Switzerland: Selected Background Issues

This Selected Background Issues paper on Switzerland reviews a few monetary and exchange rate issues, including questions related to the monetary policy framework and the assessment of recent monetary conditions and exchange rate developments. The paper examines the Swiss savings and investment levels from a welfare point of view, employing for this purpose some “golden rule” criteria of capital accumulation put forward in the academic literature. It finds that, with its unusually high levels of saving, Switzerland may be one of the few advanced industrialized countries that strictly fulfills the “golden rule” criteria.

Abstract

This Selected Background Issues paper on Switzerland reviews a few monetary and exchange rate issues, including questions related to the monetary policy framework and the assessment of recent monetary conditions and exchange rate developments. The paper examines the Swiss savings and investment levels from a welfare point of view, employing for this purpose some “golden rule” criteria of capital accumulation put forward in the academic literature. It finds that, with its unusually high levels of saving, Switzerland may be one of the few advanced industrialized countries that strictly fulfills the “golden rule” criteria.

IV. Non-Tariff Trade Barriers, the Price Level and the External Current Account 1/

1. Introduction

There are significant structural rigidities in the Swiss economy that hamper economic growth and increase the price level. These rigidities mainly affect the domestic economy, although in some are as they have the incidental effect of restricting foreign trade. Trade restrictions are normally broken down into tariffs and non-tariff trade barriers (NTBs). 2/ As in other industrialized countries, tariffs in Switzerland are low. The focus of this paper is, thus, on NTBs. Although they are by their nature difficult to quantify, some measures of their significance are given in the first part of this chapter.

In most cases, trade barriers create a wedge between the final price and the production costs of a good. In the case of tariffs, this wedge would represent revenues for the government, but in the case of an NTB, its specific type determines who receives the rent or more precisely how it is split between foreign suppliers (exporters) and domestic importers of the good.

Normally, foreign suppliers would be expected to be in a position to capture part of the rents that NTBs give rise to, by charging higher prices to the restricted market than elsewhere. The second part of this chapter seeks to analyze whether and to what extent NTBs induce German exporters to discriminate in their pricing policies against Switzerland. Contrary to expectations, the analysis—which is based on a sample of 21 goods—does not indicate that German exporters charge significantly higher prices to Switzerland than to other destinations.

It is also claimed at times that NTBs contribute to the large current account (CA) surpluses in Switzerland. The last part of the chapter considers this issue. Theoretical considerations do not give a clear answer as to how NTBs affect the CA.

2. Evidence of trade barriers in Switzerland

Apart from agriculture 1/—which is not covered by the analysis in this paper—tariffs are not common in Switzerland. Most industrialized goods enter duty free under the EFTA agreement and Switzerland’s free trade agreement with the EU from 1972. 2/

The most important form of NTBs in Switzerland consists of technical norms and regulations. Many of these are in line with international standards but a large number differ from the equivalent norms and regulations in the EU or other countries. The more stringent standards and approval procedures that Switzerland applies have originally been set for reasons of health and consumer protection, but subsequent developments may have made many of them obsolete. The Cartel Commission (Bundesamt fur Konjunkturfragen, 1994), has documented significant differences in standards and approval procedures for a number of goods, such as household appliances, bathroom appliances, cars, trucks and buses, telecommunications equipment, building equipment and materials, pharmaceutical and medical equipment, toys, measuring instruments, agricultural inputs (seeds, fertilizer, feedstuffs) and many food and beverage items.

In addition, relatively high barriers to entry into wholesale and retail trade—through building and planning regulations, rules on shop opening hours, public need requirements, etc.—have also contributed to shielding established traders from newcomers. Such restrictions have facilitated the operation of cartels—which are not prohibited according to the Swiss cartel law—and other price collusive practices across wide sectors of the economy. Lex Friedrich, the law that restricts foreign ownership of real estate for purposes such as agriculture, industry, trade, banking and insurance also discourages foreign competition. In 1994 a bill was passed in parliament that would have relaxed Lex Friedrich and facilitated foreign ownership, but the bill was rejected in a referendum in 1995.

