higher than in the EU (Porter 2008, p. 79-86). This means that if EU products are imported through a streamlined system, the domestic prices would drop by almost 10%. As a result, effectiveness is improved and this boosts welfare. Again, regional trade blocks are able to generate gains from trade as member countries reduce trade barriers among themselves (CEIBS 2012, p. 1-8).
It is also worth noting that trade agreements are beneficial to nations because they increase imports as well as exports goods. Additional, just like in the case of Switzerland, a country is bale to access raw materials to process its exports. In this regard, Switzerland imports raw materials like skimmed milk, rice and common wheat from EFTA member countries. Again, the trade agreements are instrumental in assisting countries to focus on what they can do best. It is for this reason that Switzerland imports the raw materials and specializes in processing them for exports.
One of the advantages of being involved in trade agreements is the increase in proceeds as well as increase in competition (World Bank 2005, p. 57-75). By and large, within a small market, there is likely to be a trade-off that may take place between economies of scale and rivalry. In this regard, the extension of a market eliminates the trade-offs thus facilitating the existence of larger firms with greater productive efficiency (World Bank 2005, p.57-75). Additionally, when there is an increase in completion, firms are induced to cut prices. This is of great benefit to consumers. Such a move also creates an expansion of sales and a reduction of inefficiencies (SC 2012).
The enlargement of the market also allows firms in some sectors of the economies to fully exploit the economies of scale. An increase in competition goes a long way in rationalizing production thus leading to the elimination of inefficient duplication of plants. The enlargement of a regional market also generates foreign direct investment. This is beneficial to any economy (World Bank 2005, p.57-75). The Generalized System of Preferences as adopted by the EU also ensures that tariff preferences are granted to countries that are mostly in need for the sake of reaping the most benefits. This is in line with the stipulations of the European Commission (EC 2012).
On the other hand, there are negative implications of trade agreements. In the case of Switzerland, the trade agreements have decreased its self sufficiency especially in the motor industry. This is because it depends on the EU supply it with vehicles and vehicle parts. As a result, the Switzerland’s motor industry is not well developed (World Bank 2005, p. 57-75).
The prosperity of Switzerland is largely dependent on international trade. This is because it has relatively few resources and the home market is fairly small. In such times of global fiscal uncertainty, Switzerland’s conclusion of free trade agreements with partners not within the EU plays a very important role in enhancing its access to foreign markets. The trade agreements are very relevant in the case of Switzerland since they avert discrimination against Switzerland’s service providers (CEIBS 2012).
Additionally, the FTAs are instrumental in decreasing the cost of imported goods for producers as well as consumers. In this regard, the pillars Switzerland’s trade policy on the issue of enhancing its market access is dependent on its preferential trade agreements with partners outside the EU as well as its membership with the WTO (WTO, 2012).
Foreign Direct Investment (FDI) has played a key role in the economic development of Switzerland. Over the years, it has acted as an exporter of direct investment capital. It has actually established itself to be an engine of economic growth in the country. On the whole, FDI provides a large chunk of capital for development. Additionally, it broadens the horizons of the capital base of the nation. One of the main sectors that drive FDI inflows into Switzerland’s economy is the banking industry (Peng 2009, p. 56-67).
This is because Switzerland’s banking sector is characterized by special secrecy, stability and protection of the investors’ information as well as assets. In this regard, well over 400 banks in Switzerland have earned an international reputation in the provision of discreet private banking services (CID-HU 2012). As a matter of fact, about 5.8% of Switzerland’s entire workforce is employed by the financial sector. Some of these banks include the UBS and the Credit Suisse which together account for an estimated 40% of the overall value generated by all banks in Switzerland.
Due to the fact that Switzerland has a small domestic market with limited sources, there is a somewhat reliance on imports. However, as of 2009, its exports stood at $ 190.1 billion, thus exceeding its imports by about $ 12.9 billion. The main reason behind this is due to the fact that it has a favorable trade scenario that processes imported products which are then resold to trade partners at a considerable profit margin. By and large, Switzerland’s import sectors include chemicals, metals, machinery, agricultural products as well as textiles. Its exports include watches and chocolates (FDFA, 2012).
The EU still remains to be the biggest recipient of exports from Switzerland. Other major markets of products from Switzerland include the US, Canada, India, Brazil, and Japan. According to the government, Switzerland ranked 16th among the export destination for the United States (USDS, 2012). In line with this, it ranked 21st among as a source of imports. The United States is also the second largest importer of Swiss goods at 9.75% after Germany at 19.55% (USDS, 2012). It is also worth noting that the United States is the largest foreign investor in Switzerland. It is also the largest single destination of Switzerland’s foreign investment (USDS, 2012).
Switzerland is a key partner of the EU for trade, especially in financial services. The total of EU’s exports to Switzerland was to the tune of $87.7 billion with imports from Switzerland being approximately $61.7 billion. Over and above, the balance between Switzerland and the EU was in favor of the latter (CID-HU 2012).
In conclusion, this paper has basically described Switzerland’s economic as well as political relations with other countries in form or regional, bilateral, as well as multilateral trade agreements. In this regard, the trade agreements have had a positive and sizable impact on the economic welfare of Switzerland. In addition, the regional as well as bilateral trade agreements have enhanced welfare for member countries that are directly involved, Switzerland being included. The impact of the regional trade activities has also bolstered Switzerland’s case from an economic perspective.
Additionally, regional trade has gone a long way in reducing the tariffs between countries of member states. As a matter of fact, according to Harvard University, WTO regulations require that when setting up regional trade agreements, tariffs must be reduced between the countries. This is effective in allowing people to purchase goods from other countries at lower costs (CID-HU 2012). This is the case with Switzerland whereby the government projects that if clearly streamlined according to Switzerland’s economic polices, retail products form the EU could be sold at a cheaper price to the consumers by an average of 10%.
All in all, Switzerland has greatly benefited from the bilateral, regional, as well as multinational trade agreements especially since it has resulted in the improvement of the Swiss economy over the past years. This is indicated in Table 2 whereby the economy is seen to have received exponential growth over the past few years. This is because the country has been able to improve its trade, and economic competitiveness in the region. As a result, in spite of the economic meltdown of 2008, its banking sector was able to weather the storms. To date, it still stands out as the best managed banking industry in the region.