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Countries don’t trade with one another; people do. Countries can agree trade deals, but it is down to individuals and businesses to realise the opportunities.
Trade means swapping on the back of differences. The more diverse the participating countries, the economist David Ricardo predicted more than 200 years ago, the greater the value of trade. The diversity can reside in natural resources, different regulatory and legal frameworks, technologies, higher or lower levels of education and physical capital, and so forth. These comparative advantages create mutual gains from trade – the gains which, since Ricardo’s time, have propelled the world to a level of prosperity beyond anything he could have imagined.
But the practice does not always bear out the theory. Data suggest that the largest amounts of trade, both proportionally and in absolute terms, pass between similar high-income countries. Readers of this illustrious magazine, who have been treated in the past to contributions from Friedrich von Hayek and James Buchanan, no doubt understand very well the reasons for this apparent paradox. Intra-industry specialisation in final products and supply chains, economies of scale and learning, and the value of consumer choice and variety, all play their part.
Barriers for trade in services
The UK and Switzerland, two very similar economies in this context, have been let down by the current trade rules. Our two “service superpowers”, in the words of President of the Federal Council Cassis, trade around £35bn (CHF 43bn) a year, more than half of it in our advanced services sectors, including financial services. This trade in services is not, however, covered by the UK-Swiss Free Trade Agreement (FTA) from 2019, meaning not only that barriers can be erected, but also that there are few facilitations on standards, digital trade and research. These non-tariff barriers hinder the kinds of specialisation and supply-chain integration across finance, legal services, consultancy, and fintech that benefit consumers the most, and restrict the choice and variety of services available in both countries.
It’s not a new development. The UK-Swiss FTA was designed to replicate the effect of the hundreds of smaller agreements made between Switzerland and the European Union over the past 50 years, so as to cause as little disruption to the status quo by Brexit as possible. Yet that was a status quo defined by a Brussels bureaucracy that was both protectionist and unwilling to cede any regulatory power to Switzerland. The years of fraught treaty talks between Switzerland and the EU mirror those conducted by the UK post-Brexit – they both failed because of a series of demands which, with emphasis on the jurisdiction of the European Court of Justice, proved too harsh for either of our countries to accept.
In April 2022, Switzerland and the UK began work on improving our bilateral agreement, focusing on the services sector. This time, across the negotiating table sit two parties with fundamentally aligned economic, ideological and geopolitical interests. History tells us that these are the circumstances that make for ambitious trade deals, for instance the Australia–New Zealand Closer Economic Relations Trade Agreement in 1983. If the same level of reciprocity and goodwill were brought to these negotiations with Switzerland, we can expect a full removal of tariffs, comprehensive mutual recognition of standards on digital services, fintech data flows and financial services trade, as well as replacing outdated border infrastructure requirements with faster electronic alternatives. We might also facilitate the services and background technologies behind the highly innovative Swiss and British pharmaceutical trade. Pharmaceuticals represent around 30 percent of Swiss exports to the UK.
The UK and Switzerland have the largest and second largest financial services trade surpluses in the world, so the precedents we set in this agreement are likely to become the standard against which future international agreements are measured. If we get it right, we can reasonably hope to see liberalisations of trade in services across the world, following our model.
The Swiss proof-of-concept for Brexit
But there is something altogether more political about the prospect of this enhanced agreement. From the British perspective, or at the very least, from the perspective of those of us who see great opportunity in Brexit, Switzerland has always been upheld as something of a proof-of-concept. Here was a nation, landlocked by the European Economic Area (EEA) and yet dependent on exports, which maintained mostly hassle-free borders; a nation which made no apology for insisting on autonomy; a lodestar for a major geopolitical realignment.
For years, many in Britain and abroad disparaged our ability to conduct our affairs successfully outside the EU. They argued that the kind of relationship between the EU and Switzerland was simply not possible for us to achieve. In some ways, they turned out to be right. But this was not, for once at least, due to the whims of a European Commissioner or the obligatory revanchisme of a wounded France. Instead, the messy and hostile arrangements with the EU and the intolerable Northern Ireland protocol were largely self-inflicted; the result of a false dichotomy imposed upon British politics by one group desperate to get us back into the EU (or, at least, its customs union) and another group, led by Theresa May, convinced that the mandate of Brexit was to control immigration at the expense of all else.
Had membership in the European Free Trade Association (EFTA) been seriously considered as a post-Brexit option, it may well have won the day. Of course, it would have resulted in fewer freedoms for the British state, namely, less control of immigration (in 1994, the EEA agreement extended the European single market to ETFA members, therefore binding them to the free movement of labour), less control over food and labour standards (also due to harmonised legislation within the EEA), and commensurately less negotiating room in free trade discussions with international partners. Yet two years later, we still have failed to muster the courage to use the freedoms so dearly bought to pursue market reforms, sign ambitious free trade agreements, liberalise and deregulate.
An enhanced UK-Swiss FTA on its own won’t set off this kind of domestic revolution. But it will signify the ability of the UK government to change the status quo ante, to boost our confidence, and to realise our post-EU opportunities.