It follows from their often somewhat obscure and very mixed nature that aggregate measures of the extent of NTBs and their effects on trade flows and price levels are not easily available. This is even more so in the case of Switzerland where NTBs mainly exist in the form of technical norms and regulations and barriers to entry.

UNCTAD has created a Data Base on Trade Measures which contains information on the coverage of Non-Tariff-Measures (NTM) 1/ for most OECD countries and 80 developing countries (Laird and Yates, 1990). The data base provides information on each individual NTB, its nature, countries imposing the restriction, exporting countries affected by it, and the official source of information on the measure. Table IV-1 shows the incidence of NTBs in various OECD countries. The frequency ratio measures the number of goods and services affected by NTBs as a percentage of the total number of traded goods, while the trade coverage ratio measures the share of import value affected by NTBs. The frequency ratio for Switzerland in the 1980s was lower and the trade coverage ratio somewhat higher than for the other countries. Table IV-2 shows the trade coverage rate distributed by groups of exporting countries in 1981 and 1986. Switzerland differed from the other countries with more NTBs on exports of socialist countries and less on exports of developing countries. Overall, based on these numbers Switzerland appears to have neither more nor less NTBs than the average industrialized country.

Table IV-1.

Switzerland: Frequency Ratios and Nontariff Measure Trade Coverage Ratios for Individual OECD Countries

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Source: Yeates and Laird (1991).

Excludes EEC intra-trade.

Table IV-2.

Switzerland: Analysis of the Incidence of OECD Country Nontariff Measures on Different Groups of Exporting Countries

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Source: Yeates and Laird (1991).

Excludes EEC intra-trade.

However, one must be careful not to interpret these findings as quantitative indications of the economic impact of trade measures as the data in Tables IV-1 and IV-2 do not capture the various NTBs’ effectiveness in restricting trade. In order to do that one would need to translate the individual NTBs into ad valorem tariff equivalents. The diverse nature of these measures makes such a quantification difficult, if not impossible. Another, potentially more serious weakness with these data is that they are derived only from hard core non-tariff measures. Consequently, barriers like technical standards, health and sanitary regulations and minimum price regulations—among which we probably find the preponderant types of trade barriers in Switzerland—are excluded.

Another piece of evidence on the existence of NTBs is provided by a study of the impact on Swiss industry of the internal EU market. (Mettler, et al in EFTA Occasional Paper No. 38, 1990). In this study, the authors conducted a survey among Swiss enterprises in order to ascertain their perceptions of NTBs and how they affect their activities. The survey confirms that technical norms and standards are considered to be the most important NTBs. For exports, border control was also seen as a major NTB. Overall, NTBs were considered to be more important for exports than for imports indicating that the domestic producers did not feel much protected by the NTBs. This sentiment was also confirmed by the fact that the producers considered the common market (European Economic Area) much more as an opportunity than as a risk or a danger.

In principle, the best way to approach the present issue would be to study the barriers on individual goods and compare the situation in Switzerland with that in other countries. Such a comprehensive study which would involve quantifying the trade restricting effects on a large number of goods in several countries is, however, beyond our means. We will instead try to measure the NTBs by their effects on the prices of traded goods.

3. Can price data provide information on the existence of NTBs?

There are many varieties of NTBs and their economic impact may differ. In general, as with most quantitative distortions, an NTB gives rise to economic rents. Exporters will try to capture all or part of that rent by requiring a higher price from the market with the barrier than from other markets. With homogeneous products and efficient competition between exporters all of the rents could in principle be captured by the importers and the exporters’ prices would be unaffected by the NTB. However, purely homogeneous products are a rarity as is a perfectly competitive market. In most cases, exporters will be able to “price to market” and capture part of the rent. 1/ Thus, in general the effect of the NTB would be to increase the export price fob as well as the domestic sales price.

