Business survey economiesuisse: Export Sectors Especially Affected

As we have seen the British and Swiss economies are closely interconnected.  Brexit therefore does have direct and noticeable effects on Switzerland and particularly on her export industries. Industry statements focus on the medium to long term perspective. According to a member survey conducted by economiesuisse in autumn 2016 concerns vary from sector to sector — both with regard to the economic consequences (trade and investments) and the contractual and legal challenges.

Chemical and Pharmaceutical Industries

Current importance of the British market  

Great Britain is very important in terms of trade and investments. Overall, the UK is the industry’s third most important market. In 2015, chemical and pharmaceutical products worth CHF 5.6 billion were exported to Great Britain (3rd place) and products worth CHF 2.1 billion were imported into Switzerland (6th place). Domestic chemical and pharmaceutical companies employ a considerable number of highly qualified British citizens.

The Brexit Challenge

While insecurity and the possibility of an economic slowdown in the wake of Brexit are expected to lead to stagnant or slightly declining results in trade and investments, the industry appears confident that strong negative impulses will not materialize. Thanks to the free trade agreement and bilateral treaties between Switzerland and the EU no obstacles to speak of currently impede access to the UK market. With a view to future relations between Switzerland and Great Britain no effort should be spared to maintain the high level of economic interaction with new treaties of at least equal value (e.g. a comprehensive free trade agreement CH-UK or a British EFTA membership). This includes the free movement of labor and regulatory procedures.

Brexit relevant Treaties of Switzerland with the EU

• Free trade agreement Switzerland-EU
• Bilateral agreements I & II

Machine, Electronics, and Metal Industries

Current importance of the British market   

In terms of trade and investments Great Britain is an important market for the MEM industries, especially for products from aviation, space, and car industries and for the security and defense sector. In 2015, MEM exports ran to about CHF 2.5 billion, making Great Britain the 6th most important export market.   

The Brexit Challenge

From the perspective of the MEM industries, the advantages negotiated in the free trade agreement and the bilateral treaties with the EU now appear in jeopardy as far as Great Britain is concerned. Therefore, the existing body of rules must be adequately replaced and a state of no-agreement avoided at all costs. Failure to do so, the industry fears, might result in additional non-tariff trade obstacles, higher customs duties and increasing exchange rate risks. More specifically, standards diverging from the EU market could result in considerable extra costs and administrative expenses for Swiss MEM companies. Ditto if different certification agencies and test centers have to be found in order to secure access to the British market after Brexit.

Swiss MEM companies already rate the British market considerably lower than before Brexit. Sales in the UK have further suffered due to the weak pound. Many companies lowered their forecast for incoming orders in the 12 months ahead: approximately a quarter of all companies surveyed by the industry now expect declining orders from Great Britain as a result of Brexit.

Relevant Treaties

• Free trade agreement Switzerland-EU
• Bilateral agreements I & II

Watch Industry

Current Importance of the British Market    

The British market is very important for the Swiss watch industry. In 2015 the industry exported goods for CHF 1.6 billion to Great Britain, an increase of more than 19 percent over the previous year. In the last five years, Swiss watch exports more than doubled. Today, the UK is the world's number eight export market for the Swiss watch industry and number four in Europe.

The Brexit Challenge

The free trade agreement between Switzerland and the EU currently guarantees the watch industry unrestricted access to the British market. Britain’s withdrawal from the EU adds a new layer of insecurity for an industry already facing difficult market conditions. In the medium and long term this might have a negative effect on the confidence of British customers—even as demand from tourists attracted by the weak pound might actually increase sales in the short term. In the event of a recession in Great Britain sales of Swiss watches in the UK will drop significantly. Preserving full access to the British market is thus extremely important for the industry. The same goes for all the rules concerning import, distribution and sales (e.g. technical norms, consumer protection and environmental protection).

