TITLE: SWITZERLAND ECONOMIC POLICY AND TRADE PRACTICES DATE: FEBRUARY 1994 AUTHOR: U.S. DEPARTMENT OF STATE SWITZERLAND Key Economic Indicators (Millions of Swiss francs unless otherwise noted) 1991 1992 1993 Income, Production, and Employment Real GDP (1980 Prices) /6 209,335 209,210 102,405 Real GDP Growth (pct.) /6 0.0 -0.1 -1.0 Real Per Capita GDP 31,603 31,145 n/a GDP (at current prices) /6 331,075 339,470 170,260 Labor Force (000's) /5 3,560.3 3,480.5 3,370.6 - of which foreigners /1 929.7 942.3 929.9 Unemployment Rate /4 1.1 2.5 4.8 Money and Prices Central Bank Money (pct. growth) 3.5 -1.0 3.2 /3 Money Supply M1 (pct. growth) 1.3 0.1 10.1 /7 Base Interest Rate (pct.) 7.0 6.0 5.0 /3 Personal Saving Rate 13.0 13.1 n/a Consumer Price Index (pct.) 5.9 4.0 3.4 /4 Wholesale Price Index (pct.) 0.4 0.1 -0.1 /2 Exchange Rate ($/Sfr) 0.697 0.712 0.668 /3 Balance of Payments and Trade Total Exports 82,021 86,148 42,767 /6 Exports to U.S. 6,406 7,002 3,539 /6 Total Imports 88,681 86,739 41,875 /6 Imports from U.S. 6,096 5,137 2,393 /6 Trade Balance -6,660 -591 892 /6 Gold & FOREX Reserves 34,439 37,463 41,150 /3 Notes: (1) Situation at end of April. (2) May 1993 figure, annualized. (3) August 1993 figure. (4) September 1993 figure, annualized. (5) First quarter 1993. (6) First half of 1993. (7) Average for first 7 months of 1993. 1. General Economic Framework Switzerland has an internationally-oriented, open economy characterized by a developed manufacturing sector, a highly skilled work force, a large services sector, a high savings rate and a highly protected agricultural sector. After economic prosperity in the 1980's, the Swiss economy stopped growing in 1991 and declined in 1992 and 1993. Unlike previous recessions, the period of stagnation has been extremely long while the decline in GDP has been small. There is little hope that GDP will grow at a fast pace in 1994, but at least, analysts agree that the Swiss economy will grow again in 1994. In contrast to past recessions, it appears that the current recession is mainly home-made, caused by the strong decline in investments and private consumption (while exports continued to grow in 1992). No systematic use is made of fiscal policy to stimulate the economy. However, the Swiss government agreed to spend Sfr600 million on an investment bonus in spring 1993. The program was designed to allow cantons, communes and private individuals to finish projects within six months of completion with the help of credits at very favorable terms. The investment bonus was a short-term temporary measure and was not repeated by the government. In March 1993, the Swiss voted in favor of an increased gasoline tax that should generate additional tax revenues exceeding Sfr one billion per year. In November 1993, Swiss voters approved a shift from the turnover tax to a value-added tax (VAT), effective in 1995. The approved 6.5 percent VAT will be applied in most of the service sector, broadening the Swiss tax base. The Swiss National Bank (SNB) is independent from the Finance Ministry and has the main objective to maintain price stability. Monetary policy is conducted through open market operations. The discount rate has only symbolic value and is used by the SNB as a signal to the public. The SNB is also independent from foreign central banks, although the small size of the country and the free movement of capital make Switzerland highly vulnerable to events in Europe and other world financial centers. 2. Exchange Rate Policies In the mid and long term, the SNB does not follow any exchange rate policy, and the Swiss franc is not pegged to any foreign currency. However, in cases where the Swiss currency would be likely to appreciate considerably over a short period, the SNB takes measures to prevent further appreciation. 3. Structural Policies. Government agencies use competitive bids for procurement. The Defense Ministry and the PTT (a public corporation within the government) have some restrictions on foreign purchases (small arms, clothing and boots, telecommunications equipment). The PTT requires foreign vendors to have local representatives and service facilities. Except for telecommunications, the impact of Swiss structural policies on U.S. exports is insignificant. The domestic economy is characterized by a wide variety of cartel-like agreements which are not prohibited under current Swiss law. Many cantonal laws and practices protect local small business from competitors outside the cantonal borders. But recent efforts to revitalize the Swiss economy have started to dismantle some of the barriers. Agriculture is the most protected sector in Switzerland and highly subsidized by the government either through guaranteed prices or direct payments. Farmers receive guaranteed prices for grains, sugar beets, milk, and other basic products. Prices of agricultural imports are raised to domestic levels by variable import duties and by requiring importers to buy domestic products at high prices as a condition of importing. Agricultural products like tobacco, cotton and bananas that are not produced in Switzerland can be imported without restrictions. 