A study of export prices has the advantage over a comparison of domestic wholesale or retail prices—which in principle also could be used in a search for NTBs—that they are not affected by distribution costs due to distance etc, in the importing country.

In principle, it is information on the prices of individual goods that could provide information on the existence of “pricing to market” behavior. Aggregation will make it difficult to distinguish between price differences due to NTBs and price differences due to the composition of the aggregate. We will thus need sufficiently disaggregated data to detect the price differences we are interested in. German data on exported value and quantity of goods—at the 7-digit SITC level—to individual countries areas close as one can get to meeting that requirement. Based on these values and quantities, unit values for individual goods to specific destinations can be calculated. 1/ Export values and quantities are measured at the border of the exporting country so that differences in transportation, distribution and other costs in the importing country should not influence the numbers. Out of several thousands of goods exported by Germany a sample of 21 was selected. Some of the goods were chosen because barriers were known to exist for these goods in Switzerland. Otherwise the choice was purely random, but contingent on the requirement that the export to all the countries studied should be significant. This severely restricted the number of goods.

4. Empirical model and results

The following equation was used to estimate systematic differences in German export prices:

(1)p(i,t)=a(i)+b(t)+e(i,t)

where i=1, …, N and t=1,…T index the destination market for exports and time respectively, and p is the destination specific export price. 2/

The interpretation of this equation is that the a(i) parameters capture all unobservable factors that are constant over time but vary over destinations while b(t) capture all the unobservable factors that vary over time but are constant over destinations. The primary factor underlying the time factor b(t) is the marginal cost of the exporter. One can also think of other factors included in the time factor like exchange rate changes and demand and income effects in the various markets.

Our interest focuses on a(i). These parameters will capture institutional features of the destinations of exports and can be thought of as representing the “competitiveness” (Knetter, 1995) of the export market or the average level of markup over costs. NTBs are potentially important factors behind differences in this markup.

For each good, the equations for all destinations are estimated jointly. Dummy variables are used to represent both the country and time effects. To avoid the dummy variable trap (perfect multicollinearity) one time effect had to be left out. The estimated coefficients are reported in Table IV-3, 1/ while Table IV-4 provides average German export prices of the 21 goods to the various destinations in relation to the average German export prices of the same goods to the Swiss market. As can be seen from Table IV-3, only for sanitary equipment are German export prices to Switzerland significantly higher than the prices to all the other markets. For wine, automobiles and electric model railways, there is also a clear tendency for prices of German exports to Switzerland to be higher than prices of German exports to other markets. On the other hand, prices of German exports to Switzerland tend to be lower than prices to other destinations for both varnish and built-in refrigerators.

Table IV-3.

Switzerland: Estimated Country Coefficients Based on Equation 1

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Source: Staff calculations.

Data for 1988 not available. For 1993 data not available for white wine, sanitary equipment, and electric model railway

Prices are significantly lower than to Switzerland at the 5 percent level.

Prices are significantly higher than to Switzerland at the 5 percent level.

Table IV-4.

German Export Prices to Various Destinations Average 1981-1993

(Weighed over 21 goods: Switzerland = 1)

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Source: “Statistische Bundesamt”, Germany and staff calculations.

Only 19 goods.

Comparing the results for the sub-period 1981-1987 with the results for the whole period reveals that price differentials in general have been reduced, but also that the parameters are not very stable. If anything, such a comparison could be taken to indicate diminishing use of NTBs over this period, a finding that runs counter to the common belief that the use of NTBs has increased over time to compensate for the reduction in tariffs.

Both the U.S. and Japan stand out as markets where German export prices generally are higher than to the other destinations, for 14 of the 19 goods for which data are available. German export prices to Japan are significantly higher than those to Switzerland. The opposite holds for none of the goods in the sample. Thus the data used in this paper support the findings of similar studies (Knetter, 1995), documenting the existence of NTBs in Japan. German export prices to the U.S. are also for most of the goods in the sample significantly higher than those to European countries. Based on the data in Table IV-1, however, NTBs should be equally or less frequent in the U.S. than in the European countries studied. The findings for the U.S., therefore, raise the issue of whether German exports measured fob are really unaffected by the distance to markets.

