Sino-Swiss free trade agreement offers platform for expansion

On 24 May 2013, after three years and nine rounds of negotiations, China and Switzerland finally signed the memorandum of understanding of a bilateral free trade agreement (FTA) during Premier Li Keqiang’s state visit in Bern. It was signed on 6 July 2013 and will now have to be ratified.

The Sino-Swiss FTA is considered to be the most important FTA China has signed, the first with a continental European country (which on top of that is a country with which, for a change, China maintains a trade deficit).

Switzerland has only a small market to offer (population eight million), so why is China nevertheless keen to lower the trade barrier mutually?

Strategic importance in Europe

Switzerland is located at the centre of Europe, well connected through strong rail and road networks to neighbouring Germany, France, Italy and Austria, all core members of the EU. It is politically independent of the EU but economically fully integrated in the EU market. Its stability and excellent performing systems have brought forth a durably prospering society, secure for wealth and investment from all over the world.

Under the Sino-Swiss FTA, Switzerland will become the ideal platform for Chinese companies eager to expand into the European market; a platform to locate its headquarters, risks and capital. Savvy Chinese businesses (Huawei, Neusoft, Trina Solar , etc.) pioneering the European market have already discovered in Switzerland the most efficient workforce for administering headquarters activities and for conducting research and development, thanks to its excellent education, multilingualism, multicultural background and above all, a high degree of commitment to work similar to that in China.

The Swiss economic integration in the EU market, based mainly on the bilateral FTA with the EU (1973), is not only a gateway for Chinese exports to the EU market, but also makes Switzerland a base camp to search for advanced technologies worldwide.

Global free trade network

There are many reasons why Switzerland has such a strong and competitive economy in contrast to its small size. One of them is certainly the good conditions that the Swiss government has achieved for its export-oriented industries, meaning a global FTA network comprising 26 FTAs with 35 partners besides the EU and its member states.

First of all, Switzerland has, since 1973, a free trade agreement with the EU, and is, since 1960, a member of the European Free Trade Area (EFTA), today consisting of Liechtenstein, Iceland, Norway and Switzerland. As a result, industrial products of Swiss origin are exempt from customs when exported to EU or EFTA countries.

Further, as an EFTA member, Switzerland avails itself of all FTAs concluded with the EFTA. Among such FTAs are those with Middle Eastern and East European states (Albania, Faroe Islands, Croatia, Macedonia, Montenegro, Serbia and Ukraine. Another group of such FTAs were signed with countries of the Mediterranean region (Egypt, Israel, Jordan, Lebanon, Morocco, Palestine, Tunisia and Turkey).

With increasing globalisation in the 1990s, the EFTA member states signed FTAs with Hong Kong, Peru, Mexico, Singapore, Chile, South Korea, the Southern African Customs Union states (including South Africa, Botswana, Lesotho, Namibia and Swaziland), Canada, Colombia, and the Gulf Co-operation Council states (including Saudi Arabia, Bahrain, United Arab Emirates, Qatar, Kuwait and Oman).

In 2009, Switzerland signed an FTA with Japan, after the FTA with the EU (1973) and Faroe Islands (1993), the third without EFTA involvement. The Sino-Swiss FTA is the fourth of this kind.

Chinese companies would do well to consider Switzerland as its gateway to all these countries thanks to the latter’s well developed free trade network with them.

Maximising FTA effect

“Gateway”, however, does not mean that a Chinese company may use Switzerland effortlessly as a transit or passage for its goods destined for the EU or any other country with which Switzerland has an FTA, profiting from zero tariff.

How easy or difficult it is would depend on the rules of origin (ROO) in the Swiss FTA with the destination country and should be studied specifically by a legal expert specialising in international trade.

Generally, the ROO require a minimal added value created within the FTA country.

Chinese companies could export parts and semi-finished products meeting the ROO of the Sino-Swiss FTA to Switzerland at reduced or zero tariff, and process or work on them in Switzerland, or assemble them with Swiss components in Switzerland to a sufficient extent to meet the ROO requirements for Swiss origin in the Swiss FTA with the final export destination country or countries.

The product will then be deemed Swiss made, with all its positive images and effects, and enjoy the preferential tariffs of the relevant FTA when exported to the final export destination country or countries.

Friendly to China

Switzerland is one of the first European countries that recognised the People´s Republic of China. The first foreign company to establish a Sino-foreign joint venture was the Swiss Schindler Corporation.

Unlike other European countries, Switzerland has never started a single anti-dumping campaign against Chinese products; on the contrary, it has recognised China as a free market economy.

Huawei, facing patent issues elsewhere in Europe, has won contracts from Swisscom and other major telecoms service providers in Switzerland – its unbiased, friendly headquarter country.

We welcome the ratification of this historical FTA and look forward to coming back with more identified opportunities once the final FTA text has become accessible.

Felix Egli is a senior partner and Wu Fan is counsel at the Swiss law firm VISCHER in Zurich