Relevant Treaties

• Free trade agreement Switzerland-EU
• Bilateral agreements I

Banks

Current Importance of the British Market

London is Europe’s most important financial center and for Swiss banks an extremely important location. In terms of funds under management, Great Britain also has a market share of around 37 percent worldwide and is by far the largest market for institutional funds management in Europe. UBS and Credit Suisse, two large Swiss banks, employ thousands of workers in the English metropolis, mostly in investment banking but also in asset management, personal banking and corporate functions. Much as for the insurance industry, so-called EU passporting is very important. It allows them to service EU/EEA clients from London. The London-based business units of the large Swiss banks also support many transactions of important global customers, especially in trade and wealth management.

The Brexit Challenge

Before talks between Great Britain and the EU about the future of mutual market access have even started, it is hard to give a firm assessment about possible effects. Concerned businesses are delaying decisions about possible relocations of business units and jobs. The fundamentals and the necessary information for such moves are currently lacking: the negotiating process, the timing, and especially the content of the future withdrawal agreement between the EU and Great Britain are as yet unknown. These questions will probably not be answered for quite a while.

Generally speaking, the industry expects a slowdown or decline in market activity along with increasing economic and legal risks: London is both a hub for the corporate banking of large European banks and the gateway for capital from non-EU countries into the common market. If the UK loses access to the common market as it leaves the EU these two functions will be largely at risk.

If Great Britain loses the EU passporting option without the benefit of some form of market access by way of an equivalency regime this could have several effects. On the one hand certain kinds of cross border transactions would presumably have to be moved elsewhere within the EU (e.g. Luxembourg or Frankfurt}. This would affect Switzerland’s two large banks as well. On the other hand, it might provide Switzerland with an opening to push change in the EU: team up with Great Britain to promote more clearly defined equivalency procedures for European countries. These are currently very time-consuming and complex.

For the bilateral relationship between Switzerland and Great Britain the entire regulatory framework previously held together by the bilateral agreements with the EU would have to be reproduced in a new agreement according to the industry. Here, the potential for improved regulations for cross-border financial services in the investment products sector (e.g. funds or discretionary mandates) is considerable. A quick declaration of intent, jointly issued by Switzerland and Great Britain concerning the mutual recognition of regulation would be desirable as well.

Brexit relevant treaties of Switzerland with the EU

• EU-Passporting (EU treaty without Swiss participation and influence)
• Bilateral agreements I (esp. free movement of persons)
• Agreement for automatic exchange of information in tax matters Switzerland-EU

Insurances

Current Importance of the British Market

With the exception of wholesale insurance in the non-life sector there is no appreciable cross-border exchange between Swiss insurers and Great Britain. Much more significant is the fact that major Swiss insurers transact a considerable part of their business with the EU/EEA, but also with clients in the rest of the world, through branches in the UK (financial center London). Most of these are business clients with cross-border activities and a multinational presence who require geographically comprehensive insurance solutions. For a Swiss insurer with several thousand employees in the UK in 2015 this meant a business volume of close to CHF 4 billion. In this context EU/EWR-Passporting is crucial. It allows financial service companies based in a EU/EEA member state to distribute their products in the entire EU/EEA. A separate permit in other countries of the association is not necessary (Equivalency recognition of regulatory guidelines).

The Brexit Challenge

Swiss financial services companies have no direct access to the common market. The bilateral treaties between Switzerland and the EU explicitly preclude this. Only current EU/EEA passporting rules allow Swiss insurers—through their London offices—to offer their services in the entire EU/EEA. How Brexit will affect the very international Swiss insurance sector thus depends to some extent on whether Great Britain in its withdrawal negotiations with the EU succeeds in securing the freedom of services for London even after the UK ceases to be a member of the union.

In the event of a loss of EU/EEA passporting privileges (loss of „free movement of services“) the Swiss insurance industry would have to decamp to other EU/EEA locations for certain cross border activities. Some insurers might suffer considerable premium losses in the process—between a quarter and a third of their total volume). At the same time, continuing to do business in Great Britain would necessitate the licensing and capitalization of a new and independent legal entity. In this light, it would be a very significant plus if the UK managed to negotiate an agreement with the EU about the free movement of services. There is no telling at present if this will happen. If not, this might provide an opening for Zürich to lure some business away from the competition in London.