If, in order to avoid this difficulty, we exclude Japan and the U.S. from the comparisons and just compare Switzerland’s experience with the other European countries in the sample, we find that there is a somewhat clearer tendency for German prices to be higher for exports to Switzerland than for exports to the other countries. This tendency is less clear when the whole sample is used in the estimation than in the estimation based on the first period alone. In the period 1981-1987 prices are significantly higher for exports to Switzerland than for exports to all the other European countries for five of the goods in the sample (sanitary equipment, buses, two types of cars and electric model railway). The opposite holds true for none of the goods in the sample. When the estimation period is extended to 1993, there is only one good for which prices of German exports to Switzerland are significantly higher than for exports to all the other European countries. When assessing these results, one must also bear in mind that the five goods mentioned above were specifically chosen because there are known barriers to trade for these goods.

Calculating average price differentials over all the goods and all years also gives a very mixed picture. In Table IV-4 these averages are presented with two different sets of weights for the goods. Exports of cars with engine between 1.5 and 3 liters get a very large weight if the values of German exports of the respective goods to Switzerland are used as weights. Hence, we have also added a column based on the arithmetic averages of the prices. The latter weighing method shows prices of exports to Switzerland to be even lower than prices of exports to all the other countries, except to the Netherlands.

Only a small number of goods were studied. Besides, there are other factors than NTBs in the importing country that could influence price setting by exporters and which need to be taken into consideration. First, even though the data are very disaggregated they could still contain destination-specific quality differences that would affect unit prices. 1/ Second, average unit prices might decrease as the quantity exported increases due to some form of economies of scale. Third, exchange rate changes would most likely affect the exporters’ mark-up. Part of the observed price differentials could thus be due to differences in the evolution of bilateral deutsche mark exchange rates. We have not investigated this last possibility further.

On the first point one would expect that the quality of a country’s export of a particular good is higher, the higher the importing country’s per capita income. The per capita income level in Switzerland is clearly above the average of this group of countries. Hence, the quality of goods exported to Switzerland would be expected to be higher than of exports to other countries. If anything, correcting for quality differences would result in lower prices for exports to Switzerland.

On the second point, the data as far as they go do not seem to indicate correlations between unit prices and export quantities. Sweden and the Netherlands, two of the smallest markets, also have the lowest unit prices.

The sample of goods selected for this analysis does not confirm that NTBs play a more important role in Switzerland than in the other countries. Where trade barriers are known to exist the prices of exports to Switzerland are higher than prices of exports to other countries. However, trade barriers are present in most countries. If the sample of goods where chosen based on known trade barriers in other countries we may well have found similar results for them. As mentioned earlier, this analysis is confined to measuring the existence of NTBs only to the extent that they affect the prices of exporters. NTBs may well exist without showing up in higher import prices incases where importers manage to capture all of the rents. The major NTBs in Switzerland are most likely technical norms and regulations for which one would assume that lack of information makes it more difficult for exporters to capture the rent, than for other, quota-based NTBs.

Neither do these results exclude that distortions and structural rigidities have a stronger impact on the price level in Switzerland than in other countries. But if they do, their impact would seem to work through costs and domestic distortions that raise the price of nontradables directly and affect the prices of tradable only indirectly through higher distribution costs. That prices of non-tradable are higher in Switzerland, relative to the prices of tradable than in other countries has been confirmed by other studies. 1/

5. NTBs and the current account

If the purpose of NTBs is the protection and promotion of domestic production at the expense of imports, aggregate data for exports and imports of manufacturing goods might give an indication of the extent to which that purpose is achieved. 1/ These are very rough indications, however, as many other factors influence a country’s competitiveness and its ability to produce tradable. The numbers presented in Table IV-5 hardly indicate strong protective effects of NTBs in Switzerland. 2/

Table IV-5.

Imports and Exports of SITC Goods 5-9

(In percent of GDP)

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Sources: International Monetary Fund, World Economic Outlook Database; and OECD.

Trade in manufactures as a ratio to GDP is about the same as in the other countries. 3/ Moreover the development of these ratios since 1975 does not point in the direction of a high degree of import protection in Switzerland. It is also not obvious, on purely theoretical considerations, how NTBs may affect the trade balance. A devaluation is normally considered to improve the trade balance if export and imports are sufficiently price elastic. 4/ While NTBs do not have identical effects on the trade balance as a devaluation, an analysis of the partial effects of price and income changes—as is typically done to study the effects of a devaluation—can serve as a starting point for a discussion of how NTBs might affect trade.

In contrast to a devaluation, NTBs do not directly affect export conditions. The NTBs increase the prices and thus the profitability in production of those importables affected by the NTBs. As long as the price elasticity of demand is lower than 1, the import value of goods for which there is no domestic competition will increase as a result of an NTB. For goods for which domestic production competes with imports, the domestic supply response to the introduction of an NTB will also have to be taken into consideration. For such goods, import values are more likely to fall when NTBs are applied. Overall, the effect on imports from price changes alone is thus ambiguous.

As to the income effects, there are several channels through which they work. Per se, the higher price level resulting from NTBs will reduce real income. This income reduction will be partly compensated for by a lowering of saving. As the current account per definition is the difference between saving and investment this lowering of income will worsen the current account. This could be considered the principal income effect if all the rents associated with the NTBs are collected by foreign exporters and if there is no domestic production of the affected imported goods.

If domestic producers or importers acquire the rent—which the German export price data seem to indicate—the income distribution will be affected in a way that will most likely increase savings and thus improve the current account. The point is that those who gain from the NTBs (producers and importers) have a higher income level and thus a higher marginal propensity to save than those who only face the higher import prices (wage-earners).

The total effect on investment is also ambiguous. The protected producers or those who acquire the rents will increase their income. If they consider the NTBs to be of a lasting nature, profit prospects will also have improved and one would expect investments in the protected sector to increase. Producers in other sectors will face reduced demand and higher costs as a result of the NTBs and may thus be inclined to lower their investment. But again, if foreigners manage to capture the rents and if there are no domestic substitutes total investments will certainly fall as a result of the NTB. Additional complications arise if the efficiency losses deriving from the NTBs were taken into account.

To fully capture all the effects from the introduction or removal of NTBs or other rigidities one would ideally need a general equilibrium model. Antille, Carlevaro, and Schmitt (1991) have used such a model and found that removing NTBs on industrial products alone would raise real imports by more than 5 percent and exports by less than 2 percent (Table IV-6). In addition to weakening the foreign balance, removal of NTBs was found to have a significant positive impact on real investment, on household consumption and income and on GDP. However, their calculations circumvented the difficulty of quantifying the NTBs and were instead based on some arbitrary assumptions about their tariff equivalents.

Table IV-6.

Switzerland: General Equilibrium Evaluation of Gains Due to the Removal of Barriers to Trade

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Source: Antille, Carlevaro, and Schmitt (1991).Scenario 1: Removal of nontariff barriers to imports.Scenario 2: Removal of nontariff barriers to imports and exports.

6. Conclusion

The data sample used in this study does not clearly indicate that German exporters charge higher prices to Switzerland than to other destinations. From this evidence, one cannot reject the hypothesis that NTBs are more important in Switzerland than in comparable countries. They could very well be if domestic producers and importers rather than the foreign exporters capture the rents that are associated with the NTBs. As most of the NTBs in Switzerland are technical standards and regulations and entry barriers, it is probably more difficult for exporters to capture the rent than if the NTBs were more directly quantitative restrictions.

A comparatively large size of the tradable sector in Switzerland (relative to GDP) could conceivably be an indication of the presence of protective barriers but there are no signs of protection in the import figures. Theoretical considerations give little guidance to the issue of what effect NTBs may have on the trade or current account balance.

Over the last few years, the Swiss authorities have taken action to address several of the structural rigidities in Switzerland. A new cartel law has been imposed and since the rejection of the EEA agreement in 1991 a process of harmonizing Swiss technical regulations with those in major trading partners has been initiated. A law on technical barriers to trade which will enter into force in 1996 is intended to ensure continuation of this process. The effect of these new provisions on import prices and even on the trade balance may allow further inferences to be drawn on how important the NTBs have been.

Chapter IV

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1/

This chapter was prepared by A. Lund.

2/

NTBs comprise, among others, Voluntary Export Restraints (VER), import quotas, local content requirements, technical specifications that are out of line with standards elsewhere, or any other measures that have the effect of reducing the imported quantity of any good.

1/

The agriculture sector in Switzerland is one of the most heavily protected and subsidized in the world. The OECD estimated the net producer subsidy equivalents (PSEs) for Switzerland at 75 percent in 1992. That was the second highest among the OECD countries—in Norway the PSE was estimated at 77 percent—and compared to an OECD average of only 44 percent. Clearly, deregulation in the agricultural sector would increase the trade deficit in agricultural products.

2/

In 1994, 81 percent of merchandise imports was from EU and EFTA countries. In 1988, the simple average ad valorem tariff equivalent was less than 3 percent according to a report by the GATT secretariat (GATT 1991).

1/

The term “measure” is wider than “barrier” since it encompasses all trade instruments which may be used as barriers, although their restrictive effects, if any, may vary between countries, or even at different points of time in a specific country. Moreover their restrictiveness may lie in the way the measure is applied rather than in the basic properties of the measure itself. In this analysis we will not distinguish between the two measures and will continue to use the term NTB.

1/

Tariffs, on the other hand, do not ration quantity or give rise to economic rents. It is a priori hard to say how exporters will change their prices in response to a tariff. That will depend on elasticities of demand and the exporter’s perception of those elasticities. If NTBs work like tariffs they may be difficult to detect from the pricing behavior of exporters. Neither will it be possible to detect NTBs if the exporter captures the rents from an NTB by increasing the market share rather than the price.

1/

Denmark, France, Italy, Japan, the Netherlands, Sweden, the UK, and the US were chosen as export markets. The countries were chosen partly because of their importance as Germany’s trading partners and partly because of their similarities with Switzerland regarding market size and distance from Germany.

2/

For our purposes it is the question of whether the export price to a specific destination deviates from the export price to Switzerland that is of interest. We have thus normalized the price variables so that they measure export prices relative to the export prices to Switzerland and the test is whether these relative prices deviate from 0.

1/

The data sample cover the period 1981-1993 but data for 1988 were not available. For white wine, sanitary equipment, and built-in refrigerators data were also not available for 1993.

1/

One export category—cars with between 1.5 and 3 liter engines—illustrates the problem with aggregated data. German exports of these cars are large to all markets. But at the same time this category consists of very different cars with very different prices. Clearly, the measured price differentials could very well be due to quality differences.

1/

See SM/95/2 Supplement 1.

1/

As mentioned earlier, the main form of NTBs in Switzerland, i.e. technical norms and regulations, were introduced for reasons of consumer and health protection. Their effects in discouraging imports and protecting domestic producers were of an incidental nature.

2/

One must bear in mind that it is the magnitude of NTBs in Switzerland relative to their magnitude in other countries that is relevant for their impact on the current account.

3/

The exceptions are Belgium and the Netherlands where significant transit trade influences the numbers.

4/

The Marshall-Learner condition states that the sum of the import and export price elasticities must be larger than 1 for a devaluation to improve the trade balance. This condition is normally considered to be fulfilled.