4. Debt Management Policies As a net international creditor, debt management policies are not relevant to Switzerland. The country participates in the Paris Club for Debt Rescheduling and is an active member of the OECD. Switzerland joined the International Monetary Fund and the World Bank in 1992 and holds a seat on the Executive Board. 5. Significant Barriers to U.S. Exports Import Licenses: Except for agricultural products, Swiss licensing procedures do not hinder imports from the United States. Switzerland issues a general import license which, in the case of manufactured goods, is granted freely and is used primarily for statistical purposes. Services Barriers: Under a new law that came into force January 1993, annual quotas on imported films have been abrogated. Film distributors still have to be of Swiss nationality or, in case of a company, the headquarters have to be located in Switzerland. If a distributor controls more than a quarter of the market, Swiss authorities can cancel their authorization. The same rules apply for owners of movie theaters. Barriers still exist in the area of telecommunications. The public network and basic services are still under the control of the Swiss PTT. Value added services and equipment such as telephone or fax machines have been liberalized. However, the equipment has to be approved by the Federal Office of Telecommunications. Since voice transmission is still a state monopoly, fast growing markets like mobile communications remain in the hands of PTT. Foreign banks wishing to set up business in Switzerland must obtain prior approval from the Swiss Banking Commission. This is granted if the following conditions are met: reciprocity on the part of the foreign state; the foreign bank's name must not give the impression that the bank is a Swiss one; the bank must adhere to Swiss monetary and credit policy; and a majority of the bank's management must have their permanent residence in Switzerland. Otherwise, foreign banks are subject to the same regulatory requirements as domestic banks. The Swiss stock exchange has had foreign members for many years. However, personal licenses to represent professional securities traders and to trade on the floor are available only to Swiss nationals. Insurance is subject to an ordinance which requires the placement of all risks physically situated in Switzerland with companies located in the country. Therefore, it is necessary for foreign insurers wishing to do business in Switzerland to establish a subsidiary or a branch locally. Government regulations do not call for any special restrictions on foreign insurers established in Switzerland. However, Swiss insurance companies are allowed to impose restrictions on the transfer of their registered shares to block unwelcome takeovers. Strict regulations govern the admission of foreigners seeking to enter the Swiss labor market. Nevertheless, the foreign labor force represents more than a quarter of the total Swiss work force. Sectors like construction, tourism and farming have a high proportion of low-paid, unskilled, seasonal workers. In high-tech sectors like electrical engineering, companies have problems finding qualified people. The Swiss government is therefore considering the granting of better access to qualified workers from European Economic Area (EEA) countries. Attorneys and lawyers, like members of other professions which require certification (physicians, pharmacists, therapists, engineers, and architects), must pass a federal, or in some cases a cantonal, examination and obtain appropriate certification before they may set up a business of their own. Standards, Testing, Labelling, and Certification: A large number of standards and technical regulations in force in Switzerland are based on international norms. However, household electrical appliances must be tested and approved by the Swiss Electrotechnical Association, a semi-official body. All drugs (prescription and over-the-counter) must be approved and registered by the Inter-cantonal Drug Agency. Labels are required to be in German, French and Italian. Investment Barriers: The Swiss generally welcome foreign investment and accord it national treatment. Legislation affecting foreign investment is confined to the following areas: ownership of real estate by foreigners; limits on the number of foreign workers; licensing of foreign banks and insurance companies; and, restrictions concerning the number of foreign directors on the boards of corporations registered in Switzerland. There are legal restrictions on foreign participation in the hydro-electric and nuclear power sectors, operation of oil pipelines, transportation of explosive materials, television and radio broadcasting, operation of Swiss airlines, and maritime navigation. According to Article 711 of the Code of Obligations, the Board of Directors of a joint stock company (with the exception of holding companies) must consist of a majority of members permanently residing in Switzerland and having Swiss nationality. Swiss corporate shares are issued as registered shares (in the name of the holder) or bearer shares. In the past, Swiss corporations often imposed restrictions on the transfer of registered shares to limit foreign ownership. But new legislation introduced in July 1992 and the increased reliance of public companies on the international capital markets forced Swiss companies to open their shares to foreign investors. At present, to prevent or hinder a takeover by an outsider, public corporations must cite significant reasons relevant to their survival or the conduct and purpose of their business. Public corporations may limit the number of registered shares that can be held by any one shareholder to a certain percentage of the issued registered stocks. As practice has shown, most corporations limit the number of shares to between two and five percent of the relevant stock. Under Swiss law, the purchase of property by foreign nationals or companies is subject to authorization by cantonal governments. For the acquisition of secondary residences by foreign nationals, there exists a system of quotas. However, foreigners are not allowed to engage in real estate business. Government Procurement Practices: In general, Swiss authorities comply with GATT rules regarding procurement by government entities. Certain restrictions exist for defense related items, railroads, and telecommunications. At the cantonal level, a process of liberalizing public procurement has been initiated by Geneva and Friburg. Customs Procedures: Although Switzerland may still be the only country which applies customs duties on weight rather than value, customs procedures are not burdensome. If expressed in ad valorem terms, tariff levels on industrial products are among the lowest in the OECD, ranging for most imported items between two and 10 percent. Switzerland has a highly subsidized agricultural sector that is protected by a variety of import restrictions (licensing, quotas, supplementary import charges, variable levies, conditional import rules, import calendars, etc.) According to the OECD, 75 percent of Swiss farm income is attributable to subsidies, import restrictions, or other government measures. On national security grounds, the Swiss government seeks a high level of self-sufficiency in domestic food production. 6. Export Subsidies Except for agricultural products, the Swiss government does not finance or subsidize Swiss exports. The granting of export credits is the sole responsibility of the private sector. Non-commercial risks are covered by the Export Risk Guarantee (ERG) program. Risks covered include foreign exchange difficulties, payment moratoriums, insolvency and political risk including revolution, civil strife, and nationalization. The ERG is a financially independent government institution. In agriculture, the federal government subsidizes exports of dairy products (primarily cheese), processed food products (chocolate products, grain-based bakery products, etc.) and temporary surpluses of domestic products like beef or concentrated apple juice. 7. Protection of U.S. Intellectual Property Switzerland provides a very high standard of intellectual property rights (IPR) protection, comparable to that available in the United States. It is a member of the World Intellectual Property Organization (WIPO), the Paris Convention for the Protection of Industrial Property, the Bern Convention for the Protection of Literary and Artistic Works, and the Patent Cooperation Treaty. In the context of the GATT negotiations, Switzerland is working to strengthen intellectual property rights worldwide. Patents: If filed in Switzerland, a patent application must be made in one of the country's three official languages (German, French, Italian) and must be accompanied by detailed specifications and, if necessary, technical drawings. The patent term is 20 years. Renewal fees are payable annually on an ascending scale. According to the Swiss Patent Law of 1954, as amended, the following items cannot be covered by patent protection: surgical, therapeutic, and diagnostic processes for application on humans and animals; and, inventions liable to disturb law and order and offend "good morals." Nor are patents granted for species of plants and animals and biological processes for their breeding. The issue of providing patent protection in the field of gene technology is subject to a controversial public debate. Drugs, foodstuffs, and alloys are not excluded from patent protection. Trademarks: Foreign individuals or companies engaged in trade or manufacture in Switzerland may apply for the registration of trademarks, regardless of whether their trademarks are entitled to protection in their own country. Trademarks are protected for a period of 10 years and may be renewed. Copyrights: A revised copyright law, in force since July 1993, explicitly treats computer programs as literary works (as defined in the Bern Convention) and introduces tougher measures against illegal copying of software. The revision closed an important gap in Swiss legislation on copyrights and should help to reduce the widespread copying of software. Layout Designs of Integrated Circuits: Provisions for protecting mask works are made under a new law that came into force July 1993. The protection ends after a period of ten years. The most significant area where Switzerland's intellectual property practices affect trade with the United States is in the field of computer software. Experts estimate that annual losses to copyright owners amount to several hundred million Swiss francs. 8. Worker Rights a. Right of Association All workers, including foreign workers in Switzerland, have freedom to associate freely, to join unions of their choice, and to select their own representatives. Unions can publicize their views and determine their own policies to represent members' interests without government interference. Unions may join federations or affiliate with international bodies. There are no limits on the right to strike. An agreement between unions and employers in the 1930's has meant fewer than 20 strikes on average per year since 1975. There were no significant strikes in 1993. b. Right to Organize and Bargain Collectively Swiss law gives workers the right to organize and bargain collectively and protects them from acts of anti-union discrimination. c. Prohibition of Forced and Compulsory Labor There is no forced or compulsory labor, although there is no specific statute or constitutional ban on it. d. Minimum Age for Employment of Children The minimum age for employment of children is 15 years. Children over 13 may be employed in light duties (e.g. helping in retail stores ) for no more than nine hours a week during the school year and fifteen hours otherwise. Youths between 15 and 20 may not work at night, on Sundays, or under hazardous or dangerous conditions. e. Acceptable Conditions of Work There is no minimum wage. Salaries and wages are negotiated between employers and employees. In industry, wages are in most cases determined by agreements between major labor unions and employers' association. The Federal Labor Act and the Swiss Code of Obligations regulate several important conditions of work. There is a maximum 45-hour workweek for blue and white collar workers in industry, offices, and retail trade, and a 50-hour workweek for all others. In practice, the workweek averages between 40 to 43 hours. Female workers may not be employed in dangerous work or, in industry, at night or on Sundays. Women are also legally forbidden to work two months after giving birth, although their employers' obligation to pay them sick leave during this time will depend on their length of employment. The employer must rehire women when their pregnancy leave ends. Swiss federal law also sets minimum requirements in several areas, such as annual leave, length of notice for termination of employment by either worker or employer, sick leave, and other fringe benefits. It also covers occupational health and safety regulations, as well as special regulations for protection in work places involving hazardous activities or substances, e.g. chemicals. f. Rights in Sectors with U.S. Investments. U.S. capital in Switzerland is generally not invested in labor-intensive sectors. Except for special situations (e.g. employment in dangerous activities regulated for occupational, health and safety or environmental reasons) legislation concerning workers rights does not distinguish among workers by sector, by nationality, by employer, or in any other manner which would result in different treatment of workers employed by U.S. firms from those employed by Swiss or other foreign firms. Extent of U.S. Investment in Selected Industries U.S. Direct Investment Position Abroad on an Historical Cost Basis - 1992 (Millions of U.S. dollars) Category Amount Petroleum 333 Total Manufacturing 1,508 Food & Kindred Products D Chemicals and Allied Products 208 Metals, Primary & Fabricated 122 Machinery, except Electrical 171 Electric & Electronic Equipment 216 Transportation Equipment 8 Other Manufacturing D Wholesale Trade 8,305 Banking 1,747 Finance and Insurance 15,917 Services 797 Other Industries 55 TOTAL ALL INDUSTRIES 28,662 (D)-Suppressed to avoid disclosing data of individual companies Source: U.S. Department of Commerce, Bureau of Economic Analysis. (###)