As for the bilateral contractual relationship between Switzerland and the UK, full market access to Britain and the world’s number two financial center must be secured, says the industry. Specifically, a second-generation free trade agreement should be sought, which would also include the free movement of persons and (financial) services. As a precondition, equivalent regulations in the insurance sector (especially capital requirements) in the two countries would have to be secured.

Brexit relevant treaties of Switzerland with the EU

• EU-Passporting (EU-treaty without Swiss participation and influence)
• Bilateral agreements I (including free movement of persons)
• Treaty Switzerland-EU on direct insurance
• Free trade agreement Switzerland-EU
• Agreement on the automatic exchange of information in tax matters Switzerland-EU

Financial Market Infrastructure SIX (Including Swiss Stock Exchange)

The date of the referendum had been known for a long time: June 23, 2016. Thus, SIX was able to prepare for this day: a dispositive was set up to absorb price fluctuations and high volumes. Brexit passed without incidents as far as the stock exchange was concerned.

Economies of Scale Can Only Be Realized With Market Access

Market access to the United Kingdom is vital to the Swiss financial market infrastructure. SIX generates up to 80 percent 

of its income in the area of trading and trading with downstream segments (clearing and settlement) in European countries, particularly in the UK. It is not clear at this time if SIX-relevant business activities will be shifted between the UK and the ("rest") EU nor how and when UK market access to the EU and to Switzerland will be regulated. The negotiations between the EU and Great Britain may have an impact on the negotiations between the EU and Switzerland both in terms of time and substance. In any case, continued full access to both markets is of the vital importance to SIX. Developments in these matters are closely observed.

Legal Security for Stable and Reliable Financial Market Infrastructure

It is part of SIX's mission to ensure the security and functionality of the infrastructure in the interest of the financial center, even under changed circumstances. With a view to customers and investors, the period of legal uncertainty surrounding Brexit must thus be kept to a minimum to prevent disadvantages for financial market participants from the affected markets.

Consulting

Current Importance of the British Market 

Bilateral trade with Great Britain is not very important for Swiss consulting businesses. No substantial investments are made there. Thus the volume of cross-border services relative to total revenue is only marginal. Potentially, British advisory firms might become more attractive takeover candidates as a result of the cooling local market and the sliding pound.

The Brexit Challenge

Although consulting businesses hire locally for the most part, for customer projects they rely on experts who are often found in other countries of Europe including Great Britain. Similarly, Swiss specialists (e.g. banks, pharma / chemicals, production) are also hired for projects abroad. As for Brexit, any restriction of the free movement of persons, more than anything else, would be a considerable obstacle for Swiss consulting firms. Therefore, new treaty-based framework conditions between Switzerland and Great Britain must ensure mutual labor market access and full recognition of university and commercial degrees. In addition, both countries should promote an even stronger collaboration between business and universities.

Brexit Relevant Treaties of Switzerland with the EU

• Bilateral agreements I (especially free movement of persons)

Food Industry

Current Importance of the British Market 

Bilateral Trade with Great Britain is very important for the Swiss food industry. At just short of 14,000 tons the UK imported more Swiss chocolate in 2015 than any country but Germany. The United Kingdom also plays an important role in the trade of long-life baked goods (e.g., biscuits, biscuits), confectionery, beer and refreshment drinks (e.g. coffee) and is one of the top ten export and import destinations for Swiss food producers. Great Britain is also an important investment location. Thus, a number of Swiss companies have set up production facilities, with administration and distribution centers there.

The Brexit Challenge

Foodstuffs processed and exported by Swiss companies have unrestricted access to the UK market thanks to the free trade agreement with the EU of 1972 and bilaterals I & II. Brexit might put an end to all this and make exports and imports more expensive. For investments, in addition to a new bilateral regulatory framework with Switzerland, the shape of the future relationship between EU and UK will be important, with market access as the determining factor here. For Swiss companies the development of domestic factors in the UK is also relevant (e.g. corporate taxes).

Brexit Relevant Treaties of Switzerland with the EU

• Free trade agreement Switzerland - EU
• Bilateral agreements I & II

Textile Industry

Current importance of the British market 

In 2015 the UK was the number eight export destination for Swiss textiles with an export value of CHF 35 million. Technical textiles (filter fabrics, ropes, coated fabrics) account for the largest share. For Swiss clothing, the UK was the sixth largest export market (CHF 45 million).

The Brexit challenge

Under current agreements for the textile and clothing business there are no significant market barriers in trade with Great Britain. This situation could change in the wake of Brexit, causing much political and economic uncertainty. Highly sensitive to currency movements, the textile sector would be additionally affected in the event of a recession and a continued slide of euro and pound because of the relative importance of the British market. The current legal uncertainty is also likely to lead to declining investments and a shift of certain manufacturing processes from Great Britain to Germany or Austria.

The extent of change in the trade with Great Britain depends primarily on whether a separate free trade agreement is negotiated with Great Britain or whether Great Britain will be allowed to join the FTA of 1972 between Switzerland and the EU. If treaties currently in force (esp. bilateral agreements I & II, FTA Switzerland-EU) cannot be replaced with a suitable equivalent there may be a risk of higher customs duties and higher non-tariff trade barriers such as labelling requirements or different product regulations on imports to Great Britain. This would further undermine the competitiveness of Swiss companies. Thus in a first step, the status quo of current treaties (bilateral agreements I & II, FTA Switzerland-EU) should be secured.

Because the textile and clothing sector are so dependent on the EU, eventual negotiations for a separate free trade agreement with Great Britain should aim to include it in the Pan-Euro-Mediterranean Convention (PEM-Convention). If Great Britain is not linked to the so-called „Pan-Euro-Mediterranean cumulation“ the textile and clothing industries will not be able to fully exploit the potential of a free trade agreement with Britain. Another concern for a possible separate free trade agreement is the liberalization and modernization of origin rules and the simplification of proof of origin, provided this does not interfere with the inclusion in the PEM cumulation zone.

And finally, market access to Great Britain should include a removal of technical trade barriers and the harmonization or mutual recognition of rules (e.g. regarding flammability, children's clothing or a waiver of EU-specific product labelling). As for the new Swissness legislation, what matters most for Great Britain and Switzerland is mutual recognition of each other's rules of origin, and for designs and trademarks registered in Switzerland to be protected on UK territory as well.

Brexit Relevant Treaties of Switzerland with the EU

• Free trade agreement Switzerland-EU
• PEM-Convention
• Bilateral agreements I & II (esp. technical trade barriers, free movement of persons, research agreements, public procurement)

Hotel Industry

Current Importance of the British Market  

For the Swiss hotel industry Great Britain is the fourth largest market in terms of overnight guests (behind Switzerland, Germany, and the US). In 2015, British guests generated 4.6 percent (1.6 millions) of all overnight stays in Swiss hotels. However, in the last decade traffic declined by more than 40 percent. The main destinations for British business travelers are Zurich and Geneva, while the Valais and the Bernese Alps are favored by vacationers from the UK.

The Brexit challenge

The industry currently has no way of telling how much Brexit will affect travel to Switzerland in the long run. But in the event of a recession, growing unemployment, and a significant decline of the pound against the Swiss franc (CHF) negative consequences for Swiss tourism and the Swiss hotel industry are to be expected. For the industry it is most important, that travel between Great Britain and Switzerland be allowed to continue freely and without visa requirements as before.

Relevant Treaties

• Bilateral agreements II (esp. Schengen agreement)

Aviation

Current Importance of the British Market 

Great Britain is very important for Swiss air transport which plainly reflects, in a general way, the close economic ties between the two countries. In 2015, 2.8 million air passengers travelled by plane from Switzerland to the UK. This makes Britain the most popular destination in Europe in terms of passenger volume (ahead of Germany, even). Swiss International Airlines alone offers 161 weekly flights to Great Britain. Also noteworthy is EasyJet, with regular flights from Basel and Geneva, mostly. Each day, there are more commercial flights from Switzerland to London (world's third busiest air transport hub) than IC train connections between Zurich and Bern.

The Brexit Challenge

The effects of Brexit on air transport depend strongly on the future market access of Swiss business to Great Britain in general. Any deterioration is likely to have negative effects on the volume of air transport between Switzerland and the UK. A drop is very likely in the number of British tourists visiting Switzerland, especially in winter. If the pound continues to lose value against the Swiss franc, Switzerland will become a very expensive destination. The bilateral market access in air transport is currently governed by the air transport agreement Switzerland - EU (Bilateral agreements I). Except for the economically insignificant cabotage (transport services within one country by a foreign transportation company) there are no restrictions. After Great Britain's exit, however, this agreement will no longer apply. The only existing back-up is a bilateral air transport agreement from 1950 which is no longer up to date and must be replaced. A liberal standard agreement would be desirable in this context. Since air transport in both Britain and Switzerland is governed by EU law (EASA standards), the role of the union in this matter must be clarified. Divergences in the bilateral agreement between Great Britain and Switzerland should be avoided if possible.

Brexit Relevant Treaties of Switzerland with the EU

• Bilateral agreements I (especially air transport agreement)

Medtech-Industry

Current Importance of the British Market 

With a trade volume of over CHF 500 million, Great Britain ranks eighth and seventh respectively among the industry's leading export and import markets. In addition to trading bilaterally some companies also produce locally in the UK and some of them are leading employers. Zimmer Biomet, for instance, currently employs some 1,000 people in different locations throughout the UK. According to a current Swiss industry study (before the Brexit vote) 17 percent of companies surveyed have already invested in Great Britain or plan on doing so.

The Brexit Challenge

Medtech companies that produce for the global market must fulfill the regulatory requirements of their target markets. In Great Britain, until now EU rules applied. Entering the European market with a new product was considered fairly efficient in the past (when compared to the US or China), despite high patient security. Now the question is, will Britain issue its own different guidelines in the wake of Brexit (e.g. product regulations, data protection, separate testing and certification bodies). The continuation of the free movement of persons as well as developments in British tax policy are also important for companies in Great Britain. Accordingly, the initially positive growth expectations for the British market may be in for a correction.

Brexit Relevant Treaties of Switzerland with the EU

• Free trade agreement with the EU
• Convention establishing the EFTA
• Bilateral agreements I
• Agreement Switzerland - EU about the Mutual Recognition of Conformity Assessments (MRA)
• Various EU regulations and directives, which are relevant for market entry and—by way of the MRA and their integration in Swiss law — have legal force in Switzerland. This includes the current EU guidelines concerning medical products and in vitro diagnostics, which will be replaced in early 2017 by two new EU directives (MDR/IVDR).

Great Britain is very important for most sectors of the Swiss economy — for goods, services, and investment. No problems or barriers worth mentioning currently exist in bilateral economic relations concerning the goods trade. Swiss financial service providers have no direct access to the UK and the EU in general, but this disadvantage is easily sidestepped today (EU-Passporting) through subsidiaries in London, the center of European finance. These institutes also serve their international clients very efficiently from there. However, due to the strong franc and the weak pound many companies in Great Britain and Switzerland are already experiencing difficulties. A recession in the UK due to a worsening economic environment would only increase the challenges.

A great concern for many Swiss companies in the wake of Brexit is the looming loss of today's excellent market access to Great Britain. New tariff and non-tariff barriers to trade, or product regulations differing from the EU would put an additional damper on trade. Financial services companies also fear that London might lose its privileged access to the EU. In combination, these factors create a great deal of legal uncertainty for Swiss companies, further influenced by the upcoming exit negotiations between Great Britain and the EU with an outcome that is hard to predict. As a result, Swiss companies are very cautious about making long term strategic business decisions relating to Great Britain.

Even now it is clear that the discontinuation of the bilateral agreements I & II, the free trade agreement between Switzerland and the EU, and selected sector-specific treaties will open a gaping hole in economic relations with Great Britain that needs to be fixed as quickly as possible. For all sectors an equivalent bilateral treaty solution with the UK is of great importance — a solution that liberalizes not only the trade in goods but